From Art to Assets: The Rise of Non-Fungible Tokens (NFT) in the Digital Age

ABSTRACT

A new digital phenomena has been sweeping the art world and the internet in recent months. Non-Fungible Tokens, or NFTs, are a topic of great interest that has attracted a lot of attention. NFTs are distinct and cannot be traded for another cryptocurrency on a like-for-like basis, in contrast to fungible cryptocurrencies like Bitcoin and Ethereum.

The use of NFTs is growing even with the current “Crypto Winter”. Although NFTs are typically connected to images, movies, and music, developers have been able to create a wide range of innovative and practical uses for them. Though Legal issues increases in tandem with the growing number of NFT applications, especially when such applications cross various legal domains. Both a solid grasp of how the underlying technology is being used in this rapidly changing sector and an awareness of the law are necessary when examining the potential legal ramifications for an NFT-based enterprise. The article provides a detail understanding of the legal considerations and issues which are related to NFT transactions and the field and art in which NFT are growing.

INTRODUCTION

What is NFT?

Digital assets that are one-of-a-kind and cannot be replaced by another are known as non-fungible tokens, or NFTs. They are being used to signify ownership of digital artwork and other artefacts, and they have become more and more popular in recent years, particularly in the art and collectibles industry.

However, given that NFTs are relatively new and that not many people are familiar with blockchain technology, it’s critical to comprehend the legal concerns around them. A career in NFT art should carefully evaluate concerns related to intellectual property, firm structure, and taxation. You will read about NFTs and the legal concerns surrounding them in this post.

Hence, NFTs are digital or asset-backed assets that are uniquely identified and have information recorded in a blockchain ledger that reflects the ownership and validity of a corresponding unique tangible or intangible property. As suggested by their name, NFTs are unique in that they are non-fungible, therefore it is important to assess if they are legally acceptable in India.

Digital files such as music, games, art, and other creative works can be represented by NFTs. You acquire ownership rights to that particular piece of blockchain data when you buy an NFT. NFTs have drawn a lot of interest as they have the potential to completely transform the digital art and collectibles sectors. It’s crucial to remember that NFT values are very speculative and are determined by what other people are prepared to pay. They have also come under fire for their effects on the environment because blockchain transactions need a lot of energy.

NFT USE CASES:

GAMES & METAVERSE: In the metaverse and video games, NFTs are now valued. Furthermore, developers are utilising NFTs in virtual worlds and video games (the “Metaverse”) at a very quick pace. For example, an NFT may be associated with the ability to allow the use of a certain character in a video game. As an alternative, it may be included into an inventory system that lists the character’s weapons and armour, with a corresponding NFT for each item

NFTs may also be offered for sale in haphazard “packs,” much like trading cards. In certain situations, a user can buy a pack of cards and get a pack at random, which will unlock specific players. These cards let the player employ them in games like fantasy sports matches, which may contain rewards, rather than just being collected cardboard pieces. inside the virtual realms of the “metaverse,” an NFT may be linked to the possession of a specific virtual land parcel inside that particular world. After that, the buyer can use their virtual plot of property for personal use or to promote a business.

On the one hand, games employing a gate to restrict access to specific characters or goods is nothing new. But because NFTs may be more firmly linked to a character or object, they allow players a stronger sense of ownership. It may also enable direct NFT trading between players on a blockchain. Because it gives the experience of feeling of permanence, many find it more appealing when material is recorded on a blockchain.

REAL-WORLD ASSETS: Additionally, NFTs are now connected to tangible assets in the actual world and denote ownership or other rights related to such things. NFTs, for instance, have been touted as the best method for registering real estate ownership. This information might be published on the blockchain in place of tangible documents on real estate kept in a city hall archive as the final record of ownership. It might be simply searched and validated in this way. But this kind of ownership record isn’t just for real estate; it has also been suggested for other tangible goods, usually valuable ones like jewels, watches, antique automobiles, paintings, and artworks, which gain from having a reliable chain of ownership.

There is already a strong legal foundation behind the transfer of ownership rights for tangible goods in the real world. These cover matters pertaining to real estate law, contracts, taxation, the Uniform Commercial Code, etc. Real estate, for instance, has its own distinct set of laws that control things like property transfer and recording. In addition to the rules that normally govern NFTs, these regulations would also need to be followed while using NFTs for real estate. Even the sale of other items may be subject to UCC legislation, which may apply to certain transactions. Particular tax and documentation obligations may also be triggered by all of these transfers, and it is important to take both federal and state laws into account.

ART & CREATIVE WORK: It makes sense that the majority of people associate NFTs with creative work rights, given this is the most common use scenario at the moment. Here, the NFTs are linked to a specific work a picture, a video, a piece of music, or a piece of text. An NFT may, for instance, be connected to a certain cartoon monkey picture. An NFT may also represent some ownership rights to a song or album, to provide another example.

But the IP licencing for trademarks and copyrights, as well as contract law, are the most common legal problems with these NFTs. This is due to the fact that the NFT was acquired and that the artwork it is connected to could have further copyright protection. To be lawfully transferred, any rights to the copyrighted artwork must be sold or expressly licenced to the NFT buyer. For instance, there can be concerns about the rights granted to the owner of the NFT, such as whether or not they are allowed to use the artwork for profit and, if so, what restrictions apply etc.

Notifying buyers of their rights in the underlying artwork at the time of NFT purchase is another typical concern. This can get complicated, especially if NFTs are permitted to be traded on secondary markets where buyers may or may not receive clear notice of the ownership conditions prior to making a purchase. It is crucial to inform the buyer of their rights at the time of sale because they might differ significantly between purchases based on the specific NFT.

The LEGALITY:

Presently, no laws in India expressly regulate commercial dealing in NFTs. The only statutory reference is the Income Tax Act, 1961, which has been amended to include NFTs under the definition of virtual digital assets (VDAs). Income generated from trading in NFTs is consequently taxed at 30%.

As assets with utility, which can be bought and sold on marketplaces, NFTs may also be considered goods under the Sales of Goods Act, 1930.

“According to publicly available statistics, the size of the NFT market in India is anticipated to expand at a compound annual growth rate of 61.6%, from $3.3 billion in 2021 to $27 billion by 2028. The legal standing of NFTs in India is still unclear despite their recent rise in popularity (for more information, see “NFTs in India – where do they fit in?”), which has ramifications for the technology industry.”

The legal position of NFTs has lately been under investigation due to “The Digital Collectibles” case, which highlights how these NFT transactions are changing the Indian economy. There are presently no regulations in India that specifically govern or forbid the purchase and sale of NFTs. As previously indicated, the term of “virtual digital assets” in Indian tax law contains the sole legislative mention of NFTs. The ruling concerns their right to privacy and freedom of speech, their ability to manage their online persona, and the use of public figure names and likenesses to create NFTs.

This lawsuit included the use of a sportspersons name and picture to produce digital player cards, which served as NFTs, and involved Digital Collectibles (trading as “Rario”) and Galactus Funware Technology (trading as “Mobile Premier League”).

Indian cricket players and Digital Collectibles filed a lawsuit alleging that the MPL had violated many laws, including unfair competition and interference with commercial interests, by using player names and photographs on NFTs without permission. They argued that players had the right to profit from their personalities and that their rights to publicity were an extension of their right to privacy.

On the other hand, MPL said that the players basic right to privacy did not include the “right of publicity,” which was not recognised by Indian law. As a result, no exclusive licence was required and the data utilised was freely accessible to the public. They made it clear that player identities and performance information were only used for online fantasy sports gaming and never for commercial gain.

In order to reach a ruling, The Court determined that the MPL’s use of creative artwork and publicly available data, along with non-endorsement disclaimers, validated its right to utilise player names and photographs on NFTs. The Court decided that there was no infringement of personality rights, noting that the plaintiffs’ main worries were about the tradability of digital player cards with NFT functionality. It was observed that a players persona was not the only element influencing the cost of digital player cards.

LEGAL ISSUES WITH NFT’S

Copyrights Issues: The ownership debate is one legal concern that has surfaced with the growth of NFTs. Is the underlying digital asset purchased by the buyer of an NFT, or is it only a record of ownership? The exact circumstances of the sale and the terminology used to characterise the transaction will probably determine how this problem is resolved, as courts have not yet thoroughly addressed it.

There is a common misconception that the buyer of an NFT is entitled to copyright protection for the digital artwork. That isn’t how things are. The scenario is similar to buying a painting in many respects. When you buy a painting, all you are obtaining is the artwork itself; you are not granted the permission to sell reproductions of the painting or create new works of art that are exact replicas of the original.

Tax Issues: The introduction of NFTs has given rise to a legal concern about tax treatment. The taxation of NFT sales is still unclear, though the income tax has put up 30% tax but the regulations pertaining to this matter may differ throughout nations as it may depend on state wise as it is unclear depends upon the policies formulated if by the union government regarding the same.

Money-Laundering Issues: There have been concerns raised over the possibility that the enormous sums of money invested in the NFT market and the extensive use of cryptocurrencies are being used as a means of circumventing the increasingly stringent anti-money laundering laws implemented globally.

After all, it’s sometimes hard to understand why collectors spend so much money on what are essentially just digital signatures, according to some. The more negative critics (at least in some part of India) can also point out that the rise in popularity of NFTs has coincided with the conventional art market becoming subject to anti-money laundering regulations for the first time.

CONCLUSION:

Since NFTs are non-fungible tokens, they cannot be traded for one another. Every NFT has a distinct ID, and the only way to change its status is to transfer ownership of the token to a different unique ID. Similar to cryptocurrencies, NFTs have seen significant growth in acceptance in recent times. This is a result of the fact that they operate on the blockchain and are decentralised. The blockchain technology facilitates the full transfer of digital assets and permits total transparency regarding NFT ownership. NFT regulations are unclear in India. But the authorities might move quickly if there is widespread misuse of this capability.

Author :Ishika Soni, in case of any queries please contact/write back to us via email to [email protected] or at IIPRD.

REFERENCES:

https://www.marketsandmarkets.com/Market-Reports/non-fungible-tokens-market-254783418.html

https://cointelegraph.com/learn/a-beginners-guide-on-the-legal-risks-and-issues-around-nfts#:~:text=NFT%20participants%20should%20consider%20many,regulate%20issuers%20and%20service%20providers.

https://aws.amazon.com/blockchain/nfts-explained/

https://www.settlemint.com/nfts-blockchain-use-cases

https://academy.bsvblockchain.org/blog/blockchain-nfts-properties-value-proposition-applications