INTRODUCTION
NFTs (non-fungible tokens) are unique digital assets that provide proof of ownership and authenticity. These days, they appeared to be everywhere. These digital collectibles are currently beginning to surpass traditional art in terms of market size. In 2021, the market of NFTs tied with blockchain technology reached a $41 billion value. If the NFTs get minted on the blockchain, according to financial times their worth will get higher from the latest estimate from the 2021 report, the sales of conventional art and antiques have reached up to $50 billion in 2020. NFTs were in trend among celebrities when it was first introduced. However, buying and selling NFTs can come with legal implications that individuals and brands should be aware of, and in this blog, we will discuss it.
LEGAL IMPLICATION
Many legal implications need to get explored related to buying and selling of NFTs. As we know in India there are no specific laws and provisions made in respect to it. But there are still some possibilities that will help the individual to legally participate in buying and selling of NFTs under different laws and guidelines similar to it.
Authenticity and Ownership – These two are the major legal concerns with NFTs. Buyers should ensure that the NFTs they were purchasing the legitimate or not and sellers should provide verification proof of ownership and authenticity to the buyer to mitigate any potential disputes that may take place in the future. NFT marketplace uses various methods to ensure its authenticity. Some ways by which it can get the validation are:
Research the social media profile of the owner: go through the owner’s social media profile to ensure that they are the legitimate creator of NFTs.
Dual-Code Technology: By tying physical products to secure, tamper-proof non-fungible tokens, VerifyMe’s verify NFT dual-code tech builds brand confidence and assures buyers that they are receiving a genuine product tied to its NFT by eliminating counterfeiting and fraudulent transactions.
Blockchain Certificates and Identity Verification: Verisart offers blockchain certificates and identity verification to give confidence to buyers by telling the story behind the works, and rewarding collectors with exclusive content.
Scrutinize the NFTs Metadata: It is the simplest and fastest way to verify the NFT’s authenticity by scrutinizing the NFTs metadata using a blockchain explorer like Etherscan.
Digital Certificate and Web of Trust: some NFTs have certificates that have the artist’s signature, the edition number, and the date of creation on them.
Copyright Issues – the most copyright issues associated with the buying and selling of NFTs are- Ownership rights like understanding what rights the buyer is acquiring and it is important to research and understand the terms of sale and language used to describe the transaction; Copyright infringement making and selling of NFTs based upon someone else’s artwork you don’t hold the rights to is an infringement; Intellectual property considerations, in some cases, the owner does not acquire the copyright or trademark rights or the NFT so, he cannot sell copies of work, nor can sue a company or individual who displays it without authorization; Legal penalties.
Cybersecurity Threats – Autions worth millions are increasingly commonplace on NFT marketplaces. Sotheby’s, Christie’s, and Opensea are attracting the prospective purchaser towards them, and so does the scammers. In 2021, a hacker stole NFTs worth $2.2 million from art collectors and gallerists.
Regulatory Frameworks – There is no agreement on how NFT should be handled, and the regulatory framework has not yet been fully developed. At the moment, they are only taken into account as commodities, securities, and intellectual property.
Tax Implications – It is very complex and also varies depending on the jurisdiction. NFT transactions may be across international borders, making them susceptible to foreign tax laws and regulations.
Copyright rules- Section 504- A Buyer who knowingly acquires an NFT that violates another person’s copyright may be liable for up to $1.5 million in damages which is equal to 10ETH(Ethereum) even if you made less than that from selling the NFT. In the recent lawsuit of the CryptoPunks vs. CryptoPunks dispute, the dispute has arisen against Opensea the leading marketplace for secondary NFT for infringement. OpenSea received notice under DMCA (Digital Millennium Copyright Act).
Smart Contract Issues- A self-executing contract, contains lines of code that are directly translated into the terms of the agreement between the buyer and seller which guarantees Privacy and data protection, and Consumer protection.
LEGAL IMPLICATIONS IN OTHER COUNTRIES
In the US, According to Commodity Futures Trading Commission, cryptocurrency is a part of it so if we consider NFTs similar to cryptocurrency and if it is agreed that NFTs are a commodity, then the Commodity exchange act may be imposed on NFT. Another classification is as securities and NFTs are defined as securities then the Securities Act of 1993 and the Securities Exchange Act of 1934 must be applied. In Australia, the Australian Taxation Office released directions for NFT taxation. US Congress passed the Anti-money laundering act, it does not directly relate to NFTs but expands the definition of financial institutions including businesses dealing with crypto. They haven’t designed it specifically for NFTs.
LEGAL IMPLICATIONS IN INDIA
Presently, no laws in India expressly and particularly regulate commercial dealings in NFTs. There are some regulations banning cryptocurrencies in India. There are only statutorily references:
Sales and Goods Act – The Sales and Goods Act, of 1930 may have implications on NFTs in India. As assets with utility, which can be bought and sold on marketplaces, NFTs may be considered under this act.
Income Tax Act – as NFTs come under virtual digital assets (VDA) in India and income is generated from trading, is taxed at 30%. NFT trading can only take place vis cryptocurrency and advertising NFTs would be governed under the Advertising Standards Council of India Rules, they also comply with recent guidelines for the prevention of Misleading Advertisements and endorsements for Misleading Advertisement, 2022. Sales generated of NFTs by offshore sellers to Indian buyers through an NFT marketplace may be subjected to a 2% equalization fee based on the gross value of NFT and the marketplace’s income from Indian customers. The sale of NFT may be subjected to capital gains tax. Plus, the length of time you hold an NFT before selling it can affect the tax treatment. To determine the capital gain or loss when selling an NFT, you need to calculate the cost basis, the sale of an NFT may be subjected to sales tax, and with any taxable transactions, it’s important to comply with tax reporting requirements.
Securities Exchange Board – Since NFTs have not yet been recognized as securities under Indian law, SEBI is yet to formulate a definitive position on them. This is because the legal status of NFTs is not entirely understood, especially in the lack of specified regulations.
Lack of specific regulations for NFTs – there are no explicit regulations in India that can control business activities with NFTs, which leaves buyers and sellers confused. Due to the potential for legal ambiguity for both purchasers and sellers, tax ramifications, and cybersecurity risks, immediate legislation and guidelines are required.
Cryptocurrency & Regulation of Official Digital Currency Bill, 2019- all cryptocurrency-related operations would be completely prohibited under the 2019 bill. anyone conducting such operations will be punishable by a fine, up to 10 years in prison, or both. Within 90 days of the act’s start date, a person has to declare and get rid of any cryptocurrencies he obtains.
The Cryptocurrency and Regulation of Digital Currency Bill, 2021- aims to develop an agreement that will facilitate the production of the official digital currency that the Reserve Bank of India will issue. Furthermore, the bill aims to outlaw all privately held cryptocurrencies in India. When compared to equivalent monetary violations, the outlined bill appear to be unduly grave. The public hasn’t yet been given access to the bill’s text.
Copyright Act, 1957- section 14 of the copyright act of 1957 a creative work’s copyright owner is the owner of a variety of rights, including the ability to reproduce and alter the work. selling the NFT may result in copyright infringement if the seller does not possess the rights to the underlying work of art. It is detrimental under Indian law given under section 19(1) of the copyright act, 1957 expressly states that ‘no assignment of copyright in any work shall be valid unless it is in writing signed by the assignor or by his duly authorized agent’. NFT marketplaces can be liable for contributory copyright or trademark infringement where a user creates and offers an NFT connected to an infringement.
CONCLUSION
Based on conclude that the aforementioned study, we can conclude that the NFT market continues to grow consistently and that it will become more and more crucial to consider the legal ramifications of purchasing and selling NFTs. Nevertheless proves difficult for national jurisdictions to identify and create special legislation for it because of risks and ambiguity. To ensure that NFT transactions are legally binding and in compliance with rules, it is crucial to understand the legal environment and interact with legal and tax experts. NFT markets have legal ramifications. NFTs have legal repercussions in various jurisdictions, including those related to worldwide tax laws and regulations, ownership rights, copyright issues, cybersecurity risks, and many several more. Both benefits and drawbacks of NFTs exist. To guarantee that NFT transactions are binding on the law and compatible with laws, it is crucial to be informed about any changes in the legal landscape. Just like with cryptocurrencies, particular rules and regulations for NFTs would allow buyers and sellers to transact in it with clarity and trust, giving the market as a whole a new direction and optimizing potential customers.
Author(s) Name: Minjal Sankhala
