NFTs, which stand for Non-Fungible Tokens, have now become incredibly hot. Collectors are spending billions on NFTs. Pandemic restrictions and working from home forced artists to explore this new digital platform and grab this incredible opportunity to showcase their talent and make money from it. The global NFT generated over USD 18.5 billion in 2021 and is expected to exceed USD 30 billion this year. But why are NFTs so well-liked, and why do people spend so much on them? The main concern that surrounds it is, do NFTs have any legality to them? This blog will make you understand what NFT is and its legal space in the context of Indian law.
What are NFTs?
NFTs are a new method for digitally buying and selling unique art and other media. It can be used to represent items such as paintings, audio, videos, songs, GIFs, and any type of digital art that has a uniqueness to it.
Let’s simplify it more to have a clear picture of NFTs. The word fungible implies the ability of goods or assets to be exchanged and yet hold the same value, and tokens are the proof of ownership. Let’s say you have Rs 2000 and you want to get it exchanged for four notes of Rs 500. You can do this easily as Rs 2000 notes are fungible and can be exchanged with four notes of Rs 500 and still hold the same value. But the painting of the Mona Lisa by the Italian artist Leonardo da Vinci, which is considered an archetypal masterpiece of the Italian Renaissance, cannot be exchanged as it is unique and one of a kind. Thus, it is non-fungible.
How Do NFTs Work?
NFTs reside on public blockchains such as Ethereum, Binance, and others and can be created by using development tools by the developers. Blockchain technology and NFTs provide an opportunity for artists to monetize their wares. Since blockchain is transparent, it helps to establish ownership. Several artistic items can be sold in tokenized form. Furthermore, since the trading of NFTs is possible only through cryptocurrency, artists have the flexibility to set their royalty fee for every subsequent transaction of their work in the secondary market.
Recently, Indian celebrities such as Amitabh Bachchan, Rajinikanth, and auto Indian brands like MG Motor have jumped into the NFTs and made profits of millions.
“Law space” in India for NFTs
Everyone out there is busy chasing NFTs, but the question that comes to mind is, is buying and selling NFTs shares a legal space in India? The simple answer is that India has not yet passed any law regarding NFTs to regulate them properly.
The real debate on NFT’s legality was initiated when India’s central bank and regulatory body, RBI, issued a circular dated April 6, 2018, which directed the banks not to get involved in the transactions of virtual currencies and also barred banks from providing any kind of services to such entities or individuals dealing with virtual currencies. The loss of the economy, money laundering, and territory activities are some of the reasons why the RBI came up with such a circular. This legal point was challenged in the Supreme Court by the Internet and Mobile Association of India.
In the case of the Internet and Mobile Association of India v RBI, the Supreme Court quoted the case of State of Maharashtra v Indian Hotel and Restaurant Association. The court held that there is no doubt that the RBI has very broad powers in the economy of India, but there must have been at least some empirical data about the magnitude of harm faced by the regulated establishments. Therefore, the circular issued by RBI is unfair as it also limits the Right to Trade under Article 19(1)(g) of Fundamental Rights.
Also in 2019, the Banning of Cryptocurrency and Regulation of Digital Currency Bill, 2019 was introduced, which would ban the mining, holding, selling, issuance, disposal, or use of cryptocurrencies with a fine or imprisonment of up to 10 years or both. However, on November 30, 2021, during the winter session, Finance Minister, Nirmala Sitharaman, said in Rajya Sabha that a new bill, i.e. Cryptocurrency and Regulation of Official Digital Currency Bill 2021, will be introduced in the House after it passes approval from the cabinet. As of now, it’s missed the priority list and is waiting to be on the table for discussions.
Have NFTs considered derivatives under the Securities Contract (Regulations) Act, 1956?
According to section 18A of the Securities Contract (Regulations) Act 1956, a derivative contract is only legal if such contracts are traded on a recognized stock exchange. As cryptocurrency exchanges are not recognized or licensed by the central government, there are high chances of a complete ban on trading.
NFTs and Taxation
Certain changes are made to the Income Tax Act, 1962 through the Finance Bill, 2022 (Bill no. 18 of 2022). The finance bill as introduced in the Lok Sabha provides some clarity on how these assets may be treated, especially from a tax angle. The budget introduced the definition of “Virtual Digital Asset” (VSA), which is proposed to be introduced in the IT act. A new sec 115BBH is also proposed in this budget, which will go into effect on April 1st, 2023. A higher flat tax rate on the transfer of any VDAs has been decided to be 30%. Nirmala Sitharaman, India’s Finance Minister, also said that the introduction of Central Bank Digital Currency (CBDC) will give a big boost to the digital rupee using blockchain and other technologies to be issued by the Reserve Bank of India starting in 2022-23.
NFTs and Cross-Border Transactions
FEMA (Foreign Exchange Management Act) oversees cross-border commercial ventures in India. Under the present rules of FEMA, cryptocurrencies should be considered intangible assets like software and intellectual properties, which are protected by FEMA regulations. However, determining the location of the NFTs is an issue. Also, while performing the buying and selling of NFTs, Indian participants perform cross-border transactions, and to fall under the ambit of FEMA, the transactions have to be done through authorized banking channels.
NFT and Copyright:
NFTs can only be monetized by selling them to a third party. It is not as easy as buying a physical asset. The owner of NFTs just owns the ownership and nothing more than that. To illustrate the above, consider Twitter’s former CEO, Jack Dorsey first tweet, which he sold as “NFT”. Even though the buyer would not be able to use the tweet itself, it leads to an infringement of copyright because the copyright is still owned by Twitter and Jack Dorsey himself. Although a copyright owner has numerous rights under Section 14 of the Copyright Act 1957, such as reproduction of copies, creating derivatives of the original assets, and so on, it weakens the copyright laws.
NFTs and Contracts
In blockchain technology, smart contracts are used to simplify the trading between parties. It comes under the jurisdiction of the Indian Contract Act, 1872, and the Information Technology Act, 2000. But in a smart contract, as most of the NFTs contracts are paid in cryptocurrency and the legality of cryptocurrency is still a question mark. The issue arises: are the smart contracts and the transactions based on them valid?
NFTs, bring opportunities as well as possible threats. Hence, the future of NFTs remains questionable. There is a severe lack of laws that govern NFTs. Demand to provide clarity is increasing day by day. An NFT is a great way to create a link between a collector and an artist and to have a balanced and legal regulatory environment, India can follow the paths paved by Singapore, Japan, Canada, and other countries dealing with such virtual currencies. The legislative stance should have a clear statutory framework on this issue immediately so that people can know the legal space of NFTs in the context of Indian law.
Author(s) Name: Ankita Kumari (Indira Gandhi National Open University)