Legal Implications of NFTs: Understanding the Legal Framework for Digital Asset Ownership
What is an NFT?
NFT stands for Non-Fungible Token. Unlike fungible tokens, NFTs are unique, meaning they cannot be exchanged on a one-to-one basis with another NFT. NFTs represent digital assets and provide ownership and proof of authenticity for a piece of content.
It is stored in the digital ledger that is Blockchain. Blockchain stores all the information of transactions and information regarding the ownership of assets. Creators are offered a new way to monetize their work by NFT. There are various online marketplaces where NFTs are purchased and sold. Few of them are OpenSea, Axie Infinity, Rarible, SuperRare, etc. NFT can be anything like it can be an image , video, artwork, audio files, etc.
How are NFTs Created, and what is a Smart Contract?
A notable example of an NFT sale is when Twitter's founder Jack Dorsey sold the NFT of the first-ever tweet for $2.9 million USD. Much like cryptocurrencies Bitcoin and Ether, NFTs are minted through a series of vital steps. These steps include choosing the blockchain, setting up an NFT wallet, deciding the content of the NFT, minting the NFT, and listing it for sale.
NFTs are minted using Smart Contracts, which primarily facilitate the transfer of ownership when an NFT is transferred from the previous owner to a new buyer. These smart contracts also enable the execution of a sale agreement without the need for a third-party intermediary.
The NFT Boom in 2021
The year 2021 witnessed a significant surge in the supply and demand of NFTs, leading it to be referred to as the "year of NFTs." Several factors contributed to this surge, including major NFT auctions and sales by renowned auction houses like Christie’s and Sotheby’s. For instance, Christie’s achieved a record-breaking sale of Beeple's Everydays: the First 5000 Days NFT for $69 million. Additionally, by the year's end, the metaverse also experienced a surge in the demand and supply of NFTs. However, while the NFT market continues to evolve rapidly, legal issues concerning NFTs are still catching up.
Unresolved Legal Issues Regarding NFTs
Copyright: When purchasing an NFT, the buyer does not acquire the copyright to the artwork itself. The original creator retains the right to copy the artwork. Smart contracts play a vital role here, as NFT marketplaces may delete or freeze a user's account and assets without notification if the contract terms are breached.
Privacy and Data Protection Law: Storing NFTs on the blockchain makes it practically impossible to exercise data subjects' rights to erase their personal data due to the immutable nature of the blockchain. This may result in NFTs containing personal data breaching data protection laws.
Property Law: The legal considerations regarding the ability to secure or sell an NFT are generally determined by the jurisdiction of the asset's location.
Legal Implications of NFTs in India
In India, the Reserve Bank of India issued a circular to all banks in June 2018, prohibiting dealing in cryptocurrencies. However, the Supreme Court later overturned this order in the case of Internet and Mobile Association of India vs. Reserve Bank of India, stating that the right to trade cryptocurrencies falls under the basic rights of the constitution.
Key Legal Concerns in India:
Copyright: The purchase of an NFT does not automatically confer copyright ownership of the artwork. According to Section 19 of the Copyright Act of 1957, a written sale contract explicitly declaring the assignment of copyright is required for the buyer to be considered the owner with the right to reproduce and distribute copies.
Tax Regulations: The Indian government has imposed a 30% tax on all digital assets, including NFTs. These high charges may cause investors to exit the sector, potentially lowering the value of the assets. Additionally, cross-border and digital transactions of NFTs raise further tax-related issues.
FEMA Regulations: The Foreign Exchange Management Act and regulations govern cross-border transactions, and the classification and treatment of NFTs fall under this act. Determining the location of NFTs becomes crucial as they operate through global ledgers.
As of now, there is no comprehensive legal framework for NFTs in India, and they are primarily governed by contract laws. Consequently, questions arise regarding the legality of NFT sale and purchase and related issues.
Blockchain Developer at GlobalVox