NFTs (Non-Fungible Tokens) are digital records that represent ownership of unique items. They are generally not considered as digital assets; rather a representation of them in tokenized form on blockchain. These unique items can either be intangible (in digital form) or physical.
How are NFTs different from Cryptocurrency?
NFTs exist on blockchain technology just like cryptocurrency. However, they are different because unlike cryptocurrency, NFTs are non-fungible. Each NFT is unique and cannot be traded or exchanged with other assets of the same kind. This is why, NFTs cannot be used as a purchasing medium or a reward for blockchain mining and hence, cannot serve as a medium of exchange in case of commercial transactions.
How are NFTs unique?
People often get confused between the original asset and its digitized version in the form of an NFT. An NFT is not a reproduction or replication of the tangible or intangible asset itself. It is merely a token recorded on blockchain. NFTs are minted by means of a 'smart contract'. A smart contract designates ownership to the purchaser of an NFT and manages its transferability. When an NFT is minted, a unique code is executed since the token is uniquely published on the blockchain to make it purchasable.
This is why an NFT is always unique and cannot be replicated. The original asset can be subject to duplication but not the NFT. This means that copyright cannot be attributed to an NFT per se.
Copyright and NFTs
Generally, copyright infringement does not arise in case of NFTs. Thus, it iis the original work that is usually subject to copyright protection. Since, nowadays, any random artwork, tweet, meme etc. can be digitized and turned into an NFT, plagiarism or replication of such work is very common. NFT market, being a booming one, has attracted many users. These days people are eager to be involved in either creation or investment in NFTs. The possible reasons for this might be as follows:
- Growing usage among celebrities and influencers- Constant paparazzi updates on absurd purchases of NFTs made by various celebrities has grabbed the attention of a mass population. This is one of the reasons why people are getting more inquisitive about NFTs.
- Monetary gains- The NFTs market has a potential for enormous growth. It serves various economic opportunities to its users. Social Media has spread a word regarding hefty income generation by way of NFTs.
- Pop culture- NFT market has become a new pop culture. Not everyone who is getting involved in the market has adequate knowledge about its pros and cons. Many of the users hearsay beleive that the market is steady and favorable to all when in reality not everybody becomes rich all of a sudden as soon as they start investing in NFTs. The hype around NFTs created by news and social media prompts people to become a part of this 'trend' because they are given a false hope of earning enormous wealth.
Since a large number of people are eager to be involved in the NFT market, many of them try to find quick and easy ways of doing that. NFTs are anything that can be digitalised, so people creatively find ways of turning random internet sensations into NFTs or random NFTs into internet sensations. Either way, they are able to gain popularity. However, many times the creators of NFT do not take the permission of the owners of the original work before turning their work into an NFT. This is where copyright protection comes into play. If the original work is converted into an NFT in an unauthorized manner, then the owner of the original work can sue for copyright infringement.
To prevent digitized works from getting replicated, the digital files are tokenized in order to create a certificate ownership.
Recognition of NFTs as assets in Indian Context
Under the Sale of Goods Act, 1930 'goods' include every kind of moveable property. The courts in India do not distinguish between tangible and intangible when it comes to defining 'goods' as a whole. To be classified as a good, a thing should have utility of some kind and should be tradable. NFTs conform to this criteria.
The Indian tax authorities believe that NFTs are Virtual Digital Assets. That is to say, NFTs are 'goods' under Indian sale of goods laws, being digital assets that can be bought and sold via NFT marketplaces. According to them, when the owner of a work sells their work as NFT, then, the NFT being a digital representation of the physical work, would be considered as an asset. The intangible nature of NFTs does not exclude them from the definition of goods. If the work itself is an asset as per Section 2(52) of the Central Goods and Service Tax Act, 2017, then its replication even in digital form ought to be considered as an asset. The sale of an NFT of such an asset is regarded as 'supply' as per Section 7 of the CGST Act , if the seller is a registered supplier under the CGST Act. Such a transaction will be subject to CGST. However, if the seller is not a registered supplier under the CGST Act then the transaction will not be exigible but this does not mean that the transaction would be barred from being taxed.
The Central Board of Direct Taxes recently issued a notification wherein the Central Government has categorically specified under section 2 of the Income-tax Act, 1961 that a non-fungible token is one which qualifies to be a virtual digital asset within the meaning of sub-clause (a) of clause (47A) of section 2 of the Income Tax Act. This definition does not include a non-fungible token whose transfer results in transfer of ownership of the original asset which is tangible in nature. The transfer of ownership of such underlying tangible assets should be legally enforceable.
Conclusion
In India NFTs do not have any legal recognition per se. There is no separate statute concerning NFTs. But NFTs are accepted as assets by the Indian tax authorities.
The acceptance of NFTs as assets in India creates issues with respect to their copyright. The general perception across the world is that NFTs have nothing to do with copyright. It is only the original work that calls for copyright infringement in case of unauthorized replication of work.
However, in India, NFTs may enjoy copyright protection because they are classified as goods (assets).
This is a settled view because goods include both tangible as well as intangible goods. Even though, there is no legal recognition of NFTs due to lack of separate statutes or narrow interpretation of the pre-existing statutes, it can be said that copyright protection can be awarded to those who are wronged while exchanging transactions in NFTs.
The copyright laws with respect to NFTs ought to be promptly clarified, framed and unequivocally laid down seeing the hastily booming NFT market and its users.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
