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Non-fungible Tokens – Indian Law

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“NFT” is an abbreviation for “non-fungible token” and that’s what they really are asset-backed token or digital asset with unique identifier and metadata captured in a blockchain ledger Represents the ownership and authenticity of the associated unique tangible or intangible asset. As the name suggests, NFTs are characterized by the non-fungible nature.

In economic terms, interchangeability is the ability of an asset to be exchanged with other personal assets of the same type for the purpose of value. This means that redeemable assets in the same denomination denote the same value. NFTs, on the other hand, are by definition not interchangeable, irreplaceable and unique,

The concept behind NFTs is to create a certain scarcity and scarcity in the flow of seemingly never-ending supply of virtual goods. Accordingly, NFTs promise to create a “digital original” that is unique and clearly attributable to its respective owner. In the “real world” a work always has a unique original, such as a painting created by the artist himself, until now in the digital world there was no equivalent in the sense of a “digital original”. ,

Due to the non-manipulable nature of NFTs, both real and digital artifacts can have verifiable scarcity and original ownership. For artists, it’s a way to fight plagiarism and make money from their business. NFTs also allow collectors to value digital art in the same way as physical art, opening up new opportunities for digital artists. So it should come as no surprise that it was initially the digital art market where NFTs became a mainstream phenomenon.

In other words, NFTs combine the best qualities of decentralized blockchain technology with non-fungible assets. Unlike regular digital assets that are issued and regulated by centralized entities, which can be taken from you at any time, it is possible to actually own and control your own NFTs.

Nature of NFT

Utility, security, and payment tokens are all alternative tokens. They are interchangeable with any other token of the same class. For example, 1 bitcoin can be exchanged for 1 bitcoin. On the other hand, NFTs symbolize assets even though they are not financial instruments.

When token holders have profit-sharing rights, they own a security token. As such, it is subject to financial regulation. NFTs do not grant such rights, although they do provide access to future content or rights to royalties.

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NFTs also do not entitle their holders against the issuer. NFTs are transferable, but not in organized markets. Important characteristics of NFTs are immutability and scarcity. As discussed earlier, NFTs are rare and unique.

Their main properties are:

  • Unique: Non-fungible tokens have their code information that describes the properties of each token that make them different from others. A piece of digital art may contain encoded information about its individual pixels, while tokenized in-game items may contain descriptions that help the game client understand who the player owns the item and its value. What are the features.
  • traceable: Each NFT has a record of transactions in the chain since it was created, including a record of each time it has changed hands. This means that any token can be reliably authentic and not a counterfeit – obviously a very important thing for owners and potential buyers.
  • special: For non-fungible tokens to be attractive to buyers, they must be scarce enough. This ensures that the home remains attractive in the long term and that supply does not exceed demand.
  • indivisible: NFTs usually cannot be traded as part of a whole. Just as one cannot buy half of a concert ticket or trading card, non-convertible tokens cannot be divided into smaller denominations.
  • Programmable option: Like all traditional digital assets and tokens built on smart contract blockchains, NFTs are fully programmable.

Legality and Enforceability of NFTs in the Indian Context

  • NFTs and Crypto Currency Riddle

The biggest hurdle in NFT trading is the lack of clarity about the legality of cryptocurrencies in India because, as mentioned earlier, NFTs can only be traded in cryptocurrencies. Moreover, all the Indian platforms that have started trading on NFT’s cryptocurrency exchanges so far.

In contrast, the Supreme Court of India in Internet and Mobile Association of India v. Reserve Bank of India, It overturned the April 2018 RBI circular ordering all regulated entities to refrain from trading cryptocurrencies, saying the contested circular was unfounded and therefore violated Article 19(1)(g) of the Constitution from India. In addition, early 2021 saw a drastic change in the government’s approach to dealing with cryptocurrencies, with the finance minister stating that the government was not considering a full ban on cryptocurrencies and that it would open Windows Key for human use. Will also enable RBI to issue a circular directing banks not to rely on the 2018 circular as it has been rejected by the Supreme Court of India.

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What emerges from this discussion is that there is absolutely no clarity regarding the legal immunity of cryptocurrencies in India, resulting in risky trading of NFTs.

Currently, no law prohibits the trading of NFTs in India. The legality of NFTs in India is uncertain and the chaos is compounded by the belief that trading of NFTs is not allowed under the Securities Contracts (Regulation) Act, 1956 (“SCRA”). There is no separate legal framework for NFTs in India. This has led to a polarization in the classification of NFTs. Some believe that NFTs are contracts while some state NFTs are derivatives.

Section 2(ac) of SCRA which defines “derivative” provides that derivative includes a contract that derives its value from the prices of underlying securities or a price index. When NFTs are held as derivatives, they cannot be traded on virtual platforms under Section 18A of SCRA, which states that contracts in derivatives are only valid if they are traded on a recognized stock exchange. We do. In such a situation, the platform on which NFTs are traded will have to apply for recognition as a stock exchange with the national government.

As mentioned earlier, NFTs are non-fungible, and it is this non-fungibility that sets them apart from other securities. Therefore, if a particular NFT relates only to an existing asset and is marketed as a guarantee of authenticity of ownership of such asset, it would be inappropriate to treat it as a security (derivative). Rather, it should be governed by the general principles of the contract. In contrast, fractional NFTs (which confer a fractional ownership interest in the NFT) that have arisen because NFTs have exorbitant prices that most people cannot afford can be termed a security. Moreover, if promises are made regarding the return on investment, then the NFT would look more like a speculative investment than a digital collectible, and can therefore be considered a security in India.

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America’s stance on NFTs

NFTs in the US, like India, are unregulated and the legal situation is confusing. On April 12, 2021, a petition was filed with the Securities and Exchange Commission (“SEC”), recommending that the regulator create a framework for the regulation of NFTs. There is also no formal document related to NFT. However, SEC officials have said that trading NFTs may amount to breaking the law because NFTs can often take the form of “investment contracts.”

At this point, it is appropriate to take note of the much-discussed ‘How Test’ as established by the Supreme Court of the United States in 1999. SEC v WJ Howey Co, The definition of “security” in US law includes “investment contract.” The United States Supreme Court ruled that an investment contract exists when money is invested in a joint venture with the expectation of benefiting from the efforts of others. The most controversial aspect here is the ‘attempts of others’, which is nothing but the efforts of third parties to realize the investment potential of a property. Whether the profit is the result of the efforts of others or not depends on a case-by-case basis.

conclusion

NFTs are the newest class of crypto assets. And as highlighted above, in some situations NFTs can act as securities that can be traded on peer-to-peer decentralized exchanges. Cryptocurrency legalization is essential for the smooth trading of NFTs in India. Until and unless a final decision is made on the legality of cryptocurrencies in India, NFT trading is risky. Second, clarity from the government on whether NFTs are derivatives or not is absolutely necessary.

Source: news.google.com

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