Legal Status of NFTs in India

Abstract?

In the light of a recent ruling in the United Kingdom which accords the status of a legal property to a NFT, it leads us to analyze the legal status of NFT in India as the it will help determine the Rights and Claims of NFT owners. This Blog also analyzes the effect of giving such a status to NFTs and whether it is a necessary step.

Keywords – NFTs, Property, legal Status, Contract Law, IPR

Research Methodology – The Research Methodology used in this blog is purely Doctrinal.?

What is a NFT?

NFTs are a fairly recent concept with them gaining fame overnight and being recognized as an Investment worth millions. NFTs or Non Fungible Tokens are unique which means unlike other forms like coins which you can replace one from another with both having the same value, NFTs are one of a kind and one cannot replace another NFT. NFTs are strictly limited to the digital domain and can include Art, Animations, Music etc. They are mostly administered by the Block chain technology same as the one used for Bitcoins like Ethereum.?

NFT Art can be easily copied or downloaded, but the thing is that NFTs do not give you the Art but rather you purchase the ownership to the Art, which means that only you have the original version. For an Artist it would mean that some percentage of money will be transferred to you every time your NFT changes ownership. For a buyer of the NFT that would mean you getting Rights to use that product, maybe while making a reel or posting it as a picture without the fear of getting a copyright strike.?

There are communities being built around NFTs, like Pudgy Penguins for collectors or Nifty Gateway, Rarible or OpenSea being used as an NFT marketplace.?

So, NFT is a Digital Asset like Art, Anime, song etc. whose ownership is sold. The confluence of Intellectual Property laws and NFTs is fairly new and its effects remain to be seen especially in India where the exact status of NFTs is not yet known.?

UK Ruling- Is NFT a property?

A yet to be published UK High Court Ruling dealing with NFT theft has recognized NFTs as a Legal Property in the UK. The Action was bought in the case of Lavinia Osbourne v Persons Unknown, Ozone Networks Inc. trading as Opensea. The legal recognition of NFTs as legal property is being hailed as a landmark move as this could solidify the Rights of NFT owners and give more credibility to NFTs as an asset. This will not only protect the owners but also the Artists and encourage the Digital Art Industry. According Property Rights to NFT owners will bring them under the protection of law from crimes like Theft, Criminal Breach of Trust etc. It will also open gateways for NFTs in Tax Laws, Wealth Planning, Trust Law, Inheritance Law etc.? The court has also recognized NFT as a property capable of being stayed through an Injunction, which brings a huge relief to owners as more often than not the location of the criminals in NFT theft cases are not known and given the nature of the asset, the crime can be committed from any corner of the world. Freezing the accounts having the NFTs till the dispute is settled will prevent their transfer or movement, thus, securing the asset for the time being and also giving the owners the power to bring lawsuits, seize and recover their assets or demand repayment.?

The NFT owners and buyers are however divided over the issue, as the main feature of the Block chain technology is minimal government interference. The current ruling though largely in the favor of NFT traders, since, it accords the protection to the owners, it also brings in apprehension of their now being taxed since they are now recognized as property, and also raises the question whether the current law dealing with tangible property is ready to enter the Digital Domain where it could be easily circumvented to make private transfers or get hacked.??

NFTs as property is not a new concept as they are already treated as property for the purpose of Taxation and owners are taxed under Tax Laws of the U.S.A.?

Legal Status of NFTs in India

NFTs have not been recognized in India and despite being a Billion Dollar Industry, it is not regulated.?

The Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 which imposed a criminal penalty on anyone dealing with Digital Currency, this looked like a step in the direction opposite to what the world was headed in.?

Also, in 2018, the Reserve Bank of India (RBI) issued a Notice which was aimed at prohibiting the dealing in Virtual Currencies. Alarmed by such steps being taken, Stakeholder in the Crypto markets filed a petition in the case of Internet and Mobile Association of India v. Reserve Bank of India.?

The Supreme Court in this case struck down the Notification issued by the RBI regarding Cryptos. The Court observed that the RBI was not able to prove any damages to its related entities and according to the FATF (Financial Action Task Force), crypto assets are being used for money laundering and terrorist activities, ignoring the same and not regulating it could also lead to a? lot of problems, also, crypto or Digital Assets is a Billion Dollar Industry which should be regulated, each Digital Asset being dealt with is worth a lot of money, it should be recognized to govern such transfers for the purpose of protection of rights of buyers and sellers and also for the purpose of taxation which can bring in revenue for the government.

The new Cryptocurrency and Regulation of Official Digital Currency Bill,2021 seeks to prohibit all ‘private cryptocurrencies’ in India but allows the use of underlying technology i.e. Block Chain. There is also a proposal by the RBI to come up with an official Digital currency, since, its main contention is that cryptocurrencies are not regulated by the central banks and therefore pose a threat to the Indian Economic and Financial system.

Rights of NFT owners in India

The Indian law has as of now not recognized NFTs and therefore there in not much that can be said about the Rights of NFT owners in India in case of theft etc.?

According to the NFT trends, the ownership to a NFT is transferred that would mean the grant of a Non-Exclusive license which could translate into royalty payments, rights related to selling of copies etc. This ownership is granted through an Online contract, the legality of which has been recognized in India, whether these can be applicable to the case of NFTs is yet to be seen. Online Contracts or E-Contracts are governed by the Indian Contract Act,1872 and have also been recognized under Section 3,4, 10A of the Information Technology Act,2000. The Courts have also recognized the validity of E-Contracts in leading cases like Trimex International FZE Ltd. v Vedanta Aluminum Ltd.

While you may purchase the NFT’s license, you are not purchasing the Copyright to the NFT per se, that will still remain with the Original Creator, therefore, putting an NFT owner who is not its creator outside the purview of Copyright laws.

Similar to copyright laws, buying of a NFT does not necessarily mean getting Intellectual Property Rights over it, the only exception to this rule is if you commissioned the artist to make it for you. The transfer of IP Rights otherwise is wholly at the discretion of the original creator of the NFT and their extent can be determined through the means of transfer of such rights in the licensing agreement.?

Looking at the other aspect of Law as in the Lavinia Osbourne case discussed above NFTs in India do not have the status of a Legal Property effectively leaving owners without the safeguards of law.????

Conclusion

India needs to take quick actions to keep up with the trends in other parts of the world, especially when given the fact that due to their Digital Nature, they tend to transcend physical boundaries and therefore need protection of both International as well as Domestic laws.?

The recent trend in recognizing NFTs as a legal property is indeed a step in the Right direction, while it affords for owners to have Rights over the NFTs protecting them from criminal offences like theft etc. at the same time, it takes them into purview of taxation laws would allow government to harness revenues out of an Industry worth Billions.?

India’s recent approach towards Digital assets has been largely negative, but it is important to recognize that they are a part of the future, earlier Cryptocurrency were the only Digital Asset to be dealt with, the NFTs gained immediate popularity and attracted many investors and similar Digital Asset booms can be expected in the future. While the government’s contention that the Block chain technology used to administer Digital Assets is largely out of Government Control, it can still regulate the markets. Giving the status of Legal property to Digital Assets like NFTs would bring them into mainstream laws and change the outlook of Investors towards them and make them a more lucrative option while at the same time reducing the risk and uncertainty associated while dealing in unregulated markets.