By Priyanka Khimani
In the year 2021, the overall trading market of Non-Fungible Tokens (“NFTs”) exceeded almost $21 billion in volume. Google trends analysis indicated that the interest in NFTs was much more than in cryptocurrency. While 2021 was all about the world opening up to the possibilities of NFTs; 2022 is going to be more about regulating it. Coming back to the basics, NFTs are unique digital assets on the blockchain technology. While the initial understanding of NFTs was that it was just about quirky artwork being sold at an exorbitant price, there are several leading brands that have now paved the way by being early adopters of this technology. From NBA basketball memorabilia, digital real estate to street art and graffities – everyone appears to be jumping on the NFT bandwagon. In order to develop a successful NFT marketplace, one must ensure the presence of talent and content capable of generating these valuable digital assets; and investors interested in trading in these NFTs; and there is no dearth of either in India – for example, the massive market for Bollywood and fashion NFTs in India.
With the increasing popularity of NFTs and its trading in cryptocurrencies, one of the foremost questions that arise is in relation to the regulation of these transactions. Legal regimes across the globe have been trying to grapple with the issue of regulating cryptocurrency and its use in transactions involving NFTs. Moreover, it is important to note that since cryptocurrencies are used to buy and sell NFTs, the regulations relating to the former will have major consequences on the latter. In the recent Finance Bill, 2022, India has sought to regulate the NFT space by including the expression ‘virtual digital assets’ into Section 2(47A) of the Income Tax Act, 1961 and taxing income arising from trading in such assets at the rate of 30%. The Finance Bill includes ‘Non-Fungible Tokens’ within the definition of virtual digital assets, however, we all await the actual definition thereof. With its wide consumer base and strong tech-based startup ecosystem, India is an obvious choice for businesses looking to diversify and enter the NFT marketplace. However, businesses will now have to plan their entry keeping in mind the government’s recent imposition of tax on the transfer of NFTs.
Evidently, the primary issue with regulation of NFTs is defining it. Instead of merely looking at transactions of artwork and images as volatile assets, legislators must look at it from the point of view of regulating the underlying technology involved in such transactions. NFTs are merely digital proof of ownership, which when transferred to someone, is recorded in an unassailable chain of distributed ledger. Depending on the programming of the token, these NFTs may or may not come along with actual legal rights which are enforceable in the real physical world.
It is patently clear that NFTs are here to stay. As ownership and transactions of digital assets becomes more commonplace, we will witness an increase in NFTs for more regular digital commodities. At this stage, what’s essential for the NFT space is the need for proper legal recognition, regularization and meaningful and speedy enforcement surrounding smart contracts, which forms the backbone of the virtual world. With that in mind, it will be interesting to see how various world governments arrive with legislations and regulations to closely monitor the growing NFT marketplaces and its uses.
The author is global IP and media rights expert. Views expressed are personal.
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