Blog: Non-Fungible Token: Trend or Regulation? – Lexology

As simple and crisp the full form of NFT sounds, the meaning and understanding the concept in toto is equally, if not more, complex and brain fogging. This new, vast and rapidly growing form of digital assets investment known as Non-Fungible Token has taken the world by a storm. As the name suggests a NFT is one-of-a-kind whose value cannot be traded in for another thus making it irreplaceable. For example; the Mona Lisa painting holds a unique value as there is only one such painting by Leonardo da Vinci and it cannot be replaced by any copy of the same. NFTs can be created in the form of digital objects that represent either a tangible or intangible item such as art, GIFs, video, sports or music. This unit of data is stored on blockchain representing their ownership. Such information can never be tampered with as blockchain validates that only one account is capable of owning the NFT at a certain time thus verifying the authenticity and uniqueness of that unit of data. To prove its uniqueness, every digital art that is created or exchanged on blockchain is monitored and confirmed by a network of computers. So anytime an NFT is transferred to another owner, the transaction is recorded and managed via a unique ID that cannot be replicated, solving the problem of multiple owners by keeping a track of the current and previous owners. NFTs are minted through smart contracts assigning ownership and managing the transferability of the NFTs, this is protected by strong encryptions making it fraud proof. It can be programmed in a way to give royalties to owners every time an NFT exchanges hands.

Beginning of 2021 saw a surge in NFTs and ever since it has been aggressively expanding. However, most of the current excitement is around using the technology to sell digital art, the hype of something new and celebrities endorsing and selling it. Demand drive the price, therefore more the hype around something, the more demand will be created thus increasing the price. An example of this is when billionaire Elon Musk invested in NFT there was a sudden surge in the sales of NFTs or when an animated gif of Nyan Cat which was a 2011 meme of a flying pop-tart cat was sold for more than $500,000. The most expensive NFT was sold at Christies auction house called the “first 5000 days” by Micheal Winkelman aka ‘Beeple’ for $69 million.

Even in India, there is a steady rise in the NFTs marketplace. Bollywood actor Mr. Amitabh Bachchan has become the first Indian celebrity to join the NFT bandwagon as he rolled out his NFT collection via containing his works, autographed posters from his famous movies, recorded version of the poem collection Madhushala in his voice. Cricketer Dinesh Kartik will be auctioning a digital art reel from his popular match hitting a six on the last ball. Designer Manish Malhotra, has recently sold NFTs worth $4,000 a piece for digital sketches of some of his most famous works.

There are some popular and safe marketplaces to trade in NFT such as Opensea which is by far the largest, Rairable, Cryptopunk, Foundation amongst several which have been functioning. India’s largest cryptocurrency exchange WazirX recently launched a NFT marketplace which predominantly deals with the transactions of NFTs for Indian artists. 

With increasing number of Indian buyers and sellers of NFTs over the years, the legal system including anti-money laundering regulations, taxation policies, financial regulations, intellectual property right issues will progressively emerge.

NFTs in relation to intellectual property rights are a much-needed development in order to secure the digital assets. The mere ownership of an NFT may not grant the new owner with rights over the contents, or allow for distribution of copies or public display of the data as the creator, or the owner may exclusively retain copyrights or reproduction rights. Thus NFTs only represent the ownership represented on blockchain merely giving you digital bragging rights. The creator of a digital artwork can set a fee or get a percentage every time someone resells his work. This helps the artists to not focus as much on the first sale of the artwork as there will always be a passive income every time the artwork exchanges hands.

Despite India being recognised as potentially the largest market for NFTs, it is still unregulated by domestic laws. NFTs are regulated by the various communities which run them. As of today, there exists no legislation by the government that prohibits or restricts an Indian resident from buying and selling NFTs.

The Foreign Exchange Management Act, 1999 governs the cross-border economic business activities in India, since the NFT marketplaces or the buyer/seller are mainly located outside India, the Indian members of the NFT ecosystem can be seen making several cross-border transfers of NFTs. This raises the question that whether there are any exports or imports of intangible assets, if yes, then the transactions must require a corresponding transfer in currency approved by the government to be done through an authorised banking channel as governed under FEMA. 

The major recent regulatory development in terms of NFTs has been the imposition of flat 30% tax obligation on any income from transfer of NFTs applicable from April 1, 2022. This effectively means that irrespective of the income generated by NFT transactions, even though the revenue is less than Rs. 2,50,000/- which is the basic exemption limit, taxpayer has pay tax @ 30% on transfer of NFTs.

Crypto to crypto NFT transactions are currently in an ambiguous position. The need for a law regulating the same can be met by the coming of intended ‘Cryptocurrency and Regulation of Official Digital Currency Bill 2021’ which aims to outlaw all private digital currency and enforce a regulated procedure for introducing a cryptocurrency legally. RBI also intends to launch its own official cryptocurrency under the Central Bank Digital Currency as there may be a chance for NFT’s to come within the cryptocurrency ambit because they provide a digital representation of some inherent value.

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