Non Fungible Tokens and Their Legal Implications in India

Introduction

During the pandemic, the Non Fungible Tokens (NFTs) market expanded when traditional artists, performers, galleries, and venues struggled with Covid lockdowns. Seven years after their inception, NFTs have now become the latest trend in India and many people are profiting from the rising interest in these digital assets. Many artworks, such as Beeple’s digital artwork[1] or a tweet by Jack Dorsey[2] (co-founder of Twitter), have recently been auctioned in millions as NFT. By providing a new forum for such transactions, NFTs have revolutionized the concept of artwork ownership. With billions of NFT sales, the market is confronted with legal challenges ranging from copyright and intellectual property rights to data protection legislation and estate planning.

What are NFTs?

In simple terms, an NFT is a one-of-a-kind token associated with a digital asset, be it an image, a song, an animation, or a movie, for which ownership is tracked and verified using decentralized blockchain technology, particularly the cryptocurrency Ethereum.[3] Every transaction, including future transfers and sales, is recorded on the blockchain after the token is logged, producing an easily accessible record of authenticity and ownership that cannot be erased or counterfeited. The sale and resale of NFTs and associated assets have been made possible via blockchain technology. While numerous identical pieces may exist (for example, a photograph downloaded millions of times), the digital artist can sell one high-valued item as an actual original. Fungible is something that must be easily exchangeable and have the same value as others (for example, all $1 bills have the same worth, so they are fungible). But, NFTs are not fungible because every single piece of art is one of a kind and cannot be exchanged with any other piece of art. With a market value of $2.5 billion, the NFT market is still in its nascent stage, but it has tremendous development potential. The NFT market surged by a staggering 2100% in the first quarter of 2021.[4]

How is it different from cryptocurrency?

In comparison to cryptocurrencies, which one can exchange for other cryptocurrencies, NFT is one-of-a-kind and cannot be swapped for anything else. Also, although Bitcoin can be divided into smaller components, NFTs can only exist in their entirety. [5]

Legal Implications of NFTs

The legal position of NFT in India is an unsettled issue. When it comes to the sale and purchase of NFTs in India, there are a few legal issues to consider:

  1. Is the buying and selling of NFT legal in India?

In order to respond to the above question, we should first consider the legality of cryptocurrency because NFTs use the same technology as cryptocurrencies, which is blockchain, and most NFTs are acquired with cryptocurrency. Although cryptocurrency has existed since the turn of the century, the major controversy about its being legal started in June 2018 when the RBI issued a circular[6] and instructed banks to stop dealing in cryptocurrencies. This central bank’s order was challenged in the Supreme Court in Internet and Mobile Assn. of India v. RBI[7], and it was contended that cryptocurrency is a medium of trade and the right to trade is a basic right under Article 19(1)[8] of the Indian Constitution. Hence, cryptocurrencies were held to be legal in this case. So, it can be inferred from this case that NFTs are also legal as they are purchased and sold using cryptocurrency. So, the cryptocurrency’s legality must be acknowledged for NFTs to be legal. In India, however, NFTs do not have their own legal framework.

  • Privacy and Data Protection Laws

Individuals have the right to have their data erased under certain data protection laws.[9] The immutability of a blockchain, on the other hand, makes it functionally impossible for purchasers to carry out such a statutory right. As a result, NFTs containing personal information may violate data protection rules and personal rights. The lack of regulation in the non-fungible token sector has raised concerns for many people. Parliaments and legislators all around the world are working to integrate NFTs into a modern legal framework.

  • NFTs and their Relation with IPR

The rights given to any person or organization over the creations of the mind, such as inventions, literary and artistic works, designs, symbols, names, and pictures, are examples of intellectual property rights. The owner of intellectual property rights has exclusive rights to use, replicate, and sell their work. However, copyrights to an article do not come with ownership of an NFT. A copyright owner has several exclusive rights over an artistic work under Section 14 of the Copyright Act of 1957[10], including the ability to reproduce and make duplicates of the original artwork. NFTs are merely a means of displaying ownership of something on the internet while the copyright to that content remains with its creator. The copyright is not transferred with the NFT unless it is specifically stated in the sale agreement. However, if the NFT owner wants IP rights to the artwork, this can be accomplished through licensing.[11] Besides the IP rights to the artwork, the NFT owner does not receive the original artwork; instead, he or she receives an authenticated copy of the artwork. NFT ownership usually means that the owner is purchasing an authenticated duplicate of the original artwork. NFT’s main purpose is to prove the authenticity of an artwork and its owner through the internet.

  • Royalty Payments

Smart contracts are used by some NFTs for royalty payments. Smart contracts are digital contracts in which the conditions of the contract are codified and incorporated into the tokens acquired.[12] When a preset set of criteria is met, smart contracts are programmed to run automatically. The code cannot be altered, erased, or changed because it is permanently issued as a token on the blockchain. Smart contracts are used in NFTs to ensure that a portion of the sale price is paid to the original NFT creator in the form of royalty payments. Because the contractual obligations are carried out automatically in response to a triggering event, the level of confidence necessary before a payment may be issued is drastically reduced. Smart contracts in NFTs, on the other hand, usually work in conjunction with the marketplace’s terms and conditions where the NFT is purchased. If the two don’t match up in any way, this can lead to confusion and ambiguity. The automated resale royalty payment system may not work unless the NFT is resold on the same site where it was first advertised.

  • Legal Rights of a purchaser of an NFT

The law is unclear on this matter. However, it appears that the maker of an NFT does not relinquish all of his rights to the work. The majority of the time, which rights should be transferred and which rights should be retained is decided by a “smart contract.” The platform frames these contracts, which often transfers many rights to the buyer, but the NFT is always created by the original inventor. According to some trading platforms, the copyright belongs to the corporation, and the creator of an NFT has no rights to it after it is sold. We don’t know exactly which rights the creator transfers to the purchaser because the NFT market in India is still in its nascent stage. However, unlike in many Western countries, it appears that complete ownership transfer may not be a problem under the Copyright Act. According to Section 17 of the Copyright Act[13], the person who created the copyrighted work can give his rights related to that work to the purchaser if he so desires. It might be able to transfer all copyrights to the NFT platform if required.

The NFTs Marketplace in India

In June 2021, WazirX became the first NFT marketplace in India, and according to its terms and conditions, anyone who buys an NFT receives full ownership of it. Amitabh Bachchan was the first Bollywood actor to introduce his own NFTs with BeyondLife in September 2021, which included posters with autographs from Bachchan’s films. Manish Malhotra, the designer, offered digital sketches of some of his most famous works as NFTs for $4,000 each in October. Within two minutes of the sale beginning, the other pieces went from $2,054 to $2,535 each, and this marketplace includes many more. [14]

Conclusion

NFTs can only be exchanged in cryptocurrencies, and cryptocurrency exchanges are the only platforms that have begun trading in NFTs in India. NFTs are not just digital works of art but also financial tools. Many people do not purchase digital art solely to have their name associated with it. They buy it because they believe it has the potential to sell for more money in the future. In that sense, it is an investment instrument. But, unfortunately, there is currently little clarification on the legal status of cryptocurrencies in the country, so trading in NFTs is somewhat risky. These challenges will take time to settle, whether through the courts or legislation.

Author(s) Name: Ankita Singh (University of Delhi)

References:

[1] Indian Express,  https://indianexpress.com/article/technology/tech-news-technology/a-digital-art-by-the-artist-beeple-sold-for-69-million (last visited on May 19, 2022)

[2] Economic Times, https://m.economictimes.com/magazines/panache/nft-of-first-ever-tweet-authored-by-twitter-co-founder-jack-dorsey (last visited on May 19, 2022)

[3] Ethereum.org, https://ethereum.org/en/nft/#:~:text=NFTs%20are%20tokens%20that%20we,a%20new%20NFT%20into%20existence. (last visited May 4, 2022)

[4] Indian Express, https://indianexpress.com/article/technology/crypto/nft-sales-aim-for-a-17-7-billion-record-in-2021-cointelegraph-research-7650651/ (last visited May 5, 2022)

[5] NDTV https://www.ndtv.com/business/nfts-cryptocurrency-and-digital-currency-how-do-they-stack-up-against-each-other-252505 (last visited May 5, 2022)

[6] Reserve Bank of India, Prohibition on dealing in Virtual Currencies (VCs), RBI Notification (Apr 06, 2018), https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11243&Mode=0

[7] Internet and Mobile Association of India v. Reserve Bank of India, 2020 SCC online SC 275

[8] The Constitution of India,1950 art. 19(1)

[9] General data Protection Regulation, https://gdpr.eu/right-to-be-forgotten/ (last visited May 6, 2022)

[10] The Copyright Act, 1957, s 14

[11] Jus Corpus Law Journal, https://www.juscorpus.com/what-are-nfts-and-the-ipr-side-of-it/ (last visited May 6, 2022)

[12] IBM, https://www.ibm.com/topics/smart-contracts (last visited, May 6, 2022)

[13] The Copyright Act, 1957, s 17

[14] Times of India, https://m.timesofindia.com/business/india-business/from-manish-malhotra-to-salman-khan-everyone-is-chasing-nfts-but-are-they-even-legal-in-india/amp_articleshow/87254042.cms (last visited, May 7, 2022)

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