This article is written by Oruj Aashna, a student of the University of Calcutta. This article addresses the concept of non-fungible tokens with reference to the Indian context. It also focuses on the legal viewpoint of and government’s take on the non-fungible tokens with a brief analysis of their legitimacy and sustainability in India.  

Introduction

It was earlier this year that the world saw a rapid change in the digital world. The surge of population towards the digital revolution, also known as the third digital revolution, seemingly accelerated when the pandemic struck the world. One such transformation in the digital world gave rise to digital investment and digital currencies (cryptocurrency). In India, a huge population was seen taking an interest in digital investments. Cryptocurrency thus became a huge industry, with a million Indians investing in it. The main reason why crypto became so popular was the decentralized method and the secured nature of blockchain it was functioning upon. The blockchain method subsequently raised the demand of investors willing to invest in digital assets and currencies. 

Recently non-fungible tokens, which also function and operate by the blockchain paradigm, suddenly hyped. There has been a worldwide fuss about non-fungible tokens, with millions of artists and investors coming together and engaging in these digital forms of assets. But with the popularity comes skepticism regarding the legality of NFTs. There are speculations, especially in India, about the legitimacy of these tokens. Indian population has raised concern on sustainability of the token in India. Consequently, putting the token is in question. 

What is Non-Fungible Token

A non-fungible token (NFT) is an irreplaceable digital asset or token, with each token symbolizing unique items, such as art, posters, games, real estate, etc. The word fungible in NFT means something which is replaceable by another identical item. Therefore, non-fungible tokens are those tokens that aren’t replaceable with another non-fungible token. We can see this differently: each token is different, unlike other digital currency or actual currency, which holds identical value if replaced by the same amount.

NFT is not a new concept, and it was created in the year 2012-13. It started gaining popularity in 2019 when a French street artist, Pascal Boyart, painted a mural inspired by the famous masterpiece of Eugene Delacroix. The French authorities did not approve the art and decided to coat Boyart’s painting with a purpose to hide the message behind the artwork. Boyart decided to take a picture of the mural and put it on NFT. Today, even though the physical mural does not exist, it is available in the form of NFT, and it is the first most popular art mined on the digital platform.  

Why did NFTs become popular    

With the world extending its digital scalability, everything is available online. Most notably, the trading of art and digital artwork has become accessible in one click. Each artwork is available on every next page of a different website. Thus, we are unaware of the ownership and authenticity of the work. The digital platform has adversely affected the creation of original artists. With no security and unknown ownership, the artists are left with nominal value. 

According to the proponents, NFT is designed to tackle the problem of ownership in the digital marketplace. In simple terms, NFT will represent the ownership of the unique item when attached with a token.

What is classified as unique items

A unique item could be anything original that holds value in the eye of people. The item could be anything provided it is original and irreplaceable. This is to note that anything to be considered an asset or token need not have to be anything artistic. An item could be a mere post or a tweet. The most relevant asset that projects the value of “originality” is the one-line tweet by Jack Dorsey that is sold for $2.9 million in NFT based transactions.

Working of NFTs

NFT are functioned and stored on a blockchain ledger. The blockchain method records the token data, which means the token and its associated ownership are locked in a block.

Simply put, when an item or token is stored in the blockchain, the data about its actual ownership gets recorded. Whenever there is a transaction or sale, or purchase of the NFT, the blockchain will record the same on its subsequent block. 

With every sale or resale of an item, the original artist will get a certain percentage of Royalty, and all of these will be recorded in ledger-based accounting. Blockchain thus provides peer-to-peer transactions, consequently prevents reproduction or piracy of original items. 

Whenever an artist decides to put his or her art on, it is assigned with a unique token, and this token then gets stored in the blockchain. The NFT then gets sold at auction, with prospective buyers bidding against each other. When the price reaches its highest amount, the token gets sold, and the highest bidding buyer becomes the owner of that particular token. 

Since NFTs reside on a public blockchain, anyone holding a cryptocurrency wallet such as Ethereum, Binance, Flow, Alogorand, and others can buy NFT. NFTs are typically purchased and sold using crypto assets. Some crypto exchange platforms such as Nifty Gateway also allow investors to buy it through debit or credit cards.

Indian context of NFT

• Recently Indian programmer Vignesh Sundaresan paid $69.3 million for digital art created by artist Mike Winkelmann, popularly known as Beeple. The token was sold in an auction conducted by auction house Christie. With a record-breaking auction by two investors, Vignesh, followed by Anand Venkateshwaram, became the highest betted token holder. This opened up hope for millions of investors and crypto-asset platforms in India. 
• Now various artists in India are stepping forward into a digital market to associate their artwork in NFT. With that, a famous artist Nuclaya has decided to put his album on the digital market as an NFT.  
• WazirX, which is apparently India’s most popular cryptocurrency exchange platform, launched its first NFT market for Indian artists. WazirX will allow artists across India to place their digital asset or non-fungible token, including anything artistic or unique, ranging from artwork to a mere tweet. Looking at the growing interest in NFT in the Indian audience, the company’s CEO has claimed to eliminate the fees paid to miners in respective currencies to verify transactions and make it more lucrative for customers.
• With the gaining popularity in NFT, the asset is also steeped with questions around its longevity and sustainability in the Indian environment. The uncertainty is primarily because the Government intervenes in the digital asset transaction (discussed in the preceding subhead).  

Governments’ view on NFT

As of now, there is no general prohibition on NFTs, which could penalize its movement in India. Although the Government is silent about the legality of NFT, a previous approach of the Government toward cryptocurrency has certainly made NFT a skeptical area. Late in 2019, the government issued a bill called Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, which happens to be the “Bill” for banning private digital currency and regulating public or official digital currency in India.

Section 3(1) of the said Bill states, “No person shall mine, generate, hold, sell, deal in, issue, transfer, dispose of or use Cryptocurrency in the territory of India”.

Does NFT come under the definition laid down in the Bill

• Section 2(1)(a) defines cryptocurrency as “….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 and includes its use in any financial transaction or investment, but not limited to, investment schemes.”
• If we examine the definition of cryptocurrency, there is a possibility of NFT falling under the above description’s ambit. Since NFT is a crypto token that signifies both representations of value and a store of value, it is likely to fall under the said definition.
• NFT being public and non-fungible, there is a hope that it may get exempted from the prohibition or penalty. Moreover, Section 3(3) of the bill states:

“Nothing in this Act shall apply to the use of Distributed Ledger Technology for creating a network for delivery of any financial or other services or for creating value, without involving any use of cryptocurrency, in any form whatsoever, for making or receiving payment”.

• The above paragraph lays down the exception to it by allowing ledger technology to create a network for the flow of any financial or other services or create value. But there’s still an ambiguity to this Bill.  
• But recently, the opinion of the Government has shifted to a pessimistic point. Our finance minister, Nirmala Sitharaman, made it clear that there will not be a complete ban on cryptocurrency or at least the technology associated with it. In her interview stated that there is a specific window for people to experiment with blockchain and cryptocurrency. The Government acknowledged that existing laws on cryptocurrency are inadequate to deal with the subject. The new legislation will clear the Government’s view on cryptocurrency.   

The question arises: Would NFT be affected by any future laws of banning crypto transactions?

• There is a possibility of prohibition because the definition of cryptocurrency verifies it as cryptocurrency.  
• Considering the handful of investors on NFT in India, banning the token will be a bad idea. The Government’s concern on cryptocurrency might affect NFT because these tokens are termed as “cryptocurrency” most of the time. The notion needs to be changed because NFTs are more of an asset and not just a currency. NFTs can be exempted from being a currency for one primary reason, ie. they cannot be interchanged. NFT representing unique items does not act as a means of exchange.

Regulation of NFT

1. As of now, in India, there appears to be no clear view of any regulation of non-fungible tokens. Since instruments like NFTs have no legal framework, the functioning of these tokens is controlled by the regular principles of the Indian Contract Act.
2. It has been speculated that NFTs are derivatives as per the Securities Contract (Regulation) Rules,1957 (SCRA). The SCRA states that contracts in derivatives are valid only if such agreements are: 
   1. Traded on a recognized stock exchange; and 
   2. Settled on the clearinghouse of the recognized stock exchange.
3. According to SCRA, ‘derivative’ includes: 
   1. Security from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; 
   2. A contract that derives its value from the prices, or index of prices, of underlying securities. 
4. Therefore one can only trade derivatives on authorized exchanges such as for stocks or commodities.
5. Suppose NFT has deemed a contract in derivative for the SCRA. In that case, it will make the private trade, sale, or purchase of NFTs illegal, thereby adding another layer of precariousness to the position of NFTs in the Indian context.

Conclusion 

Non-fungible tokens are a highly demanded asset right now, especially in India. Indian artists are left with minimal or non-recognition because of an outright copy of the original material. Indiscriminately copying the artist’s work consequently harms the actual value of work and the authenticity of it. Non-fungible tokens aimed to target the issue of all the artists around the world. Investors and artists are thus in massive favour of NFT irrespective of its uncertainty in the Indian environment. 

Even though non-fungible tokens provide an excellent platform for artists all around the world, it is a high-risk asset just like cryptocurrency. According to proponents, NFTs are riskier, and the investment in these assets is a high-stakes investment. Indian shares are susceptible, and so NFTs may find it hard to adjust in the Indian market. Plus, with no legal framework and resistance of the Indian government against cryptocurrency might also affect the legitimacy of non-fungible tokens.   

References 

• https://www.livemint.com/money/personal-finance/nonfungible-tokens-are-now-in-i n d ia-but-mind-the-legal-pitfalls-11617557315927.html#:~:text=There fore%2 C%2 0 you%20are%20not%20legally,as%20for%20stocks%20or%20commodities.&text=However%2C%20as%20of%20now%2C%20there,for%20a%20non%2Dfinancial%20asset
• https://www.obhanandassociates.com/blog/non-fungible-tokens-the-vanguard-of-innovation-or-simply-another-trend/#:~:text=Currently%2C%20there%20is%2 0n o% 20law,trading%20of%20NFTs%20in%20India.&text=Adding%20to%20the%20uncertainty%20is,1956%20(%E2%80%9CSCRA%E2%80%9C)
• https://www.cnbc.com/2021/03/15/india-plans-cryptocurrency-ban-will-penalize-miners-and-traders.html#:~:text=News%20Videos,India%20will%20propose%2 0a% 20law%20banning%20cryptocurrencies%2C%20fining%20anyone%20trading,the%20red%2Dhot%20asset%20class

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