This article is written by Vaishali who is pursuing a Diploma in Cyber Law, FinTech Regulations and Technology Contracts from LawSikho.
Table of Contents
Understand the concept of NFT
Non-fungible tokens, popularly abbreviated as NFT is a cryptocurrency by existence, and the special feature about NFT is that it is replaceable by another identical item, through the process of mutual interchange. It can represent through any type of digital property or files such as audio, video and photos. NFT is the class of cryptocurrency assets that is unique, such as creating digital art.
Year 2021 has seen an undisputed and sharp rise in the interest of using the NFTs. Most of the NFTs exist on a single blockchain named Ethereum, and the usage is restricted to a huge extent for creating and selling digital playthings. The blockchains also ensure that the digital property or file is authentic, original, unique and one of a kind, no duplication is entertained.
The NFTs were introduced in August 2017 on the ethereum community and crypto assets have developed to incorporate digital intellectual property, online game gadgets, digital artwork and music.
What are the reasons for the confusion to accept NFT?
It is a distinct feature of the digital content economy, that for the reason of the recreatability of the digital content and media, it is much difficult to identify the actual owner of a piece of content or media. The issue regarding the replica diminishes the value of the original piece of content.
Even if the owner gets identified, the evidence of such ownership would be dependent on a centralized institution, for the record of purchases and ownership many maintains.
Though NFT claims to solve these issues regulating ownership tracking, value storage and decentralisation.
NFT is believed to be a unique digital token that represents fix digital assets that can be traded, bought and sold among individuals. These token in trading can represent a range of digital assets including digital art, digital music files and ebooks.
The technology aims to assure that the piece of digital content can be duplicated and shared, but the ownership remains transparent and clear. Therefore, it ensures to work for securing the original asset, as well.
This is possible when the technology maintains the record of all the owners and the crypto world relevant to the digital content in a distributed ledger under a blockchain and is called Ethereum blockchains.
Here, the digital artists are assured that the value of the art is maintained at the time of sale, protecting it from unauthorized duplication. Also, ensures them that they can track future sales and collect royalties, wherever required.
Legal pitfalls of the non-fungible tokens in India
The investors are quite excited regarding the NFTs, but it is necessary to remind certain legal points regarding the cryptocurrency.
In India, the RBI, along with the federal government is working on contemplating a framework for cryptocurrency or digital currency.
As the non-fungible tokens entered the scene, there is no separate framework for that, therefore it is dependent on the Contract Act for the sale and buying of products.
Despite the sudden boom in the demand for cryptocurrency, India is far behind to contemplate the NFT revolution with the existing legislature. TIll now, cryptocurrencies are yet to get any legal status in India.
The government does not ban the NFTs or mark them as illegal, but yet uncertain regarding the details of the forthcoming Private Cryptocurrency Bill. The Bill raises doubt on the legality of the NFTs.
As there are not many details available, it is yet to determine the strategy that the Government is likely to adopt regarding cryptocurrency.
The definition of the cryptocurrency as per the Bill, it is difficult to imagine a scenario where NFTs could be considered to be both a representation of value that is exchanged based on having an inherent value in business activity (for example, proprietary code could be sold to a business as an NFT) and as a store of value (for example, buying artwork).
Sec. 3(3) of the Bill attempted to outline the exceptional matter, stating that the use of Distributed Ledger Technology can be allowed for the creation of a network for delivery of any financial or other services, or for creating value without implying the use of cryptocurrency in any form whether for receiving or giving the payment. Still, it did not make it clear if the NFT falls within the ambit of ‘services’ as it is laid out by the exemption.
Are the NFTs getting banned?
It is not required to ban the NFTs. As the numerous opportunities presented by NFTs for the digital creators strongly approves two reasons for not banning it:
- The NFTs, more than the cryptocurrency as per the definition considered by the government, is similar to the assets The NFTs can not develop into an unmonitored currency against the rupee, which is a main point of concern in the case of cryptocurrency. The reason NFTs can avoid this possibility is due to one of their defining characteristics – lack of fungibility, or interchangeability.
In case, the NFT requires to be exchanged, due to the unique nature, they shall not be interchangeable or indistinguishable from each other. In this way, the NFTs will get non-fungible. The requirement of the standardization results in the NFTs being unstable to facilitate transactions at all corner, and unable to develop into a new system that is an unregulated system of currency. Therefore, approving the NFT shall not harm the rupee being the legal tender in India.
- The NFTs ensure the digital creators must be awarded the royalties they deserve from the resales or the other uses of the creation. As the transaction on the blockchain is clear and transparent that the instances of an NFT if resold, can be tracked by the original creator, or the copyright holder.
Requirement for NFT
It is difficult to say that the NFTs are flawless, rather they are yet to be secured and still temporary. Moreover, the NFTs are completely theoretical. As such, it is necessary that while proceeding further, the citizens require to be aware of the potential for a bubble emerging in NFT markets and must be cautioned about the risks involved in investing in NFTs.
However, the benefits to the digital creators offered by the NFTs is difficult to ignore. Moreover, the NFTs are treated as a new asset class that requires dedicated legislation with an efficient and updated strategy to regulate it for the long run.
Banning NFTs without making any attempt to implement a regulatory framework to address the hindrances may keep the Indian investment market far from a new attribute.
WazirX, the largest cryptocurrency exchange in India, launched a domestic market for NFTs that allows the exchange of intellectual property and digital assets such as – audio files, artwork, programs, videos etc. On this platform, for the digital assets, the creators can hold an auction on the NFT marketplace that is based on blockchain, to earn royalties. The files get stored in a crypto wallet, where the process is under automation, the risk of default by any other party gets eliminated.
The crypto industry is still looking forward to the best use of the NFTs, but in the modern world of digitalization, several artists use it to sell their artwork in the form of collectables without any instances of copyright infringement.
In India, as there is no separate legal framework yet for regulating MFTs, the RBI announced that along with the government is working towards establishing a framework for digital currencies and cryptocurrency.
Though NFTs are treated as digital artworks, the investment advisors suggest that the tokens involve risks, and like cryptocurrency, NFTs are risky assets, so one must be careful while investing. Some NFT marketplaces have committed themselves to sustainable practice to keep environmental concerns as priority.
It can be concluded that the ambiguity in the draft bill can be made clearer with a future Bill with specific provisions relevant to cryptocurrency and crypto assets, but for that, the government has to be dedicated to the legislature framework development.
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