Non–Fungible Tokens have grabbed a lot of attention of people in the year 2021 as in March of this year the most expensive NFT was sold at a whopping price of $69.3 million (approx. 512 Crore INR) in an auction, this artwork was created by an artist known as Beeple. The amazing thing here is that any person can see this image over the internet for free, and at such a high price the owner only gets a digital image in the form of NFT and some rights with it and nothing else.
A NFT is a token created digitally for an artistic work, song or an image in order to sell the work and provide certain rights related to it to another person, it is based on the Blockchain technology, which is basically a chain of blocks that are linked together using cryptography, these blocks contain information similar to a ledger which is distributed across all the computers having that particular blockchain. It has the property that if one value of a block is altered then the value of all the blocks preceding it changes. Transactions over it are very secure as it is encrypted and it can only be changed if all the nodes of the chain allows it to.
These are non fungible in nature which means it cannot be exchanged with another NFT as every one of them is different as they have different values but it can be resold. Buying a NFT can be considered similar to buying an antique product which is unique but this token is only transferred digitally where the original piece of work remains with the owners itself but there are generally no copyrights attached to it. It has and can have various applications in future such as Digital Rights Management, distributed ownership of a work, games, using them to tokenize physical assets etc.
Legal status of NFT: USA, UK and India
In the USA, the legal nature of NFTs are that of cryptocurrencies which are fungible tokens, categorized as utility tokens and most of them can be exchanged with one another, but in the case of NFTs, they are not an instrument used for buying something in exchange. So, it depends on the rights which are shared between the owner and the buyer that if there is a right given to the buyer related to profit sharing then that token would be considered as Security token and it will be deemed to be as an investment contract. For example: If a NFT is created for the sole purpose to sell it to the public for earning investment profits then that type of NFT will be considered as a security.
In the UK, the legal status of NFTs is not clear enough as according to their perspective a distributed ledger itself is not a trusted record as private keys can be transferred off-chain and it cannot be relied upon. As per the HMRC guidelines only addresses and applies to the exchange tokens that are the cryptocurrencies such as Bitcoin, ethereum etc. and does not talk about tax implications of an asset which is tokenized.
In India, there is no legal framework related to NFTs, but it can be interpreted as a cross border transaction as mostly the tokenized assets are created in foreign countries as of now, So, there might arise certain questions such as whether it can be called an export or import of an asset, or whether the NFTs are similar to securities.
Hence, this NFT is a completely new and evolving technology similar to the Cryptocurrencies and which needs to be recognized by the countries over the world, So, the legal aspects of it can be addressed and it can also be regulated because who knows in future this technology can even extend to Physical assets.
By: Vaibhav Raj
(Legal Intern, WCSF)
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