Need for a progressive regulatory framework

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The history of crypto assets in India has been intrinsically linked to disruptions. As investors and institutions begin to get used to the idea of ​​cryptocurrencies, non-fungible tokens (NFTs) and their growing popularity are another intriguing development happening in this space. NFTs first started out as a niche segment known only to crypto enthusiasts, but they have now become a trending product globally. This is underlined by trading volumes of over $21 billion worldwide.
This trajectory is also true in the case of India, with celebrities and notable institutions issuing their own line of NFTs, ensuring they grab the attention of followers, investors and analysts. The launch of NFT Marketplaces, which hosted over 300 artists, NFT-based brands and the aforementioned celebrity NFT collections, brought it closer to mainstream discourse.
The impending cryptocurrency bill has also brought to the fore aspects such as the valuation of digital assets and the protection of investors. This year’s budget introduced a formal tax on gains from digital assets, and there are signs that NFTs may be included in that framework. Given the impending nature of this regulation, we will endeavor to unpack the rise of NFT, its use cases and regulatory themes in this context.

Explanation (image below)


Figure: An overview of the main features of non-fungible tokens (NFTs)

The Rise of NFTs

Supply and demand are factors at the heart of business and currency, and the growing popularity of NFTs and broader crypto-tech communities have helped fill these existing gaps. NFTs have enabled India’s rich cultural and artistic heritage to find a new way to reach investors, especially new investors. Moreover, the low cost of NFTs in India makes it lucrative for foreign investors to move towards transforming locally produced art into digital assets. The fluidity and transparency of the smart contracts that govern these NFT transactions are additional positives.
Another important aspect behind the growing popularity of NFTs is the sense of exclusivity and community that they imply. Similar to country club memberships being highly desirable and exclusive commodities, owning certain NFTs helps build community in the virtual world – a world we increasingly spend more and more time in. Ownership of an exclusive NFT gives the investor access to other individuals and events in that community, as well as a stake in the direction of the overall NFT project. Indeed, they have the potential to act not only as a store of financial value; but also represent the value provided by the global community.


Regulatory issues

While the rise of digital asset markets has been remarkable, there is a need to consider the regulatory uncertainties surrounding this sector, encompassing a lack of defined rules regarding crypto assets, authenticity and intellectual property, as well as consumer protection factors.
Initially, the lack of rules regarding crypto assets affects legality, as well as broader investor sentiment regarding support for NFT creators. NFT transactions, as mentioned earlier, are usually governed by smart contracts. In this context, any financial investment that requires the use of cryptocurrencies may invite scrutiny on two points: first, the lack of legality of cryptocurrencies as payment instruments, and second, the applicability from foreign exchange standards to cross-border transactions.
In the context of authenticity and intellectual property, it is important to point out that smart contracts enabling the sale of NFTs do not always result in a transfer of ownership or copyright, or a licensing authorization. Artwork. These issues should ideally be explicitly addressed in the contract. Another significant issue is the replica market for NFTs. NFTs are essentially a uniquely signed token of a particular version of an artwork. In the absence of digital forensic standards adopted by the marketplaces, replicas can also be uniquely coded, perpetuating copyright infringements and fraudulent transactions.
These issues create an imperative for well-defined consumer protection regulations based on market transparency and accountability. A major step in this direction is to verify the authenticity and credibility of NFTs sold on a particular platform. Although NFTs may be perceived as genuine due to their unique ledger coding, there is a need to only allow credible and verified institutions to operate NFT markets. This would only allow registered artists and creators to sell, preventing unverified art from flooding the digital market.


The need for a balanced approach

The inclusion of NFTs within the broader framework of crypto assets or digital assets in the upcoming bill will bring a greater degree of policy certainty to this market. However, given the rapid growth rate of this sector, it is important not to allow a prolonged regulatory vacuum to develop.
The unique nature of this market calls for a balanced approach, where NFT marketplaces could operate efficiently, but within overarching guidelines issued by central regulatory authorities. Tradable digital certificates, validating trade history and the market that enabled it, could enable greater consumer confidence in buying and selling NFTs. Once marketplaces reach stable trading volume, they could move to NFT classification. Although this is difficult given the different forms and manifestations these assets can take, countries like Luxembourg have started by classifying NFTs into three distinct groups: financial instruments, electronic money and collective investment instruments.
Government concerns about crypto assets fueling money laundering and illicit financing also carry over to the discourse around NFT regulation. The adoption of the fifth Anti-Money Laundering Directive (5AMLD) by the European Union could prove to be a benchmark for such regulation. Although it does not explicitly address NFTs, the role of ‘art intermediaries’ in the context of money laundering and art funding is highlighted.
In addition, focusing on investor protection and education is of immense importance while moving towards balanced regulation. Initially, NFT platforms should focus on labeling content and informing users of an item’s history – its valuation, average volatility, artist’s biography, and a clear classification of the type of digital content. Extending the ASCI Guidelines for Cryptocurrency Advertising to NFTs would also allow investors to make informed investments and contribute to a better understanding of digital assets.

Crypto assetsNFTs, which fall under the broader category of crypto assets or digital assets under the impending bill, will bring more legislative clarity to the market.


Conclusion
Overall, although there has been exponential growth and adoption of NFTs, most of these transactions still operate in a gray area. NFTs have the potential to revolutionize the digital art market, making it more viable and commercially accessible. To make this a reality, regulations must balance the goals of responsibility and growth, thereby empowering creators and protecting investors.

Gautam Kathuria is program manager and Abhishek V is research assistant at The Dialogue

(Disclaimer: The opinions expressed are those of the authors and Outlook Money does not necessarily endorse them. Outlook Money will not be liable for damages caused to any person/organization directly or indirectly.)

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