WHAT ARE THE LEGALITY OF NFT IN INDIA?

Introduction 

Non-Fungible Tokens (NFTs) have been in tremendous use in recent years. Their use has exploded just because of the convenience they offer to everyone. This new development has boomed so fast that now everything like our drawings, photos, videos, GIFs, music, gaming items, selfies, and even a single tweet tweeted by us can be turned into an NFT, which can be further traded online using cryptocurrency. This form of the crypto asset has exploded in popularity, and the sales of NFTs have surged up to $25 billion in 2021.

Seeing the recent surge in the usage of NFTs and blockchain technology, we need to know the basic functioning of these new technologies. Our country possesses a lot of interest in cryptocurrency, which is making India a front runner in the non-fungible token space. From common man to celebrities, everyone is talking about digital money, digital tokens, etc.

What Is an NFT?

An NFT is a digital asset that represents real-world objects like art, music, in-game items and videos. They are bought and sold online, frequently with cryptocurrency, and they are generally encoded with the same underlying software as many cryptos.

Although they’ve been around since 2014, NFTs are gaining notoriety now because they are becoming an increasingly popular way to buy and sell digital artwork. A staggering $174 million has been spent on NFTs since November 2017.

NFTs are also generally one of a kind, or at least one of very limited runs, and have unique identifying codes. “Essentially, NFTs create digital scarcity,” says Arry Yu, chair of the Washington Technology Industry Association Cascadia Blockchain Council and managing director of Yellow Umbrella Ventures.

Characteristics of an NFT

·        Non-fungible means it is non-replaceable or non-exchangeable, which signifies the unique value that every single NFT holds. Each token is unique and it cannot be exchanged for something exactly alike. 

For example – 

1.     Jack Dorsey, the billionaire founder of Twitter, recently converted his first-ever tweet into an NFT, which was later sold for $2.9 million. This action signifies that no other NFT is the same as this one, resulting in its uniqueness.

2. A digital artwork was auctioned at Christie’s. This NFT was purchased for a whopping $69 million. It was a trailblazing moment for advocates of NFTs.

·        NFT is not replaceable. It is only one type of copy in the world which indicates that no other thing holds the same value as that one particular item. For example – when we try to buy a book, we get to choose one copy for ourselves from millions of copies that got printed, which means you can buy any copy of that book, and it would be the same. It would be of the same price, contain the same contents, there would be no difference between them. But now, if we consider that one piece of the book which you were reading where you highlighted your important points, and added your essential notes, this piece of the book holds a different value. This particular copy is not like the other million copies. If one decides to convert this copy into NFT, then it would hold a distinguished value. One can obtain a digital token of this copy, that would give exclusive rights of ownership over this particular piece of the book.

·        The word ‘token’ in NFT signifies that one has the exclusive right of ownership of an item. It is a kind of agreement that tells us that we own something and shows our belongingness to that item. This kind of ownership can be tracked by everyone in the public, it is transparent. A token is riding on the blockchain, this transparency of ownership is only available because of the blockchain.

·        A token proves the ownership of a unique, distinguished item by converting it into an NFT.

·        NFTs are digital assets based on blockchain technology and traded through the use of cryptocurrency.

·        Unlike downloading pictures and screenshotting them, people are willing to spend on NFTs only because it allows the buyer to own the original item, it contains built-in authentication, which serves as proof of ownership.

·        NFTs are transferable, they can be transferred from one individual to another over the blockchain. It is available for sale and purchase and can be traced and retraced whenever one wants to.

What is blockchain

1. A blockchain-

is a chain of blocks that contains information. Most people think that Blockchain is Bitcoin and vice-versa. But it’s not the case. Bitcoin is a digital currency or cryptocurrency that works on Blockchain Technology. Blockchain was invented by Satoshi Nakamoto. As the name suggests,  Each block consists of several transactions, and each transaction is recorded in the form of a Hash. Hash is a unique address assigned to each block during its creation and any further modification in the block will lead to a change in its hash.

  Features of Blockchain Let’s have a look at the primary features of blockchain technology:

2. Immutable

a.  Immutability means that the blockchain is a permanent and unalterable network. Blockchain technology functions through a collection of nodes.   Every node in the network has a copy of the digital ledger. To add a transaction every node checks the validity of the transaction and if the majority of the nodes think that it is a valid transaction then it is added to the network. This means that without the approval of a majority of nodes no one can add any transaction blocks to the ledger.  Any validated records are irreversible and cannot be changed. This means that any user on the network won’t be able to edit, change or delete it.

3. Distributed

a.  All network participants have a copy of the ledger for complete transparency. A public ledger will provide complete information about all the participants on the network and transactions. The distributed computational power across the computers ensures a better outcome. A distributed ledger is one of the important features of blockchains due to many reasons:  In distributed ledger tracking what’s happening in the ledger is easy as changes propagate fast in a distributed ledger.  Every node on the blockchain network must maintain the ledger and participate in the validation.  Any change in the ledger will be updated in seconds or minutes and due to no involvement of intermediaries in the blockchain, the validation for the change will be done quickly.  If a user wants to add a new block then other participating nodes have to verify the transaction. For a new block to be added to the blockchain network it must be approved by a majority of the nodes on the network.  In a blockchain network, no node will get any sort of special treatment or favours from the network. Everyone will have to follow the standard procedure to add a new block to the network.

4. Decentralized

a.  The blockchain network is decentralized which means that there is no central governing authority that will responsible for all the decisions. Rather a group of nodes makes and maintain the network. Every node in the blockchain network has the same copy of the ledger. Decentralization property offers many advantages in the blockchain network:  As a blockchain network does not depend on human calculations it is fully organized and fault-tolerant. The blockchain network is less prone to failure due to its decentralized nature of the network. Attacking the system is more expensive for the hackers hence it is less likely to fail. There is no third-party involved hence no added risk in the system. The decentralized nature of blockchain facilitates creating a transparent profile for every participant on the network. Thus, every change is traceable and more concrete. Users now have control over their properties and they don’t have to rely on third-party to maintain and manage their assets.

5. Secure

a.  All the records in the blockchain are individually encrypted. Using encryption adds another layer of security to the entire process on the blockchain network. Since there is no central authority, it does not mean that one can simply add, update or delete data on the network. Every piece of information on the blockchain is hashed cryptographically which means that every piece of data has a unique identity on the network. All the blocks contain a unique hash of their own and the hash of the previous block. Due to this property, the blocks are cryptographically linked with each other. Any attempt to modify the data means to change all the hash IDs which is quite impossible.

6. Consensus

a.  Every blockchain has a consensus to help the network to make quick and unbiased decisions. Consensus is a decision-making algorithm for the group of nodes active on the network to reach an agreement quickly and faster and for the smooth functioning of the system. Nodes might not trust each other but they can trust the algorithm that runs at the core of the network to make decisions. There are many consensus algorithms available each with its pros and cons. Every blockchain must have a consensus algorithm otherwise it will lose its value.

7. Unanimous

a.  All the network participants agree to the validity of the records before they can be added to the network. When a node wants to add a block to the network then it must get majority voting otherwise the block cannot be added to the network. A node cannot simply add, update, or delete information from the network. Every record is updated simultaneously and the updations propagate quickly in the network. So it is not possible to make any change without consent from the majority of nodes in the network.

8. Faster Settlement

a.  Traditional banking systems are prone to many reasons for fallout like taking days to process a transaction after finalizing all settlements, which can be corrupted easily. On the other hand, blockchain offers a faster settlement compared to traditional banking systems. This blockchain feature helps make life easier. Blockchain technology is increasing and improving day by day and has a bright future in the upcoming years. The transparency, trust, and temper proof characteristics have led to many applications of it like bitcoin, Ethereum, etc. It is a pillar in making business and governmental procedures more secure, efficient, and effective.

Famous platforms for NFTs

1.      Reliable  – It is one of the most popular platforms to buy NFTs. It is an open marketplace where sellers can create NFTs and buyers can buy those NFTs from the sellers.

2.      Foundation – It is a type of platform where when an artist wants to post their artwork, they have to receive invites or ‘upvotes’ from fellow artists or creators to post their art.

3.      OpenSea.io – This is a peer-to-peer platform where one can start to post their works by just creating an account on it. Different categories of art forms can be browsed and chosen after that.

4.      Other websites that sell NFTs are – SuperRare, Nifty Gateway, VIV3, BakerySwap, Axie Marketplace, and NFT ShowRoom.

5.  Some of the best NFT marketplaces in India are – WazirX, Jupiter Meta, Bollycoin, BuyUCoin, BeyondLife, Colexion, etc.

Legal implications of NFTS 

NFTs and cryptocurrencies both use the same ‘blockchain’ technology, and the NFTs are usually acquired using cryptocurrency. Keeping this in mind, analysis of the legality of crypto-currencies becomes important to understand the legal implications of NFTs. 

General law 

Although cryptocurrency has been present and around in India for the last ten years, the primary debate around its legality began in June 2018, when the Reserve Bank of India (RBI) issued circular advising banks not to deal in crypto-currencies. However, the Supreme Court struck down this order in Internet and Mobile Association of India vs Reserve Bank of India stating the right to trade is a basic right under the Constitution. 

1.     Securities law 

o   Whether trading in NFTs is prohibited under the Securities Contract Regulation Act, 1956 (“SCRA”) is uncertain because there is no formal or legal structure of legislation for NFTs and hence no categorization of NFTs under the SCRA. Trading in NFTs would be illegal in India if they are considered a derivative. 

o   Under Section 2(ac) of the SCRA, the term “derivative” is defined as “a contract whose value is derived from the prices of the underlying securities”. If NFTs are considered derivatives, they cannot be traded on virtual platforms as per Section 18a of the SCRA, however, if an NFT is simply a reference to an existing asset and used as proof of its authenticity, classifying it as a derivative would be incorrect. 

2.     Copyrights Act  

o   Currently, when the NFT is purchased, the owner does not get the copyright to the underlying piece of art. According to Section 19 of the Copyright Act of 1957, to transfer copyright and be regarded as an owner, a written sale contract declaring explicit assignment of copyright must be present. 

o   Under Section 14 of the Copyright Act, only the owner of a work has the right “to reproduce and distribute copies of it”. As a result, unless the buyer and seller expressly restrict resale or copying of the NFT, such action may not be accorded protection. 

o   Consequently, the buyer cannot establish ownership over the object unless the owner specifically transfers their rights. However, the buyer’s digital item will have protection under the Copyright Act from illegal copying or dissemination. 

3.     Tax regulations  

• ·       In most cases, the type of the underlying asset should dictate the tax treatment of NFTs. Example: For income tax and Goods and Services Tax purposes, a digital art NFT could be considered an intangible asset or good and appropriate taxes should be declared and remitted on the same.  
• ·       All virtual digital assets, including NFTs, are subject to a 30% tax levied by the government. Such high charges may deter novices and traders who are out to make a fast buck, which may force investors to exit the sector, lowering the value of such assets. 
• ·       Further, NFT transactions are cross-border and digital in nature, therefore new tax problems are popping up every day. For example, sales of NFTs by offshore sellers to Indian buyers through an offshore NFT marketplace may be subject to a 2 per cent equalisation fee based on the NFT’s gross value and the marketplace’s income from Indian customers. 

4.     FEMA Regulations 

• ·       The classification of the underlying asset being transferred via the NFT, whether physical or digital, would decide their treatment under the Foreign Exchange Management Act and regulations, which regulate cross-border transactions. 
• ·       Though unclear, NFTs may be categorised as “intangible assets” and governed under the software and intellectual property part of the FEMA regulations. Hence, determining their location becomes important since they are supported by “global ledgers”, which means the information is logged, shared and synchronised across data stores.  

5.     Collective investment schemes 

• ·       If the main objective of the NFT is to grant the ability to retain, purchase and sell the asset, it is likely to be classified as a utility or exchange token. The issuance of NFTs that qualify as CIS units may require registration and acquisition of a collective investment undertaking licence from the SEBI. 

Case law: Internet and Mobile Association of India v. Reserve Bank of India (2020)

This case was brought forward in the Supreme Court of India, where the Apex Court stated that the circular which was issued by the Reserve Bank of India is illegal and the process to enforce such a circular should be made unenforceable.

Issue of the case

In the following case, the Internet and Mobile Association of India was the petitioner and the Reserve Bank of India was the respondent. The petition sought clearance on the jurisdiction of the RBI, whether it has the authority to disallow the trade of virtual currency and impose a ban on it.

BACKGROUND

·  

In 2018, a Directive of the European Parliament and the council defined the term virtual currency as a digital representation of value that is not issued or guaranteed by the central bank and public authority, is not necessarily attached to a legally established currency but is accepted by a natural or legal person as a medium of exchange and which can be transferred, stored and traded electronically.

·  

In India, RBI is the central banking institution that regulates the currency to secure monetary stability in India and it was nationalised on 1st July 1949.

In June 2013, through the report of Financial Action Task Forces, an intergovernmental organisation founded in the initiative of the G7, RBI caught on to the growth of virtual currencies because of the excessive use of online mobile technology.

On 24th December 2013 press release issued by RBI clarified that the creation, trading, and usage of Virtual Currencies as a medium of exchange is not authorised by the Central Bank or monetary authority.·  

On 27th December 2013, the enforcement directorate raided 2 bitcoin trading firms in Ahmedabad namely bitcoin and buysellbitco. in. Thereafter reports were issued in 2014 and 2015 by FATF highlighting the risk of trading Virtual Currencies

STATEMENT OF FACTS

• Reserve Bank of India, the Central Banking Institution of India had issued a circular “statement policies on 6th April institution India on Developmental and Regulatory policies on 6th April 2018 in exercising of the powers conferred by Section 35A read with Section 36(1)(a) and Section 56 of Banking Regulation Act, 1949 and Section 45 JA and 45 L of RBI Act, 1934.
• Paragraph 13 of the circular prohibited banks and other entities regulated by it from dealing in virtual currencies and exiting relationships with such persons or entities, if they have already provided any services related to virtual currencies
• This circular was based on RBI’s concern that virtual currencies were prone to hacking there could be speculations on the account of there being no underlying assets and a resultant violation could lead to a significant loss. It was observed that the use of virtual could potentially lead to money laundering and terrorist financing.
• The effect of prohibition was that the exchange through which virtual currencies were traded could no longer maintain and operate bank accounts thereby putting end to the business of virtual currencies.
• Relevantly, at the time circular was passed, there was no authoritative restriction on the utilization and exchange of virtual currencies in India and by the RBI prohibition, virtual currencies were ring-fenced from the formal economy.
• RBI directed the bank not to maintain accounts or give loans against virtual currencies. Accepting virtual currency as collateral and transfer or sale on purchase of virtual currencies was also prohibited
• The RBI circular was challenged before the Supreme Court of India by the Internet and Mobile Association of India, seeking a direction to the respondent not to restrict banks and other financial institutions from providing access to the banking services and transactions that are linked with virtual currency

STATUTES AND PROVISIONS REFERRED

BANKING REGULATION ACT, 1949

SECTION 35A  Power of the Reserve Bank to give directions

(1) Where the Reserve Bank is satisfied that-

• in the public interest or
•  in the interest of banking policy; or
•  to prevent the affairs of any banking company from being conducted in a manner detrimental to the interests of the depositors or a manner prejudicial to the interests of the banking company; or
•  to secure the proper management of any banking company generally, it is necessary to issue directions to banking companies generally or to any banking company, in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions.

(2) The Reserve Bank may, on representation made to it or on its motion, modify or cancel any direction issued under sub-section (1), and in so modifying or cancelling any direction may impose such conditions as it thinks fit, subject to which the modification or cancellation shall have an effect.

SECTION 36. Further powers and functions of Reserve Banks

(1) The Reserve Bank may-

(a) caution or prohibit banking companies or any banking company in particular against entering into any particular transaction or class of transactions, and generally advise any banking company.

SECTION 56. Act to apply to co-operative societies subject to modifications.

The provisions of this Act, as in force, for the time being, shall apply to, or about, co-operative societies as they apply to, or about banking companies subject to the following modifications, namely:– (a) throughout this Act, unless the context otherwise requires,– (i) references to a “banking company” or “the company” or “such company” shall be construed as references to a co-operative bank; (ii) references to “commencement of this Act” shall be construed as references to the commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965 (23 of 1965).

RESERVE BANK OF INDIA ACT, 1934

SECTION 45JA. Power of the Bank to determine policy and issue directions.

(1) If the Bank is satisfied that, in the public interest or to regulate the financial system of the country to its advantage or to prevent the affairs of any non-banking financial company being conducted in a manner detrimental to the interest of the depositors or in a manner prejudicial to the interest of the non-banking financial company, it is necessary or expedient so to do, it may determine the policy and give directions to all or any of the non-banking financial companies relating to income recognition, accounting standards, making of proper provision for bad and doubtful debts, capital adequacy based on risk weights for assets and credit conversion factors for off-balance-sheet items and also relating to deployment of funds by a non-banking financial company or a class of non-banking financial companies or non-banking financial companies generally, as the case may be, and such non-banking financial companies shall be bound to follow the policy so determined and the directions so issued.

(2) Without prejudice to the generality of the powers vested under sub-section (1), the Bank may give directions to non-banking financial companies generally or to a class of non-banking financial companies or any non-banking financial company in particular as to–,

(a) the purpose for which advances, or other fund-based or non-fund-based accommodation may not be made; and

(b) the maximum amount of advances or other financial accommodation or investment in shares and other securities which, having regard to the paid-up capital, reserves, and deposits of the non-banking financial company and other relevant considerations, may be made by that non-banking financial company to any person or a company or a group of companies.

SECTION 45L. Power of Bank to call for information from financial institutions and to give directions.

(1) If the Bank is satisfied that to enable it to regulate the credit system of the country to its advantage it is necessary so to do; it may– (a) require financial institutions either generally or any group of financial institutions or financial institution, in particular, to furnish to the Bank in such form, at such intervals and within such time, such statements, information or particulars relating to the business of such financial institutions or institution, as may be specified by the Bank by general or special order. (b) give to such institutions either generally or to any such institution, in particular, directions relating to the conduct of business by them or by it as financial institutions or institutions.

(2) Without prejudice to the generality of the power vested in the Bank under clause (a) of sub-section (1), the statements, information or particulars to be furnished by a financial institution may relate to all or any of the following matters, namely, the paid-up capital, reserves or other liabilities, the investments whether in Government securities or otherwise, the persons to whom, and the purposes and periods for which, finance is provided and the terms and conditions, including the rates of interest, on which it is provided.

(3) In issuing directions to any financial institution under clause (b) of sub-section (1), the Bank shall have due regard to the conditions in which, and the objects for which, the institution has been established, its statutory responsibilities, if any, and the effect the business of such financial institution is likely to have on trends in the money and capital markets.

ISSUES RAISED

1.     Whether the prohibition infringed the Fundamental Right of freedom to trade guaranteed under Article 19(1) (g) of the Indian Constitution or is this prohibition based on the expression of public interest?

2.     Whether RBI should get the authority to regulate cryptocurrency or not?

3.     Whether the decision to prohibit the regulation of cryptocurrency was a matter to be decided by legislation or by executive authority?

SUBMISSION ON BEHALF OF THE PARTIES BEFORE THE HON’BLE SUPREME COURT OF INDIA

PETITIONER’S CONTENTION

The petitioner contended that RBI does Lack the jurisdiction to disallow the trade of virtual currency as virtual currency is not legal tender (a form of money that court of law are required to recognize as satisfactory payment for monetary debt under section 24A 8 RBI Act) but a medium of exchange or store of value.

Also, it was contended that the ban imposed by RBI violated the fundamental Right to trade and it is against the test of Reasonability and proportionality.

RESPONDENT’S CONTENTIONS

·  

In response to the first contention, the respondent clarified that virtual Currencies are made of digital payment and is used as a medium of exchange and store of value, so RBI does have the power to control and prohibit the such transaction. It was further contended that since virtual currency does operate autonomously, they are resistant to government impedance.

In response to the second contention, RBI argued that cryptocurrency is a stainless digital currency where trading is done by applying encryption techniques. Though the fundamental right to freedom of trade is guaranteed under the Indian Constitution, it is not an absolute right it has some reasonable restrictions. Circular which prohibited the trade of virtual currencies intended to secure public interest and to reduce fraud and illegal activities

FINDINGS OF THE APEX COURT.

The Court decided that RBI’s notification, which instructed nearby financial establishments to suspend banking administrations being offered to any individual or organization exchanging crypto resources, should be put aside on “the ground of proportionality”.

·  

The Supreme Colly turned around RBI’s ban and noticed the accompanying:

·   RBI has not had the option to discover, during the previous 5 years, the exercises of digital money trades “to have affected unfavourably, how the elements controlled by RBI work.”

·   The “predictable stand taken by RBI up to and remembering for their answer dated 04-09-2019 is that RBI has not precluded Virtual Currencies in the nation” and

·   Indeed, even the Inter-Ministerial Committee comprised on 02-11-2017, which at first suggested a particular lawful system including the presentation of another law specifically, Crypto-token Regulation Bill 2018, was of the assessment that a boycott may be an extraordinary apparatus and that similar destinations can be accomplished through administrative measures.

·  

The Court recognized that VCs ‘have a place with various classifications going from property to item to non-traditional cash to payment instrument to cash to finance’, however, qualified its finding by expressing that it didn’t mirror the situation of law completely. While not comparing VCs to lawful delicate or fiat cash, the Court was reluctant to acknowledge the conflict that VCs ‘can never be viewed as genuine cash. The Court inferred that regardless of whether something was not comparable to cash but rather worked as cash in specific situations, the RBI could manage the incompatibility of its part as the zenith controller of the country’s monetary framework.

JUDGEMENT

·  

Court held that the Circular was unbalanced because none of the RBI’s controlled elements had ‘endured any misfortune or unfavourable impact straightforwardly or in a roundabout way, because of the interface that the VC trades had with any of them. Furthermore, by depending on the administrative methodologies in other purviews, the Court held that there were elective administrative methods through which the RBI might have accomplished its expressed targets. The push of the Court’s decision in such a manner was that guideline would be a more proportionate reaction than disallowance.

NFTs future in India

·       NFTs or Non-fungible Tokens will have a great future in the country with the developing laws and regulations. As far as we know that blockchain offers much faster and cheaper cost-effective transactions across the globe. 

·       The trust in this technology increases gradually and people started to know its importance. The future business world is going to grow with blockchain only as it is very cost-effective. 

·       NFTs, a digital asset that impacted many people including celebrities to launch their NFT collection in recent times. This impact says that we can soon start trading through NFTs and get more valuable insights.

·       Thus, the NFT community will get a speedy momentum upon the Indian government to place the rules for its validity. 

·       Monetization of digital assets will take place and it will add more advantages to the marketplace players. Also, the digital economy will boost up with the new entrants in the market for NFT and other digital assets

Relevance of Copyright Act, 1957 in NFT 

• ·   Whenever someone purchases an NFT, the owner does not get the copyright to the registered piece of NFT at that very instant. Section 19 of the Copyright Act 1957, states that if someone wants to transfer his or her copyright, then it would require a written sale contract declaring explicit assignment of copyright to be present. Therefore, the buyer cannot have full ownership until the owner specifically transfers their rights.
• ·       The distinctness between buying original craftsmanship and an NFT is that the original something held in the case of an NFT does not get fast moved to the new purchaser of the NFT. When an NFT is bought, the landowner does not catch control of the original art object. They are unbelievable to enjoy owning exclusively care just cause they store their dossier supported by blockchain science. They are not top-secret as original everything or derivative everything under intellectual property law. Still, complete for that NFT is designed may savour dominate care.
• ·   Section 2(d) of the Copyright Act, 1957, defines the ‘author’ of the work as one who has created the work. He or she is considered the sole owner of the work unless the work is shared by a co-author, which implies both of them jointly owning the work, or if the work was created by a person or entity just because he or she was paid for it, or was created under employment. In such a case, the commissioner or the employer owns the work.
• ·   Section 14 of the Copyrights Act, 1957, provides exclusive rights of ownership to the owner, which also includes the right to mint the NFT of the work. Minting means converting a digital file into an NFT backed by blockchain technology.
• ·   The property of the NFT lies accompanying the individual the one mints it. Thus, it is not inevitable that the partner of the NFT is me of the whole. Still, minting an NFT of everything that another person has the right to use will come to theft complete completely and a deliberate breach of copyright. Accordingly, before minting an NFT it is critical that the body the one is minting an NFT endure hold the right commotion so, either by being me of the work or by acquiring the copyright over the work, o by acquiring the particular rights to mint the NFT.
• ·   It endures being famous that digital artwork is further artwork, as it has continually happened, and copyright landowner and their licensees are the only ones bear be designing NFT’s established control artwork.
• ·   Copyright societies treat NFTs the same some different traditional pieces. At any time, new artwork is founded by an inventor, he acquires the copyrights that marked him as the owner. By bearing those rights, he can conceive copies of welcome work and deliver or equip others with everything rising from welcome main work as a derivative. Then, we can reply that a copyright landowner has the restricted right to find an NFT established as an original piece of the art object.
• ·   Copyright may be got for works like original brochures, acting, music, beautiful everything, cinematographic films, and recordings of sound as per the Copyright Act, 1957. We can’t define from above either an NFT would prepare as a work that may be copyrighted in India. Despite a television punch or a sound record that may be convinced into a digital asset may be copyrighted, additional belongings like a GIF, a picture, or a tweet that can again form digital assets ability not qualify as work capable of being controlled. So, skill is a need to extend the sphere of copyright laws in India.
• ·   For a legal contract expected genuine, an offer, agreement, and concern are the essential fundamentals under the Contract Act. The smart contract holds the offer and agreement parts, but the concern component may be puzzling. Most of the time, the fee is finished through cryptocurrency in a smart contract, but as said earlier, on account of the legal rank of cryptocurrency in India, it is troublesome to state whether a smart contract hopeful thought-out legal or not.

Securities Law

As there is no formal or legal structure of legislation for NFTs, there is no proper categorisation of NFTs under the Securities Contract Regulation Act, 1956(SCRA). Section 2(ac) of the SCRA defines the term ‘derivative’ as “a contract whose value is derived from the prices of the underlying securities”. Trading in NFTs would be illegal in India if they were considered a derivative because then they cannot be traded on virtual platforms as per Section 18a of the SCRA. Derivative contracts are considered legal only when they are exchanged on a recognised stock exchange. In such a case, the platforms where NFTs are exchanged must apply to the Central Government for recognition as a stock exchange.

Collective Investment Schemes (CIS)

CIS is commonly called ‘investment funds’, ‘mutual funds’ or simply ‘funds’ where money is pooled together with that of other investors and spread over the whole range of assets within the fund. The qualities of an NFT and the rights granted to a token buyer shall determine if it is a type of financial instrument.

 

What is NFT Money Laundering?

• ·       The regulation of NFTs is still in its infancy, as regulators and international bodies explore how they are used and how widespread adoption has become.
• ·       With increasing amounts of money – often cryptocurrency – being used to pay for NFTs, there are concerns that they may be used to circumvent expanding anti-money laundering (AML) rules for traditional art.
• ·       For example, under the EU’s Fifth AML Directive, anyone involved in purchasing or selling a work of art for more than €10,000 has AML obligations to carry out Customer Due Diligence (CDD) and report any suspicious activity.
• ·       As the Directive doesn’t define what a ‘work of art is, or mention NFTs, it is unclear whether NFTs could be considered works of art and be subject to AML/CFT and Know Your Customer (KYC) practices under this ruling.
• ·       However, in 2020, the EU proposed a regulation that may apply to NFTs. The Markets in Crypto-assets Regulation (MiCA) defines NFTs as “a digital representation of value and rights which may be transferred electronically, using distributed ledger technology or similar technology”. 
• ·       NFTs may fall under the ‘other crypto-assets category of the regulation – meaning issuers do not have specific licensing obligations, but are required to be a legal entity (even when being established outside the EU) and comply with specific business and governance conduct requirements.
• ·       In the US, while there is no direct regulatory guidance on NFTs, some states have created laws that could hold NFTs under their purview.

How does Money Laundering Through NFTs Work?

• ·       While the ways that criminals can launder money are diverse, the basic principles of money laundering – placement, layering, and integration – apply to NFT money laundering. 
• ·       As Financial Action Task Force (FATF) guidance states, much of the risk and regulation relating to NFTs and money laundering will depend on how they are being used and the nature of the asset that is traded.
• ·       In 2022, the US Treasury warned of the risk of NFT money laundering in the art sector. “The ability to transfer some NFTs via the internet without concern for geographic distance and across borders nearly instantaneously makes digital art susceptible to exploitation by those seeking to launder illicit proceeds of crime because the movement of value can be accomplished without incurring potential financial, regulatory, or investigative costs of physical shipment,“ the report said. 
• ·       The Treasury Department also flagged that criminals could self-launder money by purchasing an NFT, then passing it to themselves through different digital accounts, creating a sales record before selling to an unsuspecting buyer, and coming out clean on the other end.

FEMA Regulations

The assets that are transferred via NFT, whether physical or digital, will be subject to the Foreign Exchange Management Act 1999 and regulations that are involved in cross-border transactions. Although it is unclear, NFTs can be categorised as ‘intangible assets and governed under the software and intellectual property parts of the FEMA regulations. The main issue arises from pinpointing the location of an NFT, which may cause NFT holders and exchanges to circumvent FEMA restrictions entirely.

Tax levied on NFTs

All virtual digital assets, including NFTs, are subject to a 30% tax levied by the government. The 2022-2023 Budget has mentioned that it would levy 30 per cent I-T plus cess and surcharges on transactions dealing with virtual currencies.

Conclusion

Non-fungible tokens are a development in the experience of cryptocurrencies. NFTs have enhanced a powerful force for change, as they supply a tamper-opposing blockchain that stores all the facts and supports the genuineness of control. It eliminates the brokers when undertaking and shows a transparent report of all the transactions exhausted in the form of blocks on the blockchain network. NFTs may be used to show individuals’ rights to features and identities.

NFTs have happened a comer over ancient times year because they are new, inspiring, and create large price tags. Being backed by blockchain electronics, the parties complicated in NFT transactions are smart to maintain anonymity and solitude. Crowds catch a chance to conceal themselves from the regulatory experts and try to transgress the law. NFTs are an ultimate recent type of crypto advantage with a very main future. In India, it holds few risks because it has no legal rank here. The legalisation of NFTs should be for the better trading of NFTs in India.