The past few years have seen some breath-taking innovation take place across sectors and industries, which have revolutionised the traditional lens with which these industries were once perceived. For instance, in a demonstration of sheer democratisation, the prominent stock exchanges, including the New York Stock Exchange, once thought to be solely the bastion of the intimidating Wall Street steadies, was taken over by regular individuals belonging to the website Reddit. Quite a few of other recent innovations have been either propagated or adopted by the guardians of the new world order, i.e. the tech moguls. Elon Musk announced that bitcoins were now being accepted as payment for Tesla automobiles.
Bitcoin, and other cryptocurrencies, depend on a crucial piece of technology termed blockchain. Blockchain can be best explained as a digital ledger, which keeps records of transactions in the form of a decentralised database. The information of these transactions is collected together in groups, called blocks, and when the storage capacity of a certain block is maximised, it is ‘chained’ onto the previous block, thus quite accurately forming a ‘blockchain’. Therefore, the way in which blockchain is designed makes it almost impossible to compromise the system. One of the reasons for blockchain’s popularity is the decentralisation, which ensures that no single individual or group of individuals is in control of the system. Fintech is one of the primary sectors which has recognised and seeks to exploit the immense potential inherent in blockchain technology, which explains the plenitude of cryptocurrencies flooding the market.
One such recent product which owes its development to blockchain technology, is the Non-Fungible Token (“NFT“). To understand an NFT, one needs to comprehend the basic difference between a fungible asset and non-fungible asset. A fungible asset is one which may be interchanged with other individual units or assets of the same type – such as money, or even bitcoin. In simple parlance, if a bill of money was to be exchanged with a similar bill or two bills of equivalent amount, it would make no difference in monetary terms to the holder. In contrast to this, each NFT is entirely unique, non-transferable and holds different value, thus no two NFTs are interchangeable. Due to its unique properties, NFTs have particularly endeared themselves to the art world, especially the digital art world. There is no single understanding of what NFTs could comprise, and the instances till date are testament to that fact. Jack Dorsey, the Twitter founder, promoted an NFT of his first ever tweet, with bids reaching USD 2.5 Million. In a similar vein, Christie’s auctioned off an artwork for USD 69 Million as an NFT. As is apparent, the amounts involved are by no means nominal.
One fundamental question which arises is the nature of the NFT itself. What exactly has the buyer purchased? What the purchaser receives is akin to a certificate of ownership of the piece of art, however in most cases, he does not obtain the copyright to such art, similar to artwork sold in the physical world. The copyright and other assorted intellectual property rights remain vested in the seller in most cases. The buyer owns a ‘token’ that proves their ownership of the original artwork. And the security provided by blockchain ensures that the ownership of the NFT in question is not tampered with.
Currently, there is no law that bans the trading of NFTs in India. That said, NFT has been classified as a type of cryptocurrency and reports confirm that India is planning to bring about a law that will ban private cryptocurrencies. The inclination appears to be towards criminalising the possession, issuance, mining, trading and transferring of crypto-assets1. In its stead, India further plans to build a structure for introducing official digital currency. Earlier, in 2018, the Reserve Bank of India had sought to ban banks and other regulated entities from supporting cryptocurrency transactions, but such ban was eventually lifted. Adding to the uncertainty is the opinion that trading in NFT may be banned under the Securities Contract (Regulation) Act, 1956 (“SCRA“). It has been suggested that NFTs will be categorised as derivatives under the SCRA and as such, the SCRA stipulates that contracts in derivatives will be valid and legal only if such contracts are: (i) traded on a recognised stock exchange; and (ii) settled on the clearing house of the recognised stock exchange, in accordance with the bye-laws of such stock exchange2. As per the SCRA, ‘derivative’ includes: (A) a security from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; (B) a contract which derives its value from the prices, or index of prices, of underlying securities3. If NFT is deemed to be a contract in derivative for the purposes of the SCRA, then it would make the private trade, sale or purchase of NFTs illegal, thereby adding another layer of precariousness to the position of NFTs in the Indian context.
Needless to say, India shares an uneasy and chequered relationship with cryptocurrency and NFT has not even entered the consciousness of the Indian market or regulators at large. While one cannot comment on what shape the Indian cryptocurrency bill will assume, the approach so far demonstrates that private entities and individuals dealing in NFTs and cryptocurrency tread on thin ground.
2 Section 18A, Securities Contract (Regulation) Act, 1956
3 Section 2(ac), Securities Contract (Regulation) Act, 1956