This blog is authored by Kabir Chaturvedi , Associate Editor, at Law and Tech Times, RGNUL.
Owing to the expeditious rise of NFTs recently, the concept of NFTs is still relatively unknown to many. Hence, before delving into the laws which may govern NFT trade in India, this article also provides a general introduction to NFTs.
An Introduction to NFTs
What are NFTs?
NFT is an acronym used to refer to Non-Fungible Tokens. A Non-fungible item refers to an item which is unique and irreplaceable. They are stored on blockchain and hence include unique identification codes and metadata that separates them from one another. Physical parallels for the traditional world can be drawn with items which are not interchangeable, like the Mona Lisa, or a one-of-a-kind rare trading card. The value of the card arises from its rarity and uniqueness, and not its function as a trading card. So, NFTs are essentially unique digital items which can be owned by only one person at a time.
Even though NFTs are digital assets which can be bought and sold like physical assets, they do not possess a physical form.
How do they work?
The best way to explain the working of NFTs is through an example. NFTs have been most popularly employed for digital videos and images recently, with some famous employers including the likes of NBA, who’s TopShot trading cards have been traded for $230 million. TopShot cards are essentially tradeable digital cards which include video clips of their favourite players from recent matches. Now, the question that immediately pops into mind is duplicity – video clips of moments are available on the internet and can be accessed legally or illegally, and can easily be duplicated. With NFTs however, these cards can be tokenized to create a digital certificate of ownership that can be bought and sold. Further, since NFTs use blockchain technology, this unique token cannot be forged as the blockchain ledger is maintained by thousands of computers around the world. Although popularly used for digital art, NFTs can also be used for other things including smart contracts, video game collectibles, and ownership of almost anything really. For example, twitter founder Jack Dorsey’s first tweet was sold for $2.9 million on 23rd March, who auctioned it for charity.
How can you create, buy and sell them?
If you have a rare card or digital art that you’re willing to sell, you can enlist it on OpenSea or Rarible. These are third-party marketplaces which resemble traditional online shopping experiences. NFTs can also be made and traded using developer tools, but these marketplaces are more convenient for the layman. Naturally, since NFTs are sold on these platforms, they can be bought here as well.
NFTs are usually traded in the blockchain-based cryptocurrency Ethereum. One Ether is currently (as of 4:56 pm (IST), 25th April, 2021) equivalent to $2272.56, which is roughly 1,70,284 Rupees. Detailed steps on how to buy Ether and NFTs can be found here.
The treatment of NFTs under Indian Law
NFTs are primarily sold on foreign marketplaces, which attracts the applicability of the Foreign Exchange Management Act, 1999 (FEMA). However, since NFTs are essentially certificates of authority or digital tokens for items (physical or virtual), the treatment of the NFT will depend on the treatment of the item itself. For example, an NFT token certifying ownership of digital art will be treated differently from that certifying ownership of a cask of whisky. Despite the applicability of FEMA, the lack of guidelines by RBI have left a void. For the purpose of this article, and perhaps generally as well, this void has to be filled by the extension of application of FEMA. Through this extension, NFTs can be viewed as intangible assets, like software or intellectual property. Despite the extrapolation of FEMA, a large question mark still hovers over the location of NFTs. More precisely, the lack of.
One perspective is that since NFTs are stored on a decentralised blockchain ledger, and the Supreme Court deems that crypto-assets “cannot be stored anywhere” (Internet and Mobile Association of India v. Reserve Bank of India (2020) 10 SCC 274), they are stored nowhere.
Another perspective is that in cases where the NFT is tied to a physical item, it’s location is determined by the place of residence of the owner of such item. This principle however, falls short of providing a solution to instances where NFTs are linked to digital items like art.
Can NFTs be treated as Securities?
Again, the treatment of an NFT as a security depends solely on the item it is tied to – if this item qualifies to be treated as a security. For example, an NFT tied to bonds of a company will be treated as a security under Indian Securities Law, whereas an NFT tied to digital art will not be treated as a security, and it will be limited to just a token of authenticity and/or ownership.
It is important to clarify here that merely owning an NFT does not imply legal ownership of the tied item or asset unless the person selling the NFT has legal ownership himself. Hence, an NFT for a digital artwork will be meaningless if bought from a person who is not the legal owner of the art and is not the creator of the said work. The trade of NFTs without proof of title and ownership is one of the biggest intellectual property rights issues that arises from NFT dealings.
Do NFTs transfer ownership of copyright?
The agreement to buy the NFT does not transfer ownership of the copyright by default and most NFTs grant the buyer a non-exclusive license to use the digital copy of the creative work. However, the author or creator can transfer ownership of the copyright by including it in the agreement. But this is not as straightforward as it reads. To transfer ownership of a copyright (which initially resides with the author or creator of the work) the transfer must be in writing and signed by the copyright owner. The implementation of this condition in the realm of blockchain with absolute anonymity remains tricky.
What does the Government’s Anti-Cryptocurrency stance mean for NFT trade in India?
NFTs are not outlawed in India, and the government’s anti-cryptocurrency stance is not reason enough to be skeptical of trading these digital tokens; because cryptocurrencies and NFTs are polar opposites. Cryptocurrencies are fungible items which can be replaced and are made for exchanging, like the physical currency. For example, there exist innumerable notes of 2000 Rupees which can be used interchangeably and can be exchanged. It wouldn’t matter if you exchanged a 2000 Rupee note with a stranger because both of them possess the same value. As elaborated earlier, this is the exact opposite of the unique and irreplaceable NFT, as these tokens are not meant to be traded. Hence, it will not be used for scams, frauds and running online betting rackets, which are some of the reasons behind the government’s stance against cryptocurrency.
Conclusion
Even though NFTs have been around since 2013, their recent rise – especially within the upper echelons of the society – has exposed the incapability of the current legal setting to deal with these transactions. As mentioned above, extrapolation of existing statutes like FEMA can be seen as a hypothetical stop-gap fix at best. The existence of ambiguities like the location of NFTs when considered under FEMA, and the difficulty in implementation of a written and signed transfer agreement whilst maintaining anonymity in the realm of decentralised blockchain ledgers are proof of the current laws’ incapability. Therefore, apart from informing the reader about NFT transactions and how to deal with them in India, this article also serves as a caution against dealing with them in the existing legal climate – caveat emptor.
Image Credits :- https://decrypt.co/resources/non-fungible-tokens-nfts-explained-guide-learn-blockchain
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