There is no doubt that the popularity of NFTs (Non-Fungible Tokens) is constantly growing. Blockchain is gaining popularity day by day and the use of Ethereum smart contracts has also been on the rise. Cryptographic assets known as non-fungible tokens (NFTs) are distinguishable from one another on a blockchain by unique identification codes and metadata. They are not capable of being traded or converted into the same currencies as cryptocurrencies. Comparatively, fungible tokens, such as cryptocurrencies, can be used as a medium for business transactions because they are interchangeable.
There can never be more than one owner of an NFT. Ownership is managed using the special ID and metadata, which no other token can duplicate. NFTs are created using smart contracts, which also control their transferability and ownership. On virtual platforms, it can be difficult to locate and identify the original owner of a piece of work, so NFTs are primarily used to confirm the ownership. This prevents work from being easily replicated, which lowers its value. Decentralization, ownership tracking, and value storage are thus goals of NFTs. There is still a serious question about the legitimacy of these digital assets. Because there are no explicit laws restricting or forbidding Indians from dealing in NFTs, concerns have been raised about the legitimacy and legal status of such tokens, particularly in India. As a result, NFT supporters in India have expressed concerns about the technology’s long-term viability.
LEGALITY OF NFTs
Despite the fact that cryptocurrencies have been around for ten years in India, the main debate over their legality didn’t begin until June 2018 when the Reserve Bank of India (RBI) issued circular cautioning banks against dealing in cryptocurrencies. The ruling in Internet and Mobile Association of India v. Reserve Bank of India that the right to trade is a fundamental freedom protected by the constitution was overturned by the Supreme Court. In this case, it was argued that cryptocurrency traders are legitimate because Article 19(1) (g) of the Indian Constitution recognises the right to trade as a fundamental right. The action taken to regulate cryptocurrencies was found to be out of proportion to the risks involved, even though reasonable restrictions on this right could be imposed. This leads us to the conclusion that the Court did not consider cryptocurrency trading to be subject to the limitations placed on the right to trade. Because cryptocurrency is used to buy and sell NFTs, the legitimacy of the cryptocurrency must be upheld for NFTs to be legal. The majority of NFT-related transactions take place through smart contracts, which have the ability to define a license’s terms, provide automatic royalties in resale transactions, impose limitations on the use of copyrights, and keep track of subsequent purchases of an NFT. Both the Information Technology Act of 2000 and the Contract Act of 1872 apply to smart contracts. An offer, acceptance, and consideration are necessary elements of a valid contract under the Contract Act. Although a smart contract has the required offer and acceptance components, the consideration component may present difficulties.
Securities Contract Regulation Act
According to the Securities Contract Regulation, there is no structured or established the legal framework for NFTs, so as a result, there is no classification of NFTs under the SCRA, making it unclear whether trading in NFTs is prohibited by the Act, 1956 (“SCRA”). If NFTs were considered derivatives, trading in them would be prohibited in India. The term “derivative” is defined as “a contract whose value is derived from the prices of the underlying securities” in Section 2(ac) of the SCRA. NFTs cannot be traded on virtual platforms if they are considered derivatives, in accordance with Section 18a of the SCRA. It would be incorrect to classify an NFT as a derivative if it served only as a reference to an existing asset and a means of authenticating it.
Despite their popularity, digital collectables may require buyers to pay higher taxes to the government. The Goods and Services Tax (GST) and a 2% equalisation levy, which are typically charged to businesses with foreign headquarters but Indian operations, may be applied to your purchase of an NFT.
The Foreign Exchange Management Act and the rules that govern international transactions will apply differently depending on whether the underlying asset is physical or digital and is being transferred via the NFT. Despite the lack of clarity, NFTs might be categorised as “intangible assets” and be covered by the FEMA rules governing software and intellectual property. The fact that they are supported by “global ledgers,” which indicate that data is logged, shared, and synchronised across data stores, makes determining their location crucial.
The copyright to the underlying work of art is not transferred to the owner upon purchase of the NFT. Section 19 of the Copyright Act of 1957 mandates the existence of a written sale contract stating an explicit assignment of copyright in order to transfer copyright and be regarded as an owner. Section 14 of the Copyright Act states, that only the owner of a work has the authority to “reproduce and distribute copies of it.” Therefore, unless the buyer and seller expressly forbid it, the NFT may not be protected from resale or copying.
All platforms in India that have started trading in NFTs so far are cryptocurrency exchanges, and NFTs can only be traded in cryptocurrencies. Trading in NFTs seems to be more dangerous because there is still uncertainty about the legal status of cryptocurrencies in the nation. There is no specific legal framework for NFTs in India. NFTs are deemed to be derivatives by the Securities Contract Regulation Act. To exchange, trade, sell, or buy NFTs in India at the moment is therefore against the law. The trading of derivatives is restricted to authorised exchanges, such as those for stocks or commodities. Specific security, a financial instrument like stocks or commodities, is what gives a derivative its value in India. But as of yet, there is no legal framework for a derivative value for a non-financial asset. Even though they are marketed as works of digital art, investment advisors contend that NFTs are much riskier than other tokens.
Author(s) Name: Sumbul Qureshi (Jamia Millia Islamia)