Decoding NFTs and their Regulation in India
The increasing popularity of cryptocurrencies has no doubt sparked several debates around the world on their legality and efficacy. It is a topic that has split the global economy down the middle, with many now believing it is a monetary revolution.
The rise in cryptocurrency and its growing acceptance worldwide, has led to the creation of a frenzy centering around Non-Fungible Tokens or NFTs (especially post the record smashing NFT sale for $69 million!)
A Non-Fungible Token is a unique token, in the form of a link, that represents real life objects or digital works on the internet. It is a one-of-its-kind asset that is not interchangeable in nature, similar to a one-of-a-kind trading card. A NFT is essentially metadata or code which is minted on a blockchain and stored in the form of a link. Basically, it is like a certificate of ownership for virtual or physical assets, and is a digitized token that represents real-life objects, such as art, videos, audio files, memorabilia, game assets etc., and is recorded on a blockchain.
NFT and the Blockchain
A blockchain is essentially a public ledger, that is being maintained by thousands of computers worldwide working together, to record every single transaction taking place (using cryptocurrency) and maintain such records publicly. Similar to how a bank records a customer's activities in order to determine if he has enough money left in his bank account, the blockchain records all transactions involving cryptocurrency and maintains a public record of the same for any person in the world to view. No valid record or transaction can be changed on the blockchain, and anyone can verify the transactions that have been recorded.
NFTs are bought and sold through the blockchain, as the blockchain will publicly record the transfer or purchase of such NFTs for anyone to see, and the owner of a NFT will have the records of his ownership available publicly for anyone to verify. Buying a NFT usually gets the owner some basic usage rights, like being able to post the image/video/audio files/image online (not to mention the unique blockchain record and bragging rights!)
NFTs must be viewed in the same way as art. They are designed to give the owner something that can't be copied - ownership of the work (though the artist can still retain the copyright and reproduction rights, just like with physical artwork). If one were to compare it with collecting physical art- , anyone can buy a Van Gogh print, but only one person can own the original.
A common misconception is that NFTs are a type of cryptocurrency. Rather, NFTs are digital assets that can be purchased using cryptocurrency. The only similarity between crypto and NFTs is that they both have a stored digital record on a blockchain. With NFTs, each token has a unique value and cannot be exchanged for another of equal value. With cryptocurrency, the value and transparency are more obvious and one can exchange one Bitcoin for another.
Laws governing NFTs
NFTs can only be purchased through a specifically designed platform which performs the function of a facilitator (similar to an auction house). It will list the seller's NFT and encourage buyers to either pay a certain price for the same or purchase it vide an auction. Prior to any successful purchase/ auction, the terms and conditions of the sale are made available to the buyer through a smart contract which establishes all the terms regarding the use of this NFT by the buyer, such as whether he shall obtain copyright rights or only be entitled to use the same for personal non-commercial purposes. Upon the buyer making payment of the consideration, the contract comes into effect and both parties shall be bound by the laws of the Indian Contract Act, 1872. It is important to note that these smart contracts are only entered between the buyer and the seller with the platform companies being just facilitators.
Unless agreed between the parties through the smart contract, the copyright usually remains with the creator of the work of art, painting, music, etc., and the NFT serves as a unique and recognized replica of the same. Additionally, it must be noted that notwithstanding the terms of the smart contract, the rights of the creator/artist as provided in section 57 of the Copyright Act, 1957, namely, his right to claim authorship over the work and his right to restrain or claim damages in respect of any distortion, mutilation or modification of the said work, shall continue to vest with the creator/artist.
The growing popularity of NFTs is also attributable to the fact that the artists/creators tend to have resale royalties for any future sale of the NFTs. In order to ensure this,the resale royalty figures need to be coded into the smart contract being executed between the artist and the buyer. The advantage of this smart contract is that, as a rule, if the token is resold through a blockchain-enabled marketplace, the royalty payment will be made automatically without the need for any further action by the artist. However, it must be noted that automated distributions of resale royalties could be frustrated by transactions that occur outside of the blockchain (which can also be a possibility when physical assets are involved). All in all, however, the reseller shall be bound by his obligation to make royalty payments to the artist and the same can be enforceable under law.
Its a wait and watch for NFT regulations
Presently there is no separate legal framework for NFTs in India, and as such it is currently only governed by the general principles of contract. However, whilst most stakeholders believe that Cryptocurrency and Regulation of Official Digital Currency Bill, 2021l would carve out exceptions for NFTs considering its immense popularity, one will only have to wait and assess the implications NFTs may have if the Indian Government comes out with a clear ban on cryptocurrencies.
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.
