We live in times where blockchain, bitcoin and cryptocurrencies have become trending concepts. With the progress of technology, more innovations are added to this crypto-blockchain universe. One such addition is the Non-Fungible Token or ‘NFT'. The most recent brainchild of English scientist Berners-Lee, NFTs represent ownership of digital items from when he invented the World Wide Web in 19891.
NFTs, in simple non-technical words, are the digital representation of rights to a real-world asset, created into “tokens”. These tokens can represent a physical asset, like gold, land, residences, fine art, antiques, sports team merchandise, collectibles etc., which are conventionally highly-valued and illiquid. The liquidity of these assets are poised to increase considerably when rights to an asset are converted into a digital token on blockchain. These digitised assets are secured on a blockchain and can be traded on an online marketplace. Blockchain technology certifies ownership rights and authenticity of NFTs, and ensures that these tokens cannot be copied, removed, substituted, sub-divided or destroyed.
A very basic example of a digital asset is ownership of high-quality images or videos (could be trademarks or copyrighted material) that add value to an individual or company, and can be searched and discovered online.2 Some of the advantages of such Asset Digitisation & its related transactions include:
- Convenience: Buying and selling of digital assets is far less complicated than dealing with real-world assets. NFTs can be exchanged on the online platform/marketplace, facilitating smooth and convenient cross-border transactions as well.
- Larger consumer base: Since NFTs can be accessed online, they can be launched internationally for investment, which would attract a global consumer base.
- Better user experience and transparency: Online features could be added to the marketplace to ensure a user-friendly platform. There can also be an online trace and non-penetrable records database for transactions, which would increase transparency.
- Penetrating new markets: Tokenisation can unlock new markets for previously frozen, underutilized, or illiquid assets and offers possibilities for new types of fractional ownership.3
NFT Marketplaces Facilitate Online Visibility & Trade
NFT marketplaces give owners of NFTs the online platform to store, display and trade their digital assets – essentially an Amazon for NFTs. This means that a digital asset can be sold by a creator in an online marketplace in exchange for cash, credit, cryptocurrencies such as Ether etc. The currency sought for the sale of the NFT depends on the choice of the seller. There is no hard and fast rule which governs the mode of payments for NFTs. Some of the recent NFT Marketplaces functioning in India are WazirX, NFTically, and Wall.app. [websites are linked].
Where NFTs and Cryptocurrencies Intersect
As NFTs are usually bought using cryptocurrency such as Ether, Bitcoin, Dogecoin etc, let's put into perspective the similarities between the two:
- Cryptocurrency is digital currency, most of which operate on a blockchain technology to certify authenticity, similar to NFTs.
- Cryptocurrencies are protected from counterfeiting through cryptography; NFTs are similar to cryptographic tokens thereby protected against counterfeiting.
Similar to the tradable nature of money, cryptocurrencies are fungible, which means they can be traded and exchanged for something. However, since NFTs are non-fungible, they cannot be exchanged for one another. This is the fundamental difference between NFTs and Cryptocurrencies.
NFT Regulations From an India Perspective
Although there is currently no regulation for NFTs in India, it would be covered under a possible future law relating to cryptocurrencies. In 2019, Banning of Cryptocurrency and Regulation of Official Digital Currency Bill (Bill), was put forward to prohibit the use of Cryptocurrency, regulate the Official Digital Currencies and other related matters. This Bill was a result of the report submitted in 2019, by an Inter-Ministerial Committee (IMC) that was constituted in 2017, to study the issues surrounding virtual currencies in India. However, this Bill was not enacted into a law, thereby leaving cryptocurrencies unregulated in India.
In 2021, a Lok Sabha bulletin brought about new hope for regulation with the aim of introducing Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (Crypto Bill, 2021). Unfortunately, this is not yet available in the public domain, so understanding the nitty-gritty is not possible.
What the recent government efforts show is the keen interest in attempting to bring in proper regulation in this area. In a separate instance, the Delhi High Court recently sought replies from the Centre and SEBI based on a plea for guidelines on crypto-asset advertisements that attract retail investors, and the need for proper disclaimers for the same.
Back in 2010, SEBI issued strict guidelines for audio-visual advertisements on televisions for mutual funds, investing in shares in the equity market.
The same being applicable to crypto-assets, the plea before the Delhi High Court stated:
“Considering the fact that crypto-assets are inherently riskier, more volatile, subject to market risks (considering that many crypto-assets increasingly are seen to function as pump and dump schemes) than traditional mutual funds products and shares in the equity market, there is an urgent need to put in place similar strict guidelines/ rules for audio-visual advertisements running on national television qua crypto-assets to provide extra layer of protection and awareness to the retail investors who are unaware of this novel phenomenon and unaware of the technicalities involved in this digital asset.”4.
The current crypto-disclaimer text in the advertisements is “Cryptocurrency is an unregulated digital currency, not a legal tender and subject to market risks“. 5 But the font is smaller than the standard size and displays with voice iteration for less than two seconds. The plea said: “Correct placing and appropriate size of the disclaimer may instil wisdom of researching and reading up risk profiles surrounding crypto-assets prior to investing their hard-earned money in digital assets without understanding them6.”
Potential Regulatory Aspects under Various Indian Acts
The existence of cryptocurrencies, or NFTs particularly, are penetrated by different regulatory aspects. Some of the present-day Indian Acts that could be influenced by the introduction of potential laws to regulate NFTs include the following:
- The Information Technology Act, 2000 – with respect to cybersecurity and data privacy.
- The Copyright Act, 1957 – with respect to giving copyright status to NFTs
- The Finance Act 2020 – with respect taxing an e-commerce operator, since an NFT Marketplace could fall under its ambit.
- The Foreign Exchange Management Act, 1999 – with respect to regulating cross-border NFT transactions.
- The Indian Contract Act, 1872- with respect to including smart contracts since NFTs are minted using smart contracts.
Example: A person could access an song or a digital artwork within an NFT with a smart contract. In this contract he would have agreed to certain terms and conditions, and could also include terms on payment for the NFT. This is similar to a regular contract.
- The Consumer Protection Act, 2019 – with respect to settlement of possible marketplace-user disputes.
- The Competition Act, 2002 – with respect to any anti-competitive practises and other related aspects.
- The Securities Contract (Regulation) Act, 1956 – with respect to the potential recognition and subsequent inclusion of Cryptocurrencies, NFTs in particular, as a security.
- The Prevention of Money Laundering Act, 2002 – with respect to addressing the potential misuse of the anonymous profiles on the blockchain and non-regulation of value of an NFT leaves it open for money launderers to buy NFTs hefty prices and launder their money.
NFTs belonging to famous Bollywood actors and international sports stars are slowly taking over the digital art world. With its rising popularity, many first-time users are signing-up to buy merchandise and memorabilia from some of their favourite celebrities. According to Reuters, the proportion of NFT sales during the first 6 months of 2021 grew to $2.5 billion.7 Recently, famed celebrity Amitabh Bachchan's NFT collection was live on auction for the first time. While India is yet to plan for an optimal legal framework, the rising popularity of NFTs among Indians and abroad, will inevitably force legislative hands into work.
Footnotes
1 https://www.aljazeera.com/economy/2021/6/30/world-wide-web-source-code-nft-fetches-5-4m-at-auction
2 https://www.mediavalet.com/blog/what-are-digital-assets/
3 https://www.ibm.com/thought-leadership/institute-business-value/report/tokenassets
5 Ibid.
6 Id.
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