Non-Fungible Token (NFT) – a legal quandary

Background of NFT in India

Recently, Indian programmer Vignesh Sundaresan paid US dollar 69.3 million for digital art made by an artist named Mike Winkelmann, famously known as Beeple. The token was sold in the auction organized by auction house christie. With a record-breaking auction by two investors, Vignesh, followed by the Anand Venkateshwaram, became the highest betted token holder. This has opened up the space for others in India.

Many artists are coming forward into the digital market to associate their artwork in NFT in India. For example, famous artist Nuclaya has decided to put his album on the digital market as an NFT.

India’s most famous cryptocurrency exchange platform, WazirX, has launched its first NFT market for Indian artists. It would enable artists across the nation to place their digital assets or NFT, including anything unique or artistic, ranging from artwork to tweet. Growing interests of Indians in NFT, the company’s CEO has claimed to remove the fees paid to miners in respective currencies to verify transactions and make it more lucrative for customers.

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With its popularity, the asset has also raised questions concerning its sustainability and longevity in the Indian government. The uncertainty is fundamental as the government intervenes in a digital asset transaction.

Government’s stand on NFT

Currently, there is no prescription on NFT, which could penalize its movement in India. Though the government has not said anything about NFT’s legality, the government’s approach to cryptocurrencies has made the NFT a skeptical area. As a result, in 2019 government issued a bill – “Banning the Cryptocurrency and Regulation of Official Digital Currency Bill”, to ban cryptocurrencies and digital currency.

Section 3(1) of the said bill mentions that no person should generate, mine, sell, hold, deal in, dispose of, issue or use cryptocurrency in Indian territory.

Does NFT fall under the definition as mentioned above of the bill?

Section 2(1) (a) defines cryptocurrency as any core or information or number or token not being part of any official digital currency, generated via cryptographic means or otherwise, offering a digital depiction of value that is exchanged with/without consideration, with the premise or characterization of having an inherent value in any business activity that might involve risk of loss or an expectation of profit or income, or functions as a store of value or a unit of account and contains its use in any financial transaction or investment, but not restricted to, investment schemes.

By definition, we can deduce that there is a possibility the NFT might come under it as NFT has value and can be stored. Moreover, NFT being non-fungible and public, there is a chance that it might get exempted from proscription or penalty.

Section 3(3) states that nothing in this act would apply to distributed ledger technology for creating a network to deliver any financial or other services or for creating value, sans involving any use of cryptocurrency, in any form whatsoever, for receiving or making payment. But the ambiguity remains in the law.

Can any law in future affect NFT in India?

There is the possibility of prohibition as per the cryptocurrency definition. But many investors in India believe that banning the NFT would be a bad idea.

NFT regulation

There is no clear stand on the regulation of NFT in India as it does not have any legal framework; the Indian contract act has controlled its functioning.

There is speculation that NFTs are derivatives according to Securities contract regulation rules (SCRA) 1957. It states that contracts are valid only if;

– Traded on the recognized stock exchange.

– Settled on the clearinghouse of the recognized stock exchange.

As per the SCRA, derivatives mean;

– Security from share, debt instrument, loan, whether secured/unsecured, risk instrument or contract for distinctions or any other form of security.

– Contract that derives its value from prices or index of prices of underlying securities.

That’s why one can only trade derivatives on authorized exchanges like stocks or commodities.

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If the NFT has deemed a contract in derivative for SCRA. Then it would make the private trade, purchase, or sell of NFTs illegally, thereby adding another layer of ambiguity to NFT’s position in India.

Conclusion

Currently, NFTs are highly deemed as assets in India. Indian artists are left with non-recognition because of the outright copy of original material. As per the proponents, NFTs are risky, and the investment in these assets is a high-stakes investment. Indian shares are very susceptible; that’s why NFT might find it hard to adjust in the Indian market. Although NFT offers a platform for artists worldwide, it is a high-risk asset like cryptocurrency. And without a legal framework, it might affect the legitimacy of the financial market.