This article has been written by Nikunj Arora, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.

Introduction

WazirX, the Indian crypto exchange, has recently announced the launch of the Non-Fungible Token (“NFT”) marketplace for the artists and creators situated in India, thereby, making it one of the first marketplaces for NFTs in India. The ‘Nyan Cat’, a GIF that was a viral meme back in 2011, now, in February 2021, the original GIF was sold at an online auction was sold for 300 Ether (approximately $638,957), the cryptocurrency that powers the Ethereum network. 

The question is how someone can own the original copy of a GIF that was pervasive around the internet. The answer to this is NFT. The GIF was sold as NFT, which acts as a digital certificate of authenticity. In 2020, the market for NFTs boomed climbing to a market cap of at least 338 million from about 41 million in 2018. NFTs are heading towards the mainstream art world which will provide opportunities for artisans.

Along with all the hype around NFTs, experts have raised concerns such as not all NFTs to verify the person selling a digital art piece is the original creator, which is difficult particularly in online marketplaces. Another drawback of the NFTs market place is that when it comes to digital art, a buyer owns the original digital painting but the person can’t keep others from copying the image and sharing or changing it online. Proponents are bullish on the potential for NFTs but some critics believe that it may be a digital bubble in the making. 

The non-fungible tokens

To understand the applicability and design of NFTs, the following concepts should the deal with first:

Fungible V. Non-Fungible Assets

An asset is a finance term that means something useful or valuable, which can be something physical like gold, something digital like bitcoin, a financial instrument like a retirement plan, and it can be anything that helps to generate income, like a computer or cell phone.

Fungibility describes an asset’s ability to be evenly swapped with another asset of the same type. Thus, a fungible asset is something interchangeable. For example, a $100 bill is fungible, because if one person has a $100 bill and another person also has a $100 bill, they could interchange the bill and the value does not change. A bitcoin is a fungible asset as well. 

A non-fungible asset is something that is not interchangeable and not divisible for the most past. For example, a person has a pet dog and another person also has a pet dog, and they swapped dogs, the aforesaid transaction will not be an equal swap of value. Examples of non-fungible assets are houses, used cars, cards, etc. 

Tokens

A token is something physical or digital that can be exchanged for or represent a good, service or another form of value or utility. In cryptocurrency and blockchain technology, tokens are representative of value like a stake, voting right, a toll, a currency, a store of value. It could represent ownership of something, or it could be multifunctional within an ecosystem. 

The token does not have value in and of itself; the value comes from the asset it represents. When there is a creation of a token that represents a good, a service, or any forms of value, it is called ‘tokenization’. 

Tokenization of digital assets on Blockchain Technology in the form of NFTs

What are NFTs? 

A non-fungible token is simply a representation of a unique digital asset that cannot be equally swapped or traded for another NFT of the same type. NFTs can represent digital art, a ticket to an event, an in-game item, property in a virtual world, or even a real-world asset like a deed or title to actual land in the physical world. 

NFT is a form of cryptocurrency which has a unique value and is a digital certificate of ownership of an asset. According to Investopedia, NFTs are considered as a cryptographic asset on the blockchain which consists of unique identification codes and metadata which helps an NFT distinguish from the other. 

NFTs seek to solve the following problems:

• Ownership tracking,
• Value storage, and
• Decentralisation 

Some NFTs are getting millions of dollars and financial investors, futurists and monetary columnists are swirling, and organizations of all shapes and sizes are dispatching NFTs revenue-driven, exposure, or some of both. 

One interesting example of NFT is that, recently, in Los Angeles, California, a pizza shop (see here) has released an NFT that one lucky owner shall get free pies for life. Another example is that when Krista Kim, an artist, sold a virtual home named ‘Mars House’. Mars House (see here) has become the world’s first digital NFT home which has been sold for more than $500,000, i.e., the new owner paid digital artist 288 Ether, a cryptocurrency which is approximately equal to $514, 557. 

The famous example of NFT: In the latest NFT auction, Twitter and Square CEO, Jack Dorsey, sold his tweet (which was a five-word message only) for more than $2.9 million (see here).

List of most expensive NFTS:

Understanding the value of NFTs

The basic equation value of an NFT can be explained as below:

Value of an NFT = Utility value + Ownership History + Future Value + Liquidity premium. 

The above framework can act as a helpful tool for the investors as they can evaluate if the said NFT is worth investing in or not. It is helpful for NFTs developers too, as they can allot and think of various ways through which the value of an NFT is increased which can attract millions of users and investors. 

UTILITY VALUE:  In 2019, a powerful Crypto Space Commander battleship was sold for $45,250, and the value of an NFT ticket is the price of an event ticket, thus, the utility value is usually dependent on how the NFT can be used. There are several ways to increase the utility value, one of the ways can be forming partnerships with other businesses, providing benefits to people who have a holding of the NFT.

OWNERSHIP HISTORY: Typically, an NFT which has a high ownership history value are often driven and created by famous artists and companies having a strong brand value. The ways to increase value is to co-operate with companies having a strong brand identity to issue NFT tokens, for example, the first NFT representing a Formula 1 car was sold for $113,124. The other way to increase value is to resell NFTs that are owned by influential people. 

FUTURE VALUE: The future cash flow and valuation changes are the forces that usually drive the future value of an NFT, for example, in December 2017, the price of Cryptokitty, a blockchain game on Ethereum developed by Canadian studio Dapper labs that allow players to purchase, collect, breed, and sell virtual cats, jumped from 9ETH to 253ETH in just three days.

LIQUIDITY PREMIUM: Higher liquidity generally means a higher value of NFT, this means, investors usually prefer to invest in NFTs that include categories of a high trade volume. The primary reason for investors to invest in such categories is that liquidity lowers the risk of holding the NFTs. 

How are NFTs used and how do they work?

USAGE OF NFTs

Currently, the crypto industry is still trying to figure out what shall be the best use of NFTs.  For example, in the physical world, everyone has copies or printouts of the famous and iconic painting ‘Mona Lisa’, although there is only one real portrait of that painting. On the other hand, in the digital world, there can be as many copies of digital art, but the owner shall lie with the person who owns the token.  

However, the primary usage of NFTs is that they can be used for digital assets/goods that are typically different from each other in various categories and not just based on shapes/sizes, to prove their worth and rarity. 

Another application/use of an NFT is that it can be used to represent ownership of something, which may include, ownership of artwork, properties, or collection, or ownership of anything that is ‘one of its kind’. 

FUNCTION OF NFTs

As mentioned above, NFTs are the digital certificates that can be traded, i.e., brought or sold just like any other valuable item or piece of art. The simple process of owning an NFT is that when anyone buys an NFT, that person receives a digital certificate of its own which is usually secured with Blockchain Technology, and ultimately it makes that person the owner of the said digital asset. 

The primary advantage of NFT is that the cybercriminals cannot hack or temper the NFT because anyone, irrespective of gender/nationality, can easily buy or sell an NFT and the person is not required to take any prior permission from anyone to buy or sell such NFT, also, these NFT assets are stored and secured in an encrypted peer-to-peer network which protects against cybercriminals. 

Position of NFT stocks in India

According to financial experts, NFTs are relatively a new concept in India and this trend will take some time to get familiar with citizens of India, no matter how popular they are worldwide. 

In an interview (see here) Rahul Pagidipati, CEO, ZebPay, India’s first Bitcoin trading platform where anyone can invest in Bitcoin and other digital currencies globally, said India is blessed with lakhs of artisans, including modern and traditional, who could sincerely be benefited from using NFTs to verify their piece of work and to avoid any duplicability. The only thing the artisans need to do and the number of artisans are currently doing globally is that they can protect their creations with a tokenized ‘wrapper’ (NFT) to show that the work is original and not copied. Therefore, an immediate advantage of using an NFT in India is that it could be used for protecting the intellectual property rights of Indian artisans. 

The crypto exchange (ZebPay) is certainly planning to become India’s first company which shall be launching an NFT. The NFT will be named ‘Dazzle’, which is the other name for a group of Zebras. 

What is WazirX?

WazirX is one of India’s most trusted Bitcoin & Cryptocurrency exchanges. It allows buying, selling and trading Bitcoin, Ethereum, Ripple, Litecoin and more cryptocurrencies in India. It has created a token called ‘WRX’ similar to Bitcoins and other cryptocurrencies and according to the exchange, there shall be a maximum of 1 Billion WRX coins ever created. ‘WRX’, which is a utility token backed by WazirX, helps in forming the backbone of the WazirX ecosystem and ethics of cryptocurrency and blockchain. 

Recently, WazirX has launched marketplaces for NFTs, which is one of India’s first marketplaces for NFTs. This is the biggest boom for NFTs in India as the development has created a platform for seamless exchange of digital assets and intellectual properties which shall include art pieces, audio files, videos, tweets other than the digital goods and services. 

The following are the highlights of the marketplace for NFTs:

• This platform is created to cater for the needs of the artisans/creators and will help all the Indian creators/artists to place their digital assets for auction over Blockchain-based NFT marketplace and they can also earn royalty thereafter. 
• One of the prominent features of the abovementioned marketplace created for NFTs is that WazirX will not charge a single fee from their customers for creating and listing NFTs.
• A gas fee, however, shall be paid to the miners in respective currencies because NFTs are built on blockchain that allows smart contracts. The gas fee cost is used for the computer power which verifies the transactions, and WazirX is trying to eliminate this cost to make the marketplace cost-effective for artists/creators.

Nischay Shetty, the Founder of WazirX, in an interview, said that such a marketplace will transform the market in the rapidly digitizing world which shall grow interested in NFT across the globe. 

This marketplace initiative for NFT is being supervised and headed by Sandesh B Survarna, a Canadian entrepreneur, along with Vishakha Singh, film actor/producer, as an advisor. According to some market reports, in 2020, the market for NFT grew by 299% and gained more than $250 million as the total value of NFT transactions, which include transactions relating to breeding, meeting, and renting of NFTs. The marketplace for NFT will boom in 2021 as it is getting more popular. 

The popularity of Crypto art in India

The following are the major instances that highlight the popularity of Crypto art through NFT in India:

• On March 11, 2021, a JPEG file was sold for $69.3 million (approximately Rs 504 crore) and was paid in cryptocurrency.
• In February 2021, Amrit Pal Singh, who is a Delhi-based animator and art director, sold two pieces on Foundation for Rs 18 Lakh. The two pieces were toy face renditions of Daft Punk, which was the French Music duo. The pieces are a part of series of toy faces which included Frida Kahlo, Vincent van Gogh, Sherlock homes, Malala Yousafzai. In his 90 year career, he has launched various mobile apps, card games, but he got succeeded in the toy face NFTs. 
• In Chennai, Siraj Hassan has sold as many as 27 works from his series. The ‘Caged Series’ included miniature trees, human figures, etc. He created the series during the lockdown and these pieces reflect on isolation and mental health. According to him, NFTs support artists monetarily by which artists can earn a royalty on his/her art pieces.
• A Delhi-based 3D artist, Adhiraj Singh, who owns LOTA design, which is a Digi-fashion brand, has also made a mark in the NFT marketplace. He will auction some of his workpieces, including a ‘selfie’ of a digital model and influencer. 
• Khyati Trehan owns a global design firm ‘Ideo’ and is a Munich-based senior designer. He acts as an independent artist too and has sold five works on Foundation for a price ranging between 0.8ETH to 2.8601 ETH. According to him, NFT has empowered digital artists and has opened up the creative potential for monetising digital work’s virality.
• The famous artist duo Thukral and Tagra work with various media including interactive games and videos said that they are currently researching the NFT marketplace. According to him, there is rice of digital currency and its effect are exposed to the world.
•  On March 10, 2021, ArtStation, the online art platform had to cancel its NFT timed online sales after it faces rage from social media users regarding cryptoart’s ecological impact.

The legal status of NFTs in India 

As seen above, NFTs are too booming in India, however, currently, there is no legislation regarding the legal status of NFTs. Recently, the Government of India was set to pass legislation that would ban private cryptocurrencies, but, Union Finance Minister Nirmala Sitharam, has clarified in a statement that there will not be a complete ban on cryptocurrency and that the Government is not closing any paths for cryptocurrencies, or blockchain, and fintech as yet. Therefore, the legal statuses of NFTs are unclear in the future.

Government’s take on NFTs

As stated, the Government has not decided to completely ban cryptocurrency. It does not state its desire to ban NFTs either; however, the upcoming private cryptocurrency bill has some uncertainties regarding the legality of NFTs. 

The Government is likely to adopt the draft of the ‘Banning of Cryptocurrency & Regulation of Official Digital Currency Bill’ of 2019 in 2021. Section 2(a) of the act defines a cryptocurrency as following:

“any information or code or number or token not being part of any Official Digital Currency, generated through cryptographic means or otherwise, providing a digital representation of value which is exchanged with or without consideration, with the promise or representation of having an inherent value in any business activity which may involve risk of loss or an expectation of profits or income, or functions as a store of value or a unit of account…”

Under the abovementioned definition, it can be analysed that NFTs could be considered to be the following value:

• Representation of value, which is exchanged with the inherent value in any business activity, for example, a proprietary code could be sold as an NFT to a business.
• As a store of value, for example, buying any artwork/art pieces. 

However, there is an exemption to the above under Section 3(3) of the bill, which states that the use of Distributed Ledger Technology would be approved in situations of creating a network for delivery of any financial (or other) services or for creating value, which would not include any use of cryptocurrency, in any form, for making or receiving payments. The only problem with this section is that it is unclear whether NFTs would fall under the scope of ‘services’ as laid down above.  

Should NFTs get banned or not?

The simple answer to this question is ‘no’ because NFTs provide various unique opportunities for artists/creators. The NFTs are booming worldwide, and the following are the reasons NFTs should not get banned:

• The first and foremost reason is that NFTs are similar to the assets and despite being a part of cryptocurrency, are different from cryptocurrency, therefore, the Government should not get concerned about NFTs as they are with cryptocurrency. 
• NFTs are unable to develop into an unregulated currency that would be opposed to the rupee because of their lack of ‘fungibility’ or ‘interchangeability. Therefore, if NFTs are allowed, they would not have any effect on the rupee.
• Artists/creators get their royalties from resale or use of their creations, and NFTs make sure that the creators get their proper royalties. This situation is in contrast to the traditional physical or digital art forms where artists faced difficulties collecting royalties.
• Every transaction which takes place on the blockchain, where NFTs are being resold can be tracked by the copyright holder (in most cases he is only the creator). Thus, NFTs are transparent.

Conclusion

Vignesh Sundaresan, who is an Indian programmer, has recently revealed himself as a sort of ‘mysterious person’ who has paid approximately $69.3 million for digital artwork through NFTs. The Indian programmer cooperated with Anand Venkateshwaran, as an agent of ‘Metapurse’. Metapurse is a crypto-exclusive fund that specialises in identifying early-stage projects across blockchain infrastructure financed by Metakovan. 

With various opportunities and money on the line, NFTs are booming and artists/creators are the ones who are getting attracted the most by it. As far as the future of NFTs is concerned, the rule of caveat emptor shall be followed, which means ‘buyers beware’. The whole idea behind this is that there can be a scenario when all this hype around NFTs eliminates and the value of NFTs can anytime drop as easily as a stock.

In India, the Reserve Bank of India and the Government is planning for a framework for cryptocurrencies or digital currencies, however, according to some experts, there might be chances that there would be no separate legal framework and then the reliance could be placed on regular principles of the Indian Contract Act which acts for the sale/purchase of goods, while, the other is saying that NFTs are derivatives as per the Securities Contract Regulation Act. According to some investment advisors, the NFTs are much riskier; a high-risk asset and retail investors should be staying away from it. 

References 

1. https://www.livemint.com/money/personal-finance/nonfungible-tokens-are-now-in-india-but-mind-the-legal-pitfalls-11617557315927.html
2. https://inc42.com/buzz/cryptocurrency-this-week-india-mulls-blocking-crypto-trades-nfts-continue-to-gain-momentum-more/
3. https://thewire.in/tech/india-nft-cryptocurrency-digital-content-royalties-regulation
4. https://www.thehindu.com/sci-tech/technology/indian-crypto-currency-exchange-launches-nft-marketplace-for-indian-artists/article34244737.ece 
5. https://www.livemint.com/money/personal-finance/your-guide-to-non-fungible-tokens-what-nfts-are-and-how-they-work-11614768696550.html 
6. https://www.thehindu.com/entertainment/art/indian-digital-artists-are-exploring-the-latest-craze-cryptoart/article34106274.ece
7. https://medium.com/@changhugo/understanding-the-value-of-non-fungible-tokens-nft-49d2713bdfc4#:~:text=On%20the%20other%20hand%2C%20non,and%20virtual%20buildings%20on%20Decentraland.&text=NFTs%20has%20been%20widely%20discussed,by%20Dapper%20Labs%20in%202017. 
8. https://en.wikipedia.org/wiki/List_of_most_expensive_non-fungible_tokens 
9. https://www.businessinsider.in/tech/news/indian-crypto-exchange-wazirx-has-announced-a-nft-marketplace-for-indian-artists/articleshow/81909932.cms 
10. https://www.thequint.com/explainers/what-are-nfts-how-does-it-work-and-its-future-in-india#read-more
11. https://www.cbsnews.com/news/nft-nonfungible-token-blockchain-explained/#app

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