Is It Legal To Buy/Sell NFTs In India, 2022

“Salvator Mundi” (Latin for “Saviour of the World”) holds the record of being the foremost expensive piece of art ever sold at a public auction. The portrait, made by the famous Leonardo statue maker, depicts Jesus in an anachronistic blue Renaissance dress with an indication of a cross on one hand while a ball stays in the opposite hand.

With the increase of digital assets like bitcoin and technologies like the blockchain, art is no anymore the forte of Picasso or Vinci or Michelangelo. Today art doesn’t involve the intricate expression of Vinci or abstractions of Picasso or perfections of Michelangelo. In fact, the very definition of art has broadened to incorporate graphics interchange format (GIFs), in-game assets, digital art, videos, baseball hits, etc. Unlike traditional art, these don’t exist in physical form. and in contrast to the owner of “Salvator Mundi”, the art isn’t within the sole possession of the owner. In fact, the entire world can have access to the content within the same form and manner because of the creator/owner of the art. These ultra-modern arts are called non-fungible tokens or NFT in brief.

Someone might argue that “Salvator Mundi” is additionally accessible to everyone. a bit like digital art, anyone can see it with a straightforward search online. Yet the very fact remains that while we will easily have a glance at “Salvator Mundi” on our devices, the physical art remains within the possession of the owner and for the identical reason the art commands the worth it does. On the opposite hand, digital art doesn’t exist in a physical form, and also the owner has the identical visual experience as anyone else. and so, the large question that arises is why do digital art command such a high price?

To answer it in simple words, digital art isn’t simply art, it’s also an instrument for investment. Many of us don’t buy digital art only because they require to be ascribed because of the owner of the art. They decease because they believe that the art has the potential to be sold at the next price in the future. therein sense, it’s a tool for investment. Historically, investments are done through shares, bonds, and debentures. you would possibly even be aware of what’s called commodity (gold, silver, aluminum, copper, and more recently oil) and recently mutual funds have also become popular. But what has recently created a hullabaloo within the world of finances is cryptocurrency. Experts are still divided on how prudent it’s to permit a change in cryptocurrency. Digital art, or what’s popularly referred to as non-fungible tokens (NFT) has its roots in cryptocurrency. the majority of NFTs today are bought and sold using cryptocurrency. Both cryptocurrency and NFTs share the identical technology i.e., blockchain. Both cryptocurrency and NFTs differ in this cryptocurrency is fungible while NFTs don’t seem to be. To be fungible means it’s exchangeable easily and has the identical value as others (a 1$ bill is fungible because all 1$ bills have the identical value). NFTs don’t seem to be fungible since every bit of digital art is exclusive and can’t be easily traded for one more piece of art.

NFTs took birth in 2014 but never attracted the maximum amount of traction because it is attracting within the last two years. “Everyday: the primary 5000 Days”, an NFT sold for a whopping $69 million[4]. The NFT market continues to be nascent with a worth of $2.5 billion but offers huge potential for growth. within the half-moon of 2021, the NFT market grew extraordinarily by 2100%. In fact, many investors believe that the NFT is the new oil similar to what bitcoin was some years ago. While there are others who are rather more skeptical about NFT and believe the most important drawback of an NFT is its non-fungible nature which the proponents believe is the biggest advantage.

But how does NFT add practice? Let’s say an artist makes a video that he thinks has the potential to be sold as an NFT. He lists the video on a cryptocurrency platform for others to possess a glance at. in a very digital auction, someone buys the work for, let’s say $1 million. This money goes to the artists. Now, in the future, someone believes that art is far more valuable. Suppose he offers to pay $2 million to the initial buyer and buys it. At this stage, the initial creator also gets a specific percentage of the sell amount from the second purchase. For the first buyer, it’s a kind of fine investment. The second buyer buys it because he thinks that the worth of the NFT might further increase in the future. In fact, this fashion of functioning of NFT makes it resemble shares and other similar securities. But unlike a share where the underlying basis for the increase in price is the performance of the corporate, in an NFT the underlying fundamental premise is what’s termed the “Veblen effect”. The Veblen effect is an abnormal economic situation where the increase in the price of a commodity doesn’t result in a fall in demand. In fact, the more the prize, the more prestigious the commodity, and also the more its demand. Thus, if an NFT becomes more popular it’ll attract more prizes. we are able to say that popularity is the sole criteria for the determination of the prize of an NFT.

Simple. Right? while the method sounds simple and plausible yet it raises a full range of unanswered commercial, regulatory, legal, and ethical questions? The most important and unclear area is the legal ramifications of NFT in India. There are some specific legal questions that arise with respect to the sale and getting of NFTs in India:

  • Is the buying and getting of NFT legal in India?
  • What is the legal validity of “smart contracts” and whether or not they are opposed to the Copyright Act, 1957?
  • What are the legal rights that the owner of digital art transfers to the buyer of the NFT?

[1] Is The Buying And Selling of NFT Legal In India?

To understand the solution to the primary question, we might, first of all, discuss the legality of cryptocurrency since NFTs share the identical technology as a cryptocurrency (i.e., blockchain) and mostly NFTs are purchased with a cryptocurrency. Cryptocurrency has been existing since the start of the last decade but the important debate on its legality began with an RBI Circular6, issued in the June of 2018 directing banks do not to deal in cryptocurrencies. This order of the financial organization was challenged by the Supreme Court in Internet and Mobile Assn. of India v. RBI7. it had been argued during this case that cryptocurrencies were legal traders because proper trade could be a fundamental right under Article 19(1)(f)8 of the Constitution of India. while reasonable restrictions may be imposed upon this right, it absolutely was held that the action taken to control cryptocurrency wasn’t proportionate to the risks posed. From this, we will infer that the Court didn’t believe that trading in cryptocurrency fell within the restriction imposed on the correct to trade. Because NFTs are purchased and sold using cryptocurrency, the cryptocurrency’s legality must be respected in order for NFTs to be legal.

On the question of whether cryptocurrency would qualify to be a currency, the Court held that they were neither traditional currency nor can we conclude that they’re not currencies in “some special circumstance”. The court refused to consider them as commodities, as the respondent had claimed. As far as NFTs are concerned, whether or not they are commodities or currency or security is currently not clear. From their nature (that they’re non-fungible), we will conclude that they’re not currency. But whether or not they are commodities or security is somewhat debated. The writers here believe that they ought to be categorized as commodities. Though there’s part of trading with NFTs, they could still be owned and exchanged. a bit like land which is mostly owned but can even be traded for creating some profit.

Shortly after this judgment, the govt decided to make a panel of experts to control the cryptocurrency market in India. Recent updates from the panel have indicated that the govt isn’t in favor of allowing foreign cryptocurrency to control in India and instead is contemplating issuing a cryptocurrency regulated by the Federal Reserve Bank of India (RBI). If this could indeed be the case, then cryptocurrencies like bitcoin would become illegal and therefore the sale/purchase of the identical would be restricted to it extent. To sum up, we don’t know the precise status of cryptocurrency in India. Though it’s being traded and therefore the Government also deducting taxes for the identical, the long run stance of the govt. is unclear. Similarly, we don’t know the precise position of NFTs in India. Very recently, WazirX started an internet marketplace for NFTs in India and therefore the same has been functioning with no obstructions. But how the govt, the RBI, and therefore the Securities and Exchange Board of India (SEBI) take the difficulty will determine the last word faith of NFTs in India.

[2] What’s The Legal Validity Of “Smart Contracts” And Whether Or Not They Are Hostile To The Copyright Act, 1957?

The copyright-related laws are the second major concern. The Copyright Act, of 1957 is the premier legislation on the difficulty of copyrights in India. Under Section 139 of the said Act, the copyright will exist within the following works:

(a) original literary, dramatic, musical, and artistic works;

(b) cinematograph films; and

(c) audio recording.

Can we construe from the above categories of copyrighted work that NFT might qualify as a piece that may be copyrighted in India? although we’d say that a video clip or an audio recording might qualify as a piece that will be copyrighted under the meaning of this Act, what a few GIFs or for that matter an image or a tweet? If we go strictly by the Copyright Act, a tweet or a GIF won’t qualify as a piece capable of being copyrighted. So, how does an NFT author claim copyright to his work? nowadays, it seems that each NFT won’t qualify to be eligible for copyright. Thus, there’s a desire to expand the purview of the scope of works that will be copyrighted under the Indian jurisprudence.

[3] What Are The Legal Rights That Are Transferred From The Owner Of Digital Art To The Purchaser Of The NFT?

But whether or not, nowadays, we assume that the NFT is eligible for copyright under the Indian law (let’s say an amendment is delivered to that effect) what are the rights that the creator transfers to the primary buyer of his NFT? Obviously, the law isn’t clear on this but from foreign experience, it seems that the creator of an NFT doesn’t transfer all his rights within the work. Largely the questions of what rights are transferred and what rights are held are decided by what has been termed a “smart contract”. These contracts are framed by the platform itself and typically transfer any rights to the purchaser but the first creator is usually the maker of the NFT. Some trading platforms claim that the copyright rests within the company and also the creator of the NFT has no right whatsoever within the NFT after the sale of the identical. Since the NFT market is at a really nascent stage in India, we don’t know exactly what rights does the creator transfer to the customer. But it seems that the transfer of complete ownership, unlike in many western countries, may not be an issue from the purpose of view of the Copyright Act. Section 1710 of the Copyright Act provides that if the creator of a copyrighted work so wishes he can transfer all his rights within the work to the customer of the work. Should the NFT platform require the whole transfer of the copyrights, it would be possible to try to do so.

For example, WazirX, India’s first NFT marketplace, has given the founders of NFT total ownership rights under its terms and conditions. When someone buys the NFT, they’re given complete ownership of the NFT. “A worldwide, perpetual, exclusive, transferable license to use, copy, and display” is granted to the owners. But ostensibly, the platform permits the selling of the NFT only on its platform. But regardless of the way forward for NFTs, at present, in India and abroad, the NFTs are sold through “smart contract”. “Smart contracts” are nothing but a predefined contract, usually drafted by the platform itself, which is accepted by both the parties for the sale and get of the NFT. NFTs are a replacement area and are rapidly expanding. rather like other technological growth, it’s created new unanswered questions. it’ll take it slow before these issues are clarified either by the courts or through legislation. For now, there’s limited clarity on NFTs.