NFTs are tokens that represent ownership of the rights to the underlying digital content, which is recorded on a blockchain. While cryptocurrencies are ignored by regulators around the world, NFTs have been (relatively) well received, especially by the entertainment industry and creative artists. There is an element of exclusivity for NFTs, given that they are, by definition, non-identical and rated on their uniqueness. The “charm” of having a unique association with the underlying work of an artist, brand, etc., has led to some NFTs being treated as collectibles, leading to high demand from collectors. passionate. This is also true for India. According to a recent study, India has the third highest number of NFT companies headquartered in the world.
Although it looks like NFTs are here to stay, the legal status of NFTs is still unclear. In this article, we examine the current regulatory landscape governing NFTs in India and assess how they can be addressed.
Currently, no law in India regulates or expressly prohibits the sale or purchase of NFTs. If you’ve been following India’s cryptocurrency struggles, ‘no news’ is really ‘good news’! In 2020, the Supreme Court of India (“CS”) had to intervene to overturn a (fictitious) ban imposed by the financial regulator on financial institutions to facilitate the use of ‘virtual currencies’. Cryptocurrencies have been the subject of regulatory disapproval, with the financial sector regulator warning that financial entities must be aware while facilitating virtual currency transactions and fulfill all due diligence obligations, such as KYC , anti-money laundering controls, etc.
In contrast, Indian regulators have not indicated an unfavorable (or affirmative) stance towards NFTs. The only “statutory” reference to NFTs has been made in the definition of “virtual digital asset” under (Indian) tax law. Earlier this year, the central government amended the Income Tax Act 1961 to tax income generated by “Virtual digital assets” (“VDAs”) at the rate of 30% and included NFT or tokens of a similar nature as defined by the VDAs. Furthermore, the Advertising Standards Council of India has published “VDA Advertising Guidelinesfor advertising “virtual digital assets”.
What is the role of NFTs?
Are NFT Virtual Goods? If we follow the view of the Indian tax authorities, NFTs are VDAs. That is, NFTs are ‘goods’ under India’s sale of goods laws, being digital assets that can be bought and sold Going through NFT Markets. Under SOGA, “goods” include all types of movable property. Indian courts have clarified that the law does not distinguish between tangible and intangible property; Indian courts have held that the criterion for classification as a commodity is contingent on its usefulness and ability to be traded, transferred, transmitted, stored, delivered or possessed. If NFTs are classified as commodities, certain conditions and implied warranties under SOGA may apply to the sale of NFTs, such as fitness for purpose, merchantability, etc.. Indeed, buyers would be protected in the event of a sale of NFT that promises more than it delivers!
How do you really own an NFT? There seems to be some global consensus on intellectual property rights related to NFTs, at least. Since NFTs are derived from an underlying artwork (e.g., the Mona Lisa or an iconic movie scene), intellectual property rights in the underlying artwork continue to vest in the artist/author of the artwork, and the rights of the owner of the NFT are limited. to those ceded by the artist/owner (such as, reproduction rights for non-commercial purposes, performance rights, publication rights, etc.). Under the Copyright Act 1957 (“copyright law”) copyright can be obtained in original literary, musical, dramatic and artistic works. The copyright holder also has the right to reproduce it or distribute copies. Since an NFT is a digital token minted on an underlying asset, it can be argued that the author, not the creator of the NFT, has a copyright in the work the NFT is minted on. It has been argued that the sale of NFT can be likened to that of a non-exclusive software license. The purchase of software authorizes the purchaser to use it in the authorized manner by its creator. Similarly, the use of NFTs is defined by the terms set out under “smart contract‘ executed at the time of issuance of an NFT and is unlikely to involve any transfer of intellectual property rights in the underlying artwork, unless otherwise specified.
Does Indian contract law allow smart contracts? Smart contracts are programs stored on a blockchain that execute when predetermined conditions are met. Although these are usually automated, some parts may require human intervention and control. In the case of NFTs, the title of ownership is recorded on the blockchain. It is facilitated Going through a smart contract deployed on the blockchain between the buyer and the seller of the NFT. It contains the “unique identifier” associated with the minted NFT and the conditions governing the use of this NFT. The concept of smart contracts is still under development and its validity has yet to be considered under existing Indian contract law. It is an (extremely!) evolved form of click agreements, which have been found to be enforceable by Indian courts. As long as the smart contract fulfills the ingredients of a valid contract under Indian law (i.e. lawful consideration and subject matter, free consent of the parties and not considered “void”), it would be enforceable under the Indian law.
Are NFT buyers consumers? If you are purchasing goods for non-commercial purposes (even virtual goods or services), you have certain protections under India’s Consumer Protection Act 2019 (“PCA”). These include a claim of product liability for defective products and unfair trade practices (including misrepresentation as to standard or products, their usefulness, or falsely implying sponsorship or affiliation). Under the CPA, posting misleading advertisements is an unfair business practice and subject to fines and/or penalties. e-commerce entities (i.e., electronic facility or e-commerce platform).
Can you advertise NFTs? Yes, but beware of over-promising and under-delivering; misleading advertisements have consequences under Indian laws. India’s advertising industry self-regulatory body, ASCI, has also issued “Guidelines for Advertising VDAs and Related Services” (“Guidelines”). The guidelines require that ads relating to the VDA (among others) contain disclaimers, do not use the words “currency”, “securities”, “custodian” and “custodians”, do not describe minors under the age of 18, and contradict the regulatory and legal position on VDAs. The recently notified Guidelines for the Prevention of Misleading Ads and Approvals for Misleading Ads, 2022 further strengthen the regulatory regime, making celebrity endorsers and influencers equally liable for misleading ads.
Finally, are NFTs securities or an investment? No, and issuers should not pretend they are! The Indian Securities Act limits the scope of securities to stocks, shares of stock, bonds, debentures, debentures or other negotiable securities related to a company. Since NFTs derive their value from the underlying artwork, they may not be considered a security, i.e. representing a unit of investment in a business. Along the same lines, NFTs may not be derivatives or because they are not contracts whose price derives from the underlying securities. As such, the marketing of NFTs as an investment, security or commodity should be avoided, and its treatment should be clarified by the NFT platform/vendor through the terms and conditions of the website.
What to expect in the future
As is the case globally, there is no consensus on the legality of NFTs under Indian laws. Most jurisdictions (like India) follow a “wait and watch” approach and, in the meantime, treat NFTs as VDAs or collectibles for tax purposes. Although NFTs are not treated with the same degree of negative connotation as cryptocurrencies by the Indian government, laws aimed at regulating NFTs may come onto the government’s radar if there are widespread abuses, such as the piracy Bored Ape Yacht Club NFTs that resulted in a loss of $2.2 million for its owner. Parties engaged in buying, selling or facilitating NFTs should be aware of and consider the risks in this light.