While the COVID-19 pandemic has had a negative impact on India’s art markets, there is only one thing that has instead provided hope to artists and producers hoping to break through traditional market boundaries and that are NFTs. They are one-of-a-kind digital assets that can be used to establish ownership. NFTs are “minted” on these assets utilising blockchain technologies like Ethereum and smart contracts like Binance Smart Chain, which make them extremely safe by creating a unique digital signature.
From Kevin Mc Coy’s Quantum to Beeple who sold his piece “Everydays: The First 5000 Days” for a staggering $69 million to now even Amitabh Bachchan announcing the launch of his NFT collection of one-of-a-kind artworks inspired by his life and career, NFTs have come a long way.
NFT and Cryptocurrency:
NFTs are fundamentally different from cryptocurrencies like Bitcoin, which are indistinguishable from one another as the value of one Bitcoin would remain the same as the value of another and thus fungible. But NFTs as the name says, ‘Non-Fungible Tokens’ aren’t freely exchangeable as all of them have unique properties and cannot be exchanged for one another. This can be linked to the claim of originality which NFTs provide to the asset’s purchaser. For example, anyone who wants to buy a Van Gogh painting can do so, but only the individual who owns the original can control its ownership and enjoy all other rights.
Moreover, there is a royalty generation mechanism for NFTs that would automatically transmit a predetermined portion of the resale revenues to the asset’s original inventor.
The issues with NFTs
NFTs are traded globally because DLT platforms typically perform better outside of national borders. At the same time, the likelihood of illicit actions being enabled by cryptocurrencies because they are anonymous is one of the issues regarding NFTs as according to investors all around the world, even if it is difficult to create an NFT, the prevailing fear of the world is that NFTs are not immune to foul play. The “pump and dump” strategy is used by creating many accounts to artificially raise the pricing resulting in pricing fluctuations among countries. It is too early to tell whether NFTs are a long-term investment or merely a “trend”.
The Financial Action Task Force has voiced worry about NFTs, stating that they may be used to support money laundering or terrorism financing. Even under the Money Laundering Regulations, 2017, crypto assets are defined as “a cryptographically secured digital representation of value or contractual rights that uses a form of distributed ledger technology and can be transferred, stored, or exchanged electronically.” This implies that dealing in cryptocurrency-related properties would necessitate registration.
In the case of United States v. Harmon, Criminal Case No. 19-cr-395 (BAH) (D.D.C. Apr. 16, 2021), the respondent was said to be conspiring to launder monetary instruments by using a bitcoin tumbler known as ‘Helix.’ This tumbler’s service had been touted expressly as a tool to conceal transactions from authorities. Furthermore, persons who buy NFTs use pseudonyms and their profiles lack any information that can be used to identify them. For example, Vignesh Sundaresan, who paid $69 million for the most expensive NFT, purchased it anonymously and only later revealed his identity.
Moreover, there are no set rules or criteria for pricing NFTs, it can be subjective, for example, an animated flying cat with a pop-tart body, on the other hand, was recently auctioned for nearly $600,000 because there are no parameters for determining the worth of this flying cat and other similar NFTs, money launderers can acquire them at inflated rates, making it incredibly easy to launder significant quantities of money.
Another issue that arose with NFTs is their contribution to the tonnes of planet-warming carbon dioxide emissions due to the cryptocurrencies that are used to buy and trade them. Take, for example, “Space Cat,” an NFT that is essentially a GIF of a cat in a rocket travelling to the Moon, the carbon footprint of Space Cat can be said to be equivalent to the two-month supply of power for an EU resident. Clean energy, i.e., more cryptocurrency machines using renewable energy is the simplest solution to NFTs’ emissions problem.
NFTs and Intellectual Property Rights
Let’s take the most famous example of a video of LeBron James’ slam-dunk, which can be purchased and sold on the ‘Top Shot’ marketplace. Even if the card representing the dunk sells for a lot of money, the NBA still owns the rights to the original film. Even if one is fortunate enough to own one of the rare NBA NFTs, they are still prohibited from altering the video moment captured in your NFT or selling any items related to your NFT without the NBA’s permission. If one breaks the conditions of their licence, platforms like Top Shot marketplace may suspend or deactivate their account.
The ownership and commercialization of IP rights in NFTs is a complex area as of now. The owner of the NFT may or may not have rights to the underlying IP rights. The owner of a work has the right to copy or distribute copies of his work under Section 14 of the Copyright Act, 1957. As a result, the author’s specific permission, licence, or assignment is required for the NFT owner to exploit or replicate the artwork in any way. Otherwise, the NFT they own is more akin to a licence to use the artwork for personal purposes, collectibles, or secondary market sale.
Is it legal?
As of now, there are no rules in India that control the trade of NFTs. Since NFTs can only be traded in cryptocurrencies, crypto-trading companies such as WazirX, Zebpay, and others have already built their own virtual NFT marketplaces in India .Despite the fact that cryptocurrencies are not illegal in India, the Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019 pushes for a complete prohibition. It also imposes a fine or a sentence of up to ten years in prison for those who deal in it.
In Internet and Mobile Association of India v. Reserve Bank of India, the Supreme Court of India held that the April 2018 RBI circular prohibiting all regulated organisations from trading in cryptocurrencies was irrational and hence violated Article 19(1)(g) of the Indian Constitution.
In India, even though there is no explicit legislation governing NFTs, there are a few Foreign Exchange Management Act (FEMA) provisions that prohibit crypto-trading. FEMA laws have operated as a check on the flow of cash beyond Indian borders on numerous occasions. If one looks at the current FEMA laws, crypto assets should be classified as intangible assets like software and intellectual property, which are both protected by FEMA regulations.
It is a fact that the majority of NFT buyers and sellers are located outside of India’s borders, hence participants from India are frequently seen making cross-border transfers to participate in NFTs. There is currently no universal rule governing cross-border NFT transactions. If they are classified as intangible assets under FEMA, determining their location is critical because they are backed by cryptocurrencies, which are recognised as “global-ledgers,” meaning that the data is recorded, shared, and synchronised across multiple data stores or through a distributed network of different network participants. This will make it impossible to link the NFT to a specific location. If Indian participants continue to participate in the cryptocurrency market, they must do so using fiat currencies that are reported to their approved dealer banks in order to take a less risky approach.
Moreover, with the introduction of the Finance Act of 2020, a non-resident “e-commerce operator” is required to pay a 2% equalisation levy on the amount of consideration received or receivable by him. Foreign entities selling NFTs now will be required to pay the equalisation levy if they want to operate in India.
Conclusion
NFT is a developing field, and only time will tell if it will stick around. For the time being, the NFT revolution appears to be thrilling and promising, especially for artists who want to monetise their work and safeguard it from limitless replication in the digital realm. But what makes trading in NFTs more risky is that there is no clear understanding of the legal status of cryptocurrencies in India,
India can learn from countries with a well-balanced legal and regulatory environment, such as Singapore, Canada, Japan, and Switzerland.
If NFTs are deemed legal in India, amendments to the Prevention of Money Laundering Act, 2002, as well as the Antiquities and Art Treasures Act, 1972, will be required. Taking more advice from the European Union’s “Fifth Anti-Money Laundering Directive” may also be beneficial. In fact, there is a special law to combat money laundering through the art market, which includes NFTs in the definition.