NFTs – A Game Changer

Author: Business Law Chamber |

Article by Business Law Chamber

The current raging trend in the tech world and blockchain technology is undoubtedly, the Non-Fungible Tokens (NFTs). They bring great opportunities for investors and tons of new possibilities for artists/ creators around the world. The digital world is growing at a pace where, finally, art is being recognized like never before, where a taco art is being sold for hundreds of dollars and a bored ape for millions!

While cryptocurrency has been in news for some time now, like cryptos, NFTs are digital assets that are built on blockchain using the same technology. Here’s all you need to know about them:

NFT is a digital asset which can’t be interchanged or substituted with any other digital asset. These are unique digital assets, however, NFTs hold real world value. NFTs are created using blockchain technology and the process is as simple as picking your NFT (which may be a painting, meme or a picture), choosing the blockchain such as Ethereum, setting up your digital wallet (which has cryptocurrency), selecting an NFT marketplace, uploading the file and voila! You’re ready to trade your NFT!

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Blockchain technology is what creates digital assets like NFTs. NFTs operate through these blockchains, Ethereum being one of the most popular ones, due to its nature of being a private ledger blockchain with features such as smart contract and the inability to modify the ownership of a particular token. A blockchain holds the information that makes it a part of the blockchain and identifies the file as original and who the real owner of the NFT is.

In essence, NFTs gain value from three things: verifiable ownership, collectibles (since these items are limited in nature and quantity, they can be perceived as a collector’s item or collectible, and has an ability to derive value. An instance of the same can be pokemon cards) and thirdly, social status. Just like most expensive things, they are often purchased as well as a symbol of social status.

How is an NFT different from cryptocurrency?

NFTs and cryptocurrency are both digital assets that are built on blockchain, using the same technology. However, there is a significant difference among the two, cryptocurrency is a digital currency and a fungible asset, meaning thereby, cryptos are interchangeable. The term ‘fungible’ refers to the ability of a good or an asset to be interchangeable with another good or asset of the same type, where the value of the goods remains the same. Whereas, NFTs, being non-fungible assets, represent a unique ownership of anything in digital form (except cryptocurrency), which has been minted (the process of turning a digital file/ art/ item into a digital asset through blockchain). It is important to note that one requires cryptocurrency to trade in NFTs.

How do you buy one and what are the kinds of NFT that are generally available?

To buy an NFT, there are several platforms such as opensea, rarible, wazirx, where you need to register. The procedure is simple and only requires the buyer to have access to a crypto wallet such as metamask or coinbase.

The different kinds of NFT that are generally purchased can be essentially in any form, i.e., they can range from pictures in jpeg format or small videoclips, audio files, in-game purchases, parcels of land on meta, etc. Cryptokitties, bored ape yacht club, etc. are an example of valuable NFTs.

An NFT allows its creator, royalty on each subsequent sale of such NFT, however, one must note that, not all NFTs yield royalties. A smart contract (a contract in the blockchain) has to specifically mention for royalties in its terms. Also, NFTs allow unlockable content which may be accessible only by the owner, for example, a high-quality music files that may be required by various artists or a disc jockey. Leading artists may grant the creation rights to their fans and this may also be used to derive royalties from streaming of their work.

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Another version of monetization of NFTs can be derived from a mixed model of utility as well as a collectible such as in-game purchases. For example, equipment/items in a game, which are an NFT, can be bought and can be used for future reselling purpose.

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Tourism And Metaverse: Opportunities Due To NFTs

Virtual real estate being attributed ownership through NFTs can be an opportunity for people to visit landmark heritages and popular locations. Especially, during the pandemic, when travelling is specifically restricted, this has to be seen that these virtual tours can be used in metaverse to generate revenues as well. Recently, a Toronto artist, Krista Kim, made it to the headlines for creating a digital home known as ‘Mars House’, a mansion in virtual reality on Mars (in the Mars atmosphere). Premier releases of movie shows and events can also be made to holders of NFTs. This can generate preview access to a select few customers due to NFTs and thereby drive value.

Regulatory Issues in India

Section 53(A) of the Copyright Act, 1957 (“Act”) provides for resale of a copyrighted product and the derivation of revenue/royalty to be passed to the original creator. The Act states that in the case of resale of original copy for a certain price the first owner of rights shall have a right to a share in the resale price of such original copy, provided that such right shall cease to exist on the expiration of the term of copyright.

As per the recent Union Budget 2022 issued on 1st February 2022, the Government of India has proposed to tax virtual digital assets, it states that any income from transfer of any virtual digital asset shall be taxed at the rate of 30%. While, it has provisioned to tax the digital assets (which includes cryptocurrency and NFTs) at the highest slab rate, it has not legally recognized them in the country; only the digital currency that is envisaged to be issued by the Reserve Bank of India will be recognized as a digital currency.

In case NFTs are recognized in the country, the NFT marketplaces will be interpreted as Intermediaries according to the Information Technology (Intermediary Guidelines) Rules, 2021, meaning thereby, the platforms will have to comply to these guidelines.

Another concern from the regulatory perspective for NFT and the wider crypto and blockchain industry is compliance with Foreign Exchange Management Act, 1999 (FEMA). Any person looking to participate in sale, purchase, minting, etc. of an NFT may be required to comply with the FEMA regulations and provisions thereunder. NFT being a digital manifestation of something, the underlying idea has to be understood as well. Often an NFT can be treated as copyrightable work under FEMA and taxed accordingly.

Conclusion

In the Indian context, the relevant government authorities are yet to recognize the validity of crypto and NFTs, however, considering the craze for these digital assets globally and that the Indian Government is imposing tax on these digital assets, it seems that these assets might hold a future in the country. Having said that, while trading in digital assets, one must consider the current laws and regulations as well so as to avoid any non-compliance.