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Is NFT collection in India

 

 

 

 

The hysteria for non-fungible tokens (NFTs) in Republic of India is obvious later on the mythological reaction to auctioneer of megastar Amitabh Bachchan's NFT compendium. The accumulation power saw the highest-always invite of more than than ₹7 crore. However, NFTs are non for everyone, enounce experts. Ace of the biggest concerns is their collection condition in Republic of India. "In India, NFTs are traded as cryptocurrencies, and all trading is currently taking place on crypto exchanges. There is no regulatory structure in India for cryptocurrencies, making NFTs considerably riskier," says Himanshu Yadav, Initiation Partner, Woodstock Monetary fund. Unfortunately, NFTs don’t experience a differentiate effectual fabric in Bharat either.

 

 

Hey Bollywood fans! Are NFTs sound in Bharat?

 

 

 

 

The madden for non-fungible tokens (NFTs) in Bharat is obvious later on the mythical reply to auctioneer of megastar Amitabh Bachchan's NFT assemblage. The aggregation sawing machine the highest-e'er bidding of Sir Thomas More than ₹7 crore. However, NFTs are non for everyone, enounce experts. Unmatchable of the biggest concerns is their effectual position in Republic of India. "In India, NFTs are traded as cryptocurrencies, and all trading is currently taking place on crypto exchanges. There is no regulatory structure in India for cryptocurrencies, making NFTs considerably riskier," says Himanshu Yadav, Founding Partner, Woodstock Investment firm. Unfortunately, NFTs don’t make a separate sound model in Republic of India either.

 

 

NFTs are crypto assets with a unequaled certificate of legitimacy. This makes them rare and high-note value integer assets. BeyondLife.golf-club says nontextual matter associated with an NFT is stored on a decentralised register organization and gives the gatherer possession of a alone collectible. It is also traceable on the blockchain, an changeless decentralised account book of data.

 

At that place is a impression that NFTs are solely a status symbol of the super-plentiful. This couldn’t be farther from accuracy. NFTs, as an emerging asset, are a Handy investment. Just Vikas Ahuja, CEO, Crosstower Bharat and Appendage of BACC (Blockchain and Crypto Assets Council) advises investors to be thorough with their explore ahead investment.

 

 

Shivam Thakral, CEO, BuyUcoin, recommends NFTs to mass who are collectors and investors World Health Organization empathise artistic creation and its prize in the prospicient terminus. "If there is a specific use case of a certain NFT, it can be brought by the general public since they will be getting direct value out of it," he adds.

 

 

The NFT marketplace is volatile, says Yadav of Woodstock Store.

 

 

In showcase of collectable NFTs, fluidity is another large care. "You might get in easily but when you want to get out, there is a high chance that there will be no buyer if your NFT is overvalued or worthless in buyers' eyes, '' says Thakral of BuyUcoin. Buyers should also verify the true ownership. There have been cases of people trying to sell replicas as originals, says Ahuja of Crosstower India.

 

 

Currently, art and collectible NFTs, like the ones launched by the Bollywood actors, are capturing mainstream attention. However, NFTs will be the standard representation for digital assets in the next three-five years, believe experts. "Identicalness NFTs, aggregation documents delineate as NFTs, tickets as NFTs are a few use cases we are worked up most and thus, we look NFTs as an ubiquitous engineering which will be incorporated in everyone’s lives," says Yadav of Woodstock Fund.

 

 

Meanwhile, Indians' investment in cryptocurrencies has increased to over $10 billion from $923 million in April last year, shows a recent report by CREBACO, a crypto research and intelligence platform.

 

 

As per CoinGecko, a cryptocurrency data aggregator, the global cryptocurrency market cap has breached the $3 trillion mark. The total crypto market cap was $3.09 trillion at 2:35 p.m. on Tuesday. Avinash Shekhar, Co-CEO of ZebPay and member, BACC, says increasing interest by institutional and retail investors in crypto assets, blockchain-based products and services like NFTs are behind these achievements.

 

 

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N on-fungible tokens (NFTs) have been a hot topic of discussion worldwide for the past couple of years, and India has recently joined this bandwagon. Earlier this year, some of India’s biggest cryptocurrency exchanges launched their own NFT marketplaces that run on blockchains created by these exchanges. These NFT marketplaces have been created to bridge the gap between artists and buyers by providing end-to-end platforms, primarily for facilitating trade, using cryptocurrency as a medium of exchange.

 

 

N on-fungible tokens (NFTs) have been a hot topic of discussion worldwide for the past couple of years, and India has recently joined this bandwagon. Earlier this year, some of India’s biggest cryptocurrency exchanges launched their own NFT marketplaces that run on blockchains created by these exchanges. These NFT marketplaces have been created to bridge the gap between artists and buyers by providing end-to-end platforms, primarily for facilitating trade, using cryptocurrency as a medium of exchange.

 

 

 

 

There is a lot of scepticism around the future of NFTs in India, and the validity of NFT transactions. One of the reasons is the question of the legality of cryptocurrency in the country, which remains unanswered. In 2018, the central bank, the Reserve Bank of India (RBI), had issued a circular asking banks not to deal with or provide any services to entities dealing with virtual currencies.

 

 

However, in 2020, the Supreme Court of India struck down the 2018 circular. In early 2021, the finance minister stated that the government was not closing its options and would give room to stakeholders for experimenting with blockchains, bitcoins and cryptocurrencies. In May, the RBI issued another circular that directed all banks to carry out due diligence for transactions in virtual currencies, in line with the existing regulations pertaining to anti-money laundering, foreign exchange and combating of financing of terrorism. However, stakeholders are still waiting for more guidance on the scope and extent of legality of cryptocurrencies and crypto assets from the government, as well as other regulatory authorities.

 

 

At this time, India does not have any law or regulation to govern NFTs. Accordingly, as far as NFTs are concerned, we must rely on the established principles of law as laid down in statute books in the country.

 

 

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It is settled that NFTs can represent various things, however their worldwide popularity, including in India, is attributed to their representation of a digital art form. Therefore, in its most popular form, an NFT is a digital copy or token of an underlying original work. Having said this, owning an NFT does not confer ownership of the underlying work that the NFT represents.

 

 

It follows that the difference between buying an original artwork and buying an NFT is that the copyright in the original underlying work does not get automatically transfer to a purchaser of an NFT. While it is possible for a copyright holder to transfer ownership rights to the purchaser of the NFT at the time of sale, the provisions of the Copyright Act, 1957, require the contract for sale to provide for such assignment of rights explicitly, in writing.

 

 

Once the rights are assigned in compliance with the provisions of the Copyright Act, an NFT holder would be treated as the owner of the copyrighted work. Accordingly, the rights of the parties to an NFT sale, and the extent of such rights, are determined by the governing sales contract.

 

 

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Most NFT-related transactions take place through smart contracts, which may stipulate the terms of a licence, provide automatic royalties in case of resale transactions, set limits to the use of copyrights, and track subsequent purchases of an NFT. A smart contract is governed by the Contract Act, 1872, and the Information Technology Act, 2000.

 

 

Under the Contract Act, an offer, acceptance and consideration are the cornerstones of a valid contract. While a smart contract has the offer and acceptance components of a valid contract, the consideration component may be an issue. Usually, in a smart contract governing an NFT transaction, consideration would be in cryptocurrency. However, as explained above, the legality of cryptocurrencies in India continues to be cloudy, leading one to question the validity of a smart contract and the underlying transaction.

 

 

Given the RBI circular, which requires compliance with laws relating to foreign exchange and money laundering in all virtual currency transactions, it would not be far-fetched to state that NFT transactions would also be subject to these laws. In the absence of a legal framework, Indian legal scholars are divided on the classification of NFTs required for such compliance. This classification is key in understanding the legal implications with respect to these NFTs, and their effects on the assets they represent.

 

 

If an NFT represents an asset that is considered a security under Indian securities laws, then it may be subject to these securities laws. According to some legal experts, NFTs are essentially derivatives under the Securities Contract (Regulation) Act, 1956 (SCRA). As per the SCRA, derivates include "a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; a contract which derives its value from the prices, or index of prices, of underlying securities."

 

 

Furthermore, a contract in derivatives would be valid and legal only if derivatives are traded on an authorised stock exchange in accordance with the laws of that exchange. Consequently, if NFTs are classified as derivatives, then any contract in such derivatives would be illegal because the marketplaces on which they are traded are not authorised by law.

 

 

However, the way the current marketplaces have been set up may not require such authorisation. This is because these marketplaces have been fashioned less like exchanges and more like platforms, where a buyer purchases an NFT from the seller without any intervention from or payment to these platforms other than a nominal sales commission or gas fee (an amount paid by users towards computing energy that is required to validate NFT transactions on blockchains).

 

 

Similarly, the popular view is that the treatment of NFTs under India’s taxation regime would depend on the nature or classification of the underlying asset. An NFT would be subject to a goods and services tax (GST), and the definition of goods under the Central Goods and Services Tax Act, 2017 includes moveable property other than money and securities, and services include anything other than goods. It is highly likely that the GST would be imposed, based on what the NFT represents.

 

 

However, there may be additional complications in cases of cross-border NFT transactions. The Finance Act, 2020 contains provisions regarding an equalisation levy (EL), which charges a 2% fee on corporations based out of India but having operations within the country. If a marketplace is considered as an e-commerce operator under the Finance Act, then the2% EL may apply on the gross value of the NFT, or the gas fee charged by these marketplaces, or both.

 

 

In addition, cross-border NFT transactions will also invoke provisions of the Foreign Exchange Management Act, 1999 (FEMA). Again, the treatment of an NFT under the FEMA would depend on the nature of the underlying asset. However, the situation is not as simple as it sounds, since it is almost impossible to determine the location of an NFT. This may lead NFT holders and marketplaces to avoid FEMA regulations altogether.

 

 

The emergence of NFTs has also led to concerns regarding money laundering. NFTs are based on blockchains that provide a perfect opportunity for maintaining anonymity and privacy for parties to the transactions. Although it may be possible to trace these parties by contacting the marketplace or crypto wallet and identifying the IP address, the overall process would be slow and tedious, providing enough opportunities for such parties to evade the law, or hide from regulatory authorities.

 

 

As is evident, there are a lot of concerns surrounding NFTs, particularly for a nation that is still struggling with the cryptocurrency conundrum. However, what started as a fad is now gaining ground in the country. One of the major reasons attributed to the rapid acceptance of NFTs is the sheer number of traditional and digital artists in India, and the benefits they can reap from NFTs.

 

 

While speculation persists around NFTs and virtual assets, the Indian government has proposed a new law for regulating cryptocurrencies. Stakeholders and experts anticipate that this legislation will also play a role in clearing the air surrounding NFTs in India.

 

 

New regulations are definitely the need of the hour, because current laws can only provide quick fixes to issues, whereas new regulations are capable of providing long-term solutions pertaining to this new facet of technology. Although the future of NFTs in India remains unknown, it is fairly certain that they are here to stay.

 

 

 

 

The newest fad in the market today is of Non-Fungible Tokens ("NFTs") . They are essentially a certification of ownership of cryptoassets, and like cryptocurrencies operate using the blockchain technology. Furthermore, presently trading in NFTs is possible only through cryptocurrencies. However, that is where the similarity between cryptocurrencies and NFTs end. Cryptocurrencies are exchangeable or "fungible" while each NFT is unique and therefore, cannot be exchanged the way cryptocurrency can be, thus giving rise to the term "non-fungible". NFTs may also represent physical assets thereby enabling exchange of physical assets on a digital marketplace. NFTs can represent a broad range of things – from an artwork, to a GIF, to trading cards and even virtual real estate. And even though the basic characteristic of a digital creation is an infinite supply, NFT provides an ownership of a particular digital creation. The basic idea behind this is to cut off the infinite supply of the digital creation thereby raising the value of the digital creation. While multiple copies of that artwork may exist on the internet, the NFT owner has ownership of the original artwork, and it is for these digital "bragging rights", an exorbitant amount of money is paid.

 

 

Non-Fungible Tokens: Examining its Legal Validity in India

 

 

The newest fad in the market today is of Non-Fungible Tokens ("NFTs") . They are essentially a certification of ownership of cryptoassets, and like cryptocurrencies operate using the blockchain technology. Furthermore, presently trading in NFTs is possible only through cryptocurrencies. However, that is where the similarity between cryptocurrencies and NFTs end. Cryptocurrencies are exchangeable or "fungible" while each NFT is unique and therefore, cannot be exchanged the way cryptocurrency can be, thus giving rise to the term "non-fungible". NFTs may also represent physical assets thereby enabling exchange of physical assets on a digital marketplace. NFTs can represent a broad range of things – from an artwork, to a GIF, to trading cards and even virtual real estate. And even though the basic characteristic of a digital creation is an infinite supply, NFT provides an ownership of a particular digital creation. The basic idea behind this is to cut off the infinite supply of the digital creation thereby raising the value of the digital creation. While multiple copies of that artwork may exist on the internet, the NFT owner has ownership of the original artwork, and it is for these digital "bragging rights", an exorbitant amount of money is paid.

 

 

Crypto-trading platforms such as WazirX , Zebpay , etc., have already launched their own virtual NFT marketplaces in India. With NFTs penetrating the Indian market and their sales growing at record pace, it is important to analyse them from a legal standpoint.

 

 

The Cryptocurrency Conundrum

 

 

Perhaps the biggest obstacle in NFT trading is the obscurity surrounding the legal validity of cryptocurrencies in India because as stated earlier, NFTs are tradeable only in cryptocurrencies. Further, all Indian platforms which have launched trading in NFTs till date are cryptocurrency exchanges. Even though cryptocurrencies are not illegal in India, the Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019 advocates a complete ban on the use of cryptocurrency. It also provides for a fine or/and imprisonment for those who deal in cryptocurrency.

 

 

On the contrary, the Supreme Court of India in Internet and Mobile Association of India v. Reserve Bank of India, while striking down the April 2018 RBI circular directing all regulated entities to refrain from dealing in cryptocurrencies, opined that the impugned circular was unreasonable and hence violative of Article 19(1)(g) of the Constitution of India. Furthermore, early 2021 saw a drastic change in the approach of the government in dealing with cryptocurrencies with the Finance Minister stating that the government was not considering a complete ban on cryptocurrency and that it will allow windows for people to do experiments. RBI also issued a circular directing the banks to not rely on the 2018 circular since it was struck down by the Supreme Court of India.

 

 

What emerges out of this discussion is that there is absolutely no clarity as to the legal sanctity of cryptocurrencies in India which consequently makes trading in NFTs riskier.

 

 

Can NFTs be classified as Securities?

 

 

As discussed, presently no law bans trading in NFTs in India. The legality of NFTs in India is uncertain and adding to the chaos is the belief that trading in NFT is not permitted under the Securities Contract (Regulation) Act, 1956 ("SCRA"). There is no separate legal framework for NFTs in India. This has led to polarisation among the scholars as to the classification of the NFTs . Some opine that NFTs are contracts whereas some state NFTs to be a derivative. If the latter is true, in essence it would mean a ban on trading in NFTs in India.

 

 

Section 2(ac) of SCRA which defines "derivative" provides that derivative also includes a contract which derives its value from prices or index of prices of underlying securities. If NFTs are held to be derivatives, then they cannot be traded on virtual platforms by virtue of Section 18A of SCRA which provides that contracts in derivate shall be legal only if they are traded on recognised stock exchange. Under such circumstance, the platform where NFTs are traded will have to apply for recognition as Stock Exchange with the Central Government.

 

 

As pointed out earlier NFTs are non-fungible, and it is this non-fungibility that separates them from other securities. Hence, if a particular NFT relates solely to an existing asset and it is marketed as an assurance for authenticity of the ownership of such asset, reckoning it as a security (derivative) would be improper. It should be rather governed by the general principles of contract. On the contrary, fractional NFTs (providing partial ownership interest in the NFT) which have come into existence due to exorbitantly priced NFTs, which most people cannot afford, may be termed as a security. Furthermore, if promises pertaining to return on investment are made then NFTs will resemble a speculative investment rather than a digital collectible, and therefore, could be deemed as a security in India.

 

 

NFTs in the United States:

 

 

NFTs in US, like India, are unregulated and the legal position is in a confusing state of affairs. A petition was filed with the Securities and Exchange Commission ("SEC") on 12 April 2021 recommending the regulator to enact a framework for the regulation of NFTs. Apart from this, there is no formal document pertaining to NFTs. However, SEC officials have opined that dealing in NFTs can amount to breaking of law because NFTs can often take the shape of ‘investment contract’.

 

 

At this juncture it is pertinent to note the much talked about ‘Howeytest’ as laid down by the Supreme Court of the United States in SEC v. W. J. Howey Co . The definition of ‘security’ under US law also includes ‘investment contract’ among many other things. The Supreme Court of the United States opined that an investment contract exists when there is investment of money in a common enterprise wherein profits are expected through the efforts of others. The most contentious aspect here is ‘efforts of others’ which is nothing but third-party efforts to realize an asset’s investment potential. Whether the profits are a result of others’ efforts depends on a case-to-case basis. To illustrate, NFT derived from a GIF or a painting is not a security because the GIF/painting is in its final stage and hence its value is not dependent upon ‘efforts of others’. As against that, if a real estate developer has financed a particular project through the issue of NFTs (representing a floor or unit), these NFTs would be securities under the Howey test because here the purchasers of the NFTs expect a return based on the efforts of the developer.

 

 

Along with the issues discussed above there are various other legal and regulatory challenges which come along with the advent of NFTs. The foremost of these regulatory challenges are those related to intellectual property rights, right to privacy and money laundering. In the next part of this blog the authors will focus on how NFTS maybe a tool to launder money.

 

 

NFTs: A new-age tool for Money Laundering?

 

 

There are three main steps to launder money – (i) placement, (ii) layering and (iii) integration. Arguably, the most crucial and the most complex aspect of money laundering is to ensure that source of the money becomes untraceable, i.e., layering the money. Historically, buying those legal assets whose value is difficult to determine, such as art, has been the preferred choice for criminals to layer their ill-gotten money. Plato once said, "the beauty lies in the eyes of beholder", and this is exactly why buying art is the preferred vehicle of criminals to layer their ill-gotten gains, simply because of the fact that value of art is fundamentally subjective. Further, transactions involving art also provide much needed anonymity and privacy to criminals . There is also a lack of regulations wherein most art dealers neither having to report transactions nor verify their clients. With the emergence of NFTs, the problem regarding money laundering through art is bound to worsen.

 

 

Firstly, NFTs can provide complete anonymity. The technology on which NFT operates is blockchain, on which every transaction involving a cryptocurrency is publicly recorded. For the creation of NFTs, blockchain is a critical technology. It employs encryption to link blocks together to create a growing list of records. Each block is linked to the previous block by a cryptographic hash, or a string of characters that uniquely identifies a piece of data. A Merkle tree is a data structure that stores the transaction records of a series of blocks. This enables for quick access to previous records. A ledger of sorts is maintained. While through this ledger it is theoretically possible to work backwards, identify wallets through which the cryptocurrency passed, and then associate those wallets with people by IP tracing, cryptocurrency tumblers can make this task extremely difficult to carry out. A ‘tumbler’ essentially mixes identifiable or traceable cryptocurrency with non-traceable ones so as to make the original source of the cryptocurrency unidentifiable. In the recent case of USA v. Harmon , the defendant has been charged of conspiring to launder monetary instruments through operating a bitcoin tumbler known as ‘Helix’. The service provided by this tumbler had been specifically advertised as a way to camouflage transactions from authorities. Further, people buying NFTs have pseudonyms and their profile lacks anything through which they can be identified. For example, Vignesh Sundaresan who bought the most expensive NFT at $69 Million bought it anonymously and only later chose to reveal his identity.

 

 

Secondly, the pricing of NFTs can be subjective with no proper parameters or criteria. Art, other than cryptoart, even though can be valued subjectively, it has a few parameters such as the antiquity of the painting, condition, rarity, etc., based on which at least a price range can be determined. However, recently an animated flying cat with a pop-tart body was sold for almost $600,000. There are no parameters to determine the value of this flying cat and other similar NFTs and therefore it becomes convenient for money launderers to buy NFTs at exorbitant prices making it very easy to launder large sums of money.

 

 

Conclusion: The Way Forward

 

 

In addition to the problems highlighted above there is also a question regarding ownership rights in NFTS. When contemplating the intellectual property implications of NFTs, it is vital to understand the difference between ownership of the NFT and ownership of the intellectual property that underpins it. The rights given by an NFT seller are determined by the rights transferred via a license or assignment, which might differ from one NFT to the next. And therefore, what is required Is NFT legal in India a firm stance of the legislature on this point through a definite statutory framework.

 

 

NFTs are the newest class of cryptoassets. And as highlighted above in certain situations NFTs can act as securities which may be traded on peer-to-peer decentralized exchanges. India also needs to take lessons from countries like Singapore, Canada, Japan, and Switzerland which offers a balanced legal and regulatory environment. Cryptocurrency legalisation is essential for a smooth trading of NFTs in India. Unless and until, there is a firm decision as to the validity of cryptocurrencies in India, NFT trading is risky. Secondly, a clarity from the government as to whether NFT amounts to derivative or not is inevitable.

 

 

Financial Action Task Force (the global anti money laundering watchdog) taking the notice of NFTs and publishing draft guidance is a clear signal that NFTs, if unregulated, may be used for nefarious purposes. If NFTs are classified as legal in India changes will be required in the Prevention of Money Laundering Act, 2002 as well as Antiquities and Art Treasures Act, 1972 . Further taking guidance from " Fifth Anti-Money Laundering Directive " issued by the European Union may also be prove to be helpful. In fact, a separate legislation to combat money laundering through art market, where NFTs are included in the definition of art seems to be the most desirable option.

 

 

This article has been written by Dharmvir Brahmbhatt and Devarsh Shah, students at Gujarat National Law University, Gujarat.

 

 

 

 

E. Contractual Requirements

 

 

Legal Considerations Before Launching An NFT Platform In India

 

 

NFT

 

 

Non-Fungible Tokens ("NFT") are the buzzword of today. Each NFT represents a unique certificate of ownership. These tokens can be transferred among individuals and the ownership of a NFT may pass hands from one person to another. NFT platforms enable the transferring of NFTs digitally. Once you buy a NFT through a platform, a smart contract gets executed adding you to the ownership chain. The entire transaction gets executed using blockchain technology. The fact that NFTs bestow one of a kind ownership, make these tokens valuable. Everything from paintings to video game features are being sold digitally as NFTs these days. Recently, even Bollywood actors like Amitabh Bachchan, Salman Khan announced the launch of their NFTs.

 

 

In India, the regulatory jargon around NFTs is still being untangled. We do not have a regulatory regime governing NFTs. In the absence of a dedicated law, regulating NFTs, it becomes difficult to navigate the maze of regulatory compliance, while launching NFTs in India.

 

 

We discuss, some legal considerations, you should keep in mind if you want to launch a NFT platform in India.

 

 

Legal Considerations to take note of before launching NFT Platform in India.

 

 

A. Which Law Regulates the Trading of NFTs?

 

 

In order to determine the applicability of legal provisions, one first needs to determine, the nature of an NFT. One common question that has been recently debated regarding NFTs is that whether a NFT is a traded security or a derivative? A security, in simple terms refers to shares, scrips, bonds etc. and also includes a derivative within its ambit. A derivative is a contract which derives its value from an underlying security. Such underlying securities are typically financial in nature such as stocks or commodities such as gold. However, a NFT may derive its value from a non-financial instrument as well. In fact, NFTs derive a lot of their value from the reputation of their content. For instance, if someone sells Thor’s hammer as a digital asset, it may yield a great value. How would Thor’s hammer fall under the definition of an `underlying security’? Would it satisfy the definitions of ‘security’ or ‘derivatives’ as given under the Securities Contracts (Regulation) Act, 1956? In the absence of clear regulations and/or amendments in existing laws, one still cannot be certain that under which regulation would the trading of NFTs be regulated.

 

 

What you may do:

 

 

     

     

  • make sure that your terms and conditions policy reflected on your website, clearly mentions the fact that there is no exclusive law regulating the trading of NFTs in India and that there may be risks involved if a user wishes to participate in the trade of NFTs.
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  • Remain compliant with all applicable laws including but not limited to Contracts Act, Anti-Money Laundering regulations, Consumer laws etc.
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B. Intellectual Property Considerations

 

 

An NFT confers on you exclusive ownership rights of that specific NFT and not of the NFT content. For example, if you bought a digital asset representing Thor’s hammer, you will exclusive ownership of the NFT representing that digital asset, but you cannot stop anyone else from minting a NFT containing that specific asset.

 

 

What you may do:

 

 

     

     

  • Mention clearly in your terms and conditions document that it is only the ownership of the NFT that may be transferred and not the ownership of NFT content.
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  • The NFT content may still be owned by the actual owner and it is important to apprise the users of the same. For instance, buying a particular painting does not give you copyright over that painting but just an exclusive certificate of ownership over the painting.
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C. E-Commerce Regulations

 

 

A NFT Platform may be covered under the definition of an e-commerce marketplace under the E-Commerce Regulations, 2020. The E-Commerce Regulations mandate a number of obligations on e-commerce marketplaces such as having clear refund, return and exchange policies, require sellers to undertake that the information regarding their products are genuine etc. However, the non-traditional nature of NFTs, again pose an issue in the compliance of the E-commerce Regulations by NFT Platforms. The nature of transaction through which NFTs are traded/sold, may make issuing refunds/exchanges difficult.

 

 

What you may do:

 

 

     

     

  • A blanket representation from the sellers, through separate terms and conditions, stating that they are legally permitted to sell the NFTs and that in the process of them offering NFTs for sale through the Platform, no laws would be breached, should be obtained.
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  • If possible, publish the ownership chain or the Smart contract link on the Platform for users to verify.
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D. Anti-money laundering regulations:

 

 

NFTs may also be sold anonymously and hence, can be used by anti-social elements for illegal activities such as money laundering. Hence, a NFT Platform, needs to have a strict Anti-Money Laundering Policy in place.

 

 

E. Contractual Requirements

 

 

Apart from the smart contract that would get executed between the seller and the buyer, the NFT platform should have a list of policies ready and published, such as (illustrative not exhaustive):

 

 

     

     

  • Terms and conditions for buyers
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  • Terms and conditions for sellers
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  • Anti-money laundering policies
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NFTs are still a largely unregulated realm. With the world looking towards cryptocurrencies and NFTs as the future, India too has an unbridled enthusiasm pertaining to it. However, it becomes important to keep the aforementioned legal considerations in mind, before you decide to launch a NFT Platform.

 

 

If you have any queries regarding legal issues or documentation surrounding NFTs, you may contact us by clicking on the WhatsApp icon below.

 

 

 

 

NFTs must be viewed in the same way as art. They are designed to give the owner something that can't be copied - ownership of the work (though the artist can still retain the copyright and reproduction rights, just like with physical artwork). If one were to compare it with collecting physical art- , anyone can buy a Van Gogh print, but only one person can own the original.

 

 

Is NFT legal in India

 

 

The increasing popularity of cryptocurrencies has no doubt sparked several debates around the world on their legality and efficacy. It is a topic that has split the global economy down the middle, with many now believing it is a monetary revolution.

 

 

The rise in cryptocurrency and its growing acceptance worldwide, has led to the creation of a frenzy centering around Non-Fungible Tokens or NFTs (especially post the record smashing NFT sale for $69 million!)

 

 

A Non-Fungible Token is a unique token, in the form of a link, that represents real life objects or digital works on the internet. It is a one-of-its-kind asset that is not interchangeable in nature, similar to a one-of-a-kind trading card. A NFT is essentially metadata or code which is minted on a blockchain and stored in the form of a link. Basically, it is like a certificate of ownership for virtual or physical assets, and is a digitized token that represents real-life objects, such as art, videos, audio files, memorabilia, game assets etc., and is recorded on a blockchain.

 

 

NFT and the Blockchain

 

 

A blockchain is essentially a public ledger, that is being maintained by thousands of computers worldwide working together, to record every single transaction taking place (using cryptocurrency) and maintain such records publicly. Similar to how a bank records a customer's activities in order to determine if he has enough money left in his bank account, the blockchain records all transactions involving cryptocurrency and maintains a public record of the same for any person in the world to view. No valid record or transaction can be changed on the blockchain, and anyone can verify the transactions that have been recorded.

 

 

NFTs are bought and sold through the blockchain, as the blockchain will publicly record the transfer or purchase of such NFTs for anyone to see, and the owner of a NFT will have the records of his ownership available publicly for anyone to verify. Buying a NFT usually gets the owner some basic usage rights, like being able to post the image/video/audio files/image online (not to mention the unique blockchain record and bragging rights!)

 

 

NFTs must be viewed in the same way as art. They are designed to give the owner something that can't be copied - ownership of the work (though the artist can still retain the copyright and reproduction rights, just like with physical artwork). If one were to compare it with collecting physical art- , anyone can buy a Van Gogh print, but only one person can own the original.

 

 

A common misconception is that NFTs are a type of cryptocurrency. Rather, NFTs are digital assets that can be purchased using cryptocurrency. The only similarity between crypto and NFTs is that they both have a stored digital record on a blockchain. With NFTs, each token has a unique value and cannot be exchanged for another of equal value. With cryptocurrency, the value and transparency are more obvious and one can exchange one Bitcoin for another.

 

 

Laws governing NFTs

 

 

NFTs can only be purchased through a specifically designed platform which performs the function of a facilitator (similar to an auction house). It will list the seller's NFT and encourage buyers to either pay a certain price for the same or purchase it vide an auction. Prior to any successful purchase/ auction, the terms and conditions of the sale are made available to the buyer through a smart contract which establishes all the terms regarding the use of this NFT by the buyer, such as whether he shall obtain copyright rights or only be entitled to use the same for personal non-commercial purposes. Upon the buyer making payment of the consideration, the contract comes into effect and both parties shall be bound by the laws of the Indian Contract Act, 1872. It is important to note that these smart contracts are only entered between the buyer and the seller with the platform companies being just facilitators.

 

 

Unless agreed between the parties through the smart contract, the copyright usually remains with the creator of the work of art, painting, music, etc., and the NFT serves as a unique and recognized replica of the same. Additionally, it must be noted that notwithstanding the terms of the smart contract, the rights of the creator/artist as provided in section 57 of the Copyright Act, 1957, namely, his right to claim authorship over the work and his right to restrain or claim damages in respect of any distortion, mutilation or modification of the said work, shall continue to vest with the creator/artist.

 

 

The growing popularity of NFTs is also attributable to the fact that the artists/creators tend to have resale royalties for any future sale of the NFTs. In order to ensure this,the resale royalty figures need to be coded into the smart contract being executed between the artist and the buyer. The advantage of this smart contract is that, as a rule, if the token is resold through a blockchain-enabled marketplace, the royalty payment will be made automatically without the need for any further action by the artist. However, it must be noted that automated distributions of resale royalties could be frustrated by transactions that occur outside of the blockchain (which can also be a possibility when physical assets are involved). All in all, however, the reseller shall be bound by his obligation to make royalty payments to the artist and the same can be enforceable under law.

 

 

Its a wait and watch for NFT regulations

 

 

Presently there is no separate legal framework for NFTs in India, and as such it is currently only governed by the general principles of contract. However, whilst most stakeholders believe that Cryptocurrency and Regulation of Official Digital Currency Bill, 2021l would carve out exceptions for NFTs considering its immense popularity, one will only have to wait and assess the implications NFTs may have if the Indian Government comes out with a clear ban on cryptocurrencies.

 

 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

 

 

 

 

The quick expansion of NFTs over the recent months indicates that a legal system hasn’t yet entirely caught up with this phenomenon. It could be a matter of time before legal issues focused on non-fungible tokens and digital art begin to arise.

 

 

What happens if your NFT sale goes wrong or what if the platform fails in some way?

 

 

Also, of course, you will want to get an NFT lawyer involved to decompress that sale or gain damages or other relief. NFTs are continuing to be almost for a lengthy time. For the creative community, NFTs offering monetization openings were not ahead. Make sure that you and your consultant understand the legal issues around any NFT sale.

 

 

Still, you will also want to get a lawyer who understands NFTs to help make out the terms of service and the website programs for that platform as you are looking for a platform to make software services around the NFT business.

 

 

law-INC

 

 

 

 

Furthermore, a contract in derivatives would be valid and legal only if derivatives are traded on an authorised stock exchange in accordance with the laws of that exchange. Consequently, if NFTs are classified as derivatives, then any contract in such derivatives would be illegal because the marketplaces on which they are traded are not authorised by law.

 

 

Legal status of NFTs

 

 

There is currently no law in Japan that directly regulates NFTs. However, if money or other assets that are considered to be a "distribution of profits" are delivered to a holder of an NFT, it is highly likely that the NFT falls within the definition of "securities" under article 2.1 of the Financial Instruments and Exchange Act. Even if an NFT does not correspond to securities, if it has an economic function, such as being a means of payment, there is the possibility that it falls within the definition of a "crypto asset" or a "prepaid payment instrument" under article 2.5 or article 3.1 of the Payment Services Act.

 

 

However, when looking at how NFTs are transacted, there is no delivery of money or other assets that can be considered to be a distribution of profits to the holder from the NFT itself, and it can be surmised that an NFT does not have an economic function, such as being a means of payment. Therefore, as to the current state of play, it is understood that NFTs are not subject to the financial or business regulations under the Financial Instruments and Exchange Act, the Payment Services Act, or other Japanese laws.

 

 

 

 

If NFTs are used as premiums (i.e. contest prizes or promotions), the Act against Unjustifiable Premiums and Misleading Representations will apply, and NFTs will be subject to price caps and controls on the total amount. Gambling is, in principle, illegal under the laws of Japan and criminal penalties can be imposed, and the use of NFTs in any act of gambling is prohibited.

 

 

 

 

"Globally, the market is nascent at $10-15 million per week, but the potential is huge. As of now, it is difficult to estimate the market size in India. We’re in discussions with some artists for listing. Basically, the artist has to first create the music or video file and upload it to a crypto wallet. The money then gets locked into a smart contract which only transfers the NFT when payment is received. Only cryptocurrencies can be used for the payment," Said Nischal Shetty, founder of WazirX.

 

 

Future of NFTs in India:

 

 

Very recently WazirX, known to be the largest cryptocurrency exchange body in India, launched India’s first NFT marketplace. According to sources, this platform will feature artists from various fields from the home country and a few from South African countries. WazirX is concentrating on NFT token developments as well. The collectors can purchase NFTs through WazirX using its token called WRX with a 5 % service fee on every sale. The tokens thereafter can be transferred to a different blockchain. According to Vishakha Singh, Advisor of NFT marketplace at WazirX states "Our list of curated collectors and the 5 Million strong WazirX Crypto Community shall give us the impetus needed to grow the NFT community within the region."

 

 

Keypoints of NFT Marketplace in India:

 

 

     

     

  • There are 15 existing creators and the number of applications received is more than 15 thousand from various creators and collectors.
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  • It will follow the same technology as its parent company Binance.
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  • No listing price has been decided yet.
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  • An open platform for all to buy/sell NFT.
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  • A gas fee of $1 shall follow as a transaction charge.
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  • There will be no bidding, only "fixed price" sales to be allowed at present.
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  • Spotlight and Discover will be the two categories of any artwork on sale.
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  • The spotlight section shall feature only the curated artists, whereas the Discover section shall feature 50 artists out of the thousands.
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"Globally, the market is nascent at $10-15 million per week, but the potential is huge. As of now, it is difficult to estimate the market size in India. We’re in discussions with some artists for listing. Basically, the artist has to first create the music or video file and upload it to a crypto wallet. The money then gets locked into a smart contract which only transfers the NFT when payment is received. Only cryptocurrencies can be used for the payment," Said Nischal Shetty, founder of WazirX.

 

 

Does Government approve?

 

 

The government has not shown any indication to disapprove NFTs yet but there is a cloud of ambiguity hovering over their legal status. As per the Securities Contract Regulation Act, NFTs are derivatives making them unsuitable for exchange, trade, sell or purchase. A value of an NFT is derived from stocks or commodities but there remains no framework for a non-financial asset.

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