[The Viewpoint] NFTs in India: The saga continues

Two incidents recently caused a frenzy in India. The first was comedian Vir Das’ monologue on ‘two Indias,’ and the second was the news of the proposed Cryptocurrency Bill introduced by the government in Parliament.

In his monologue, Das spoke about the duality and contradictions inherent in Indian society and enumerated various incidents to illustrate his point. It appears that technological developments such as the rise of Cryptocurrency and Non-Fungible Tokens (NFTs), and their intersection with law, have not remained untouched from this duality.

On one hand, there is an India that has been experimenting with and investing in these technologies and wants it to remain true to its inherent nature – decentralized and transparent. On the other hand, there is an India which feels that the public should not be given a free hand, given the risks involved, and these developments should be regulated, if not banned completely.

In the midst of this conundrum, the government has introduced a Bill in Parliament to purportedly regulate private virtual currencies and transactions in India, and to introduce its own virtual currency. While discussing the Bill in the Rajya Sabha during the Winter Session of Parliament, Union Finance Minister Nirmala Sitharaman also mentioned that the government is monitoring NFTs and is considering regulating them.

While there is a lot of speculation, given that the Bill has not been made public yet, these developments have kept everyone, including stakeholders, regulators, art collectors, digital artists and tech enthusiasts on the edge of their seats. This is because these technologies, particularly, NFTs, are still at a nascent stage in India with a lot of potential that remains unexplored.

Although NFTs have been around for quite some time, this digital asset came to the limelight when a digital collage called Everyday: The First 500 Days was sold by a graphic designer for over $69 million. Since then, the worldwide popularity of NFTs has grown exponentially. India is not too far behind, with eminent personalities such as Amitabh Bachchan, Manish Malhotra, Kamal Hassan and Dinesh Karthik, introducing and selling NFTs and various cryptocurrency exchanges that are based in India, and setting up their own NFT marketplaces to facilitate NFT transactions.

NFTs are a type of digital asset or, in simple terms, a digital certificate, the ownership of which is recorded on a blockchain. As the name suggests, these are non-fungible, and it is this characteristic that forms the very foundation of this digital asset. Non-fungibility, a concept in economics, is used to describe things that cannot be replaced or interchanged owing to their unique properties. Non-fungibility is also what makes NFTs different from cryptocurrencies as the latter can be exchanged. NFTs represent a variety of real-world assets that are unique and are considered a digital collectible of the work they represent, such as, tweets, art, music, games, etc.

Given their unique characteristics, NFTs can be used as a digital certificate for authenticating ownership of the both the digital as well as the physical asset. For instance, the luxury watch company Breitling issues digital certificates that are encoded in an NFT, to authenticate its luxury watches.

Having said this, it is essential to understand that ownership of an NFT does not automatically transfer ownership of the underlying asset/work, particularly when the underlying asset is a copyrighted work. Ownership of an NFT essentially means ownership of the digital copy of the underlying work. This ownership does not give rights over other digital copies or the underlying work that the NFT represents. If the underlying work falls within the definition of copyrighted work under copyright law, then the person who is minting the NFT must seek permission from the owner of the work, as the copyright in the underlying work subsists with the owner of the underlying work.

Accordingly, an NFT holder cannot publish, distribute or earn royalties from the underlying work, unless such rights have been expressly transferred to the owner of the NFT by way of a written contract. This is because as per the Copyright Act of India, only the owner of the underlying work would own the bundle of rights associated with the underlying work.

Typically, an NFT transaction takes place through a smart contract which provides the terms of the assignment or license and may also be used to set limits to the use of copyrights, provide royalties, and monitor subsequent purchases of an NFT.

As noted above, the government has recently turned its attention to NFTs, which means that there is no law or regulation currently in place that governs NFTs or is used to regulate their transactions. In the absence of a dedicated law, NFT transactions would be subject to the current regulatory framework and statues pertaining to securities, tax, foreign exchange, and money laundering in India. However, there is not much clarity on how these laws apply to NFT transactions, which may make investment risky.

This risk is further accentuated by the fact that the medium of exchange of nearly all of the NFT transactions is cryptocurrency, and such transactions take place on marketplaces set up by cryptocurrency exchanges.

With the increasing uncertainty regarding the fate of cryptocurrencies in the country, people have started questioning the legal sanctity of NFTs too. Some believe that the proposed Cryptocurrency Bill would be pivotal in providing clarity regarding the future of NFTs in the country, as cryptocurrencies and NFTs are based on the same technology. Others have higher expectations from the government and hope that the government will recognize the inherent differences between these two types of technologies and would view them through different lenses.

Since the text of the Bill is not available for public yet, it would be too early to comment on its future. Nonetheless, it would be interesting to see how the situation unfolds and the manner and pace at which the NFT marketplace develops in India.

Urfee Roomi and Rishikaa are Principal Associate and Associate respectively at Sujata Chaudhri IP Attorneys.