Reproducibility is an inalienable attribute of digital content. The cost of reproduction and distribution of digital content tends to be zero. This makes it virtually impossible to identify an 'original' copy of any digital asset and therefore devalues the original content. NFTs seek to solve the problems of proof of ownership and value storage by acting as a certificate of authentication. And so, has the potential of revolutionising the value of digital assets.
Smart contracts are lines of code containing the terms of the arrangement agreed between the parties which are embedded into the NFTs. These are programmed to execute automatically when certain pre-defined conditions are met. An example of such a condition would be the purchase of an NFT. Indian law does not expressly recognise smart contracts. Regardless, the inherent flexibility built into the law that governs enforcement of contracts in India ought to allay any apprehension that smart contracts are unenforceable per se.
Non fungibility, an essential characteristic of NFTs, displaces the legal debate surrounding crypto assets, significantly. As an overarching summary, an artist ought to be able to launch NFTs in India in a manner that is completely consistent with Indian law.
(a) Securities Law
NFTs that offer rights and interests that are similar to (i) those typically exercised by shareholders (for example – a right to receive dividends or a right to mandate management) or
(ii) those that are seen in collective investments (for example – the pooling of funds with a view to purchase an asset and receive return on investment) may continue to fall afoul of Indian law. However, its application to digital art ought not to be unduly restricted by securities law.
Similarly, whether a platform that permits parties to trade NFTs (especially where the traded asset is not considered securities) are less likely to be considered an exchange under the Securities Contract Regulation Act, 1956.
(b) Anti-Money Laundering / Terrorist Financing
Indian regulators have expressed significant disquiet on account of a tendence for crypto assets to be used to launder money or finance anti-national activities. As long as legitimate KYC protocols are adopted, the Non-Fungible nature of NFTs will address many concerns raised by the enforcement authorities.
(c) Intellectual Property
Licensing of the underlying assets for the purpose of tokenisation is complicated. Let us take sports' NFTs as an example. It has recently become quite popular for platforms to mint and sell NFTs representing sports memorabilia. This often proves to be a complex process because various entities in the sporting ecosystem may have rights to different elements that are critical to the final product. The right holders may include the teams, leagues, players, tournament organisers, broadcasters, and perhaps other stakeholders. A platform wishing to mint a sports NFT therefore must ensure that it has obtained appropriate authorisations from right holders.
As the economy embraces Web 3.0, we expect the use of NFTs to increase. While legal challenges exist, a well thought strategy of acquisition and distribution of rights and ensuring basic KYC protocols and diligence and compliance requirements ought to enable Indian corporates to launch NFTs.
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