As people continue to purchase cryptocurrencies and seek to diversify their investment portfolio, NFTs, non-fungible tokens are also getting asset-class credibility.
Indians are warming up to the new digital asset, offering collaborators and creators a new platform to earn better revenue and make more value for their work.
NFTs allow individuals to purchase and sell unique digital items’ ownerships in cryptocurrencies and keep track of who owns them via Blockchain technology. Technically, NFTs can include anything digital, including artworks, drawings, GIFs, tweets, video games, and even songs.
Overall, the NFT trend is picking up in the country as fast as its crypto industry. As crypto exchanges use the bear market to concentrate on other business segments, India has witnessed three new marketplaces for NFTs in less than two months.
The COVID-19 pandemic had a big hand in the noise around NFT. Last year, the total value of NFT transactions surged to more than 330 million USD, which was about 44 million in 2018. One major reason could be the surge in Bitcoin price to an all-time of over 50k USD (1).
In July, Twitter stated that discussions around NFTs are also growing in India. As per the company, the conversation volume about these crypto tokes has surged by 43% between April and June 2021 (2). And the buzz around NFTs is showing no sign of slowing down in the country (3).
India’s NFT Marketplaces
WazirX, India’s top cryptocurrency exchange, was the first to jump into the space. It rolled out its NFT marketplace in June, and in two months, it already has competition. In July, another NFT marketplace, called NFTically, followed suit, and another one called Wall.app also joined the space.
According to a Mint report (4), artists across India have started using NFTs to break conventional industry barriers. After all, NFT marketplaces help them skip conventional brands and exhibitions to make money, middlemen, years of waiting, and high commissions. Yes, YouTube is a nice alternative, but it doesn’t work for everyone. NFTs nicely bridge the gap in the market for them.
Even though WazirX took the traditional NFT route with its marketplace, it brought down the gas fees for listing a single NFT to one USD using the Binance Smart Chain. For comparison, platforms such as OpenSea charges about 100 to 150 USD (5).
Meanwhile, NFTically is using the Polygon platform for similar offerings. Apart from users selling via its marketplace, NFTically also offers a SaaS product that allows anyone to build their own NFT marketplace (6).
It is different from OpenSea as it allows creators and artists a whole new level of autonomy. Even though they will have to pay NFTically for SaaS access, they will not need to pay commissions on the auctions via the platforms they build.
On the other hand, Wall wants to create its social commerce platform hinged on NFTs (7). The company is inviting creators and artists to showcase their art and build a community of sellers and buyers, all in one place. The company is eying for a launch in the upcoming months.
According to an Economic Times report (8), within a month of the launch of its NFT marketplace, WazirX has sold more than 160 digital art pieces. And since Indian NFT marketplaces are bringing down gas fees significantly, there are high chances of them getting global relevance (9).
Use Cases of NFTs
The history of NFTs begins around 2012; however, they have gained prominence in India and across the globe over the past few months with some marquee use-cases such as NBA Top Shot, which allow people to “own basketball games’ greatest moments” by owing NFTs of NBA highlight clips. Certainly, the most popular NFT form in the past few months seems to be digital videos or images.
Digital games are another popular use case of NFTs. For example, F1 Delta Game, a blockchain game licensed by Formula 1, sells digital car parts as NFTs for use in the game. Notably, the most prominent NFT transaction has been the 69 million USD purchase of an image collection of digital artist Beeple (10). Another headline-grabbing deal was the auction of the first-ever tweet of Jack Dorsey for 2.9 million USD (11).
Another prominent use-case of NFTs includes experiencing or viewing something such as exclusive content from a musician or representing legal rights and commercialization rights of an image or song.
Initially, the present excitement and sky-high valuations around NFTs seem like dot-com and ICO bubbles, both of whom had genuine innovations but witnessed unfounded hype. Regardless, we are leaning towards the idea that as the market matures, genuine use-cases would survive in the long run.
NFTs are also an example of the type of innovation crypto assets, and blockchains can offer, in this case, building a hitherto undiscovered market. Its potential to build a paradigm shift by building an “Internet of Assets” is another reason the country’s blockchain and crypto-asset ecosystem should be encouraged. (We will discuss their regulatory position in India later below.)
How to Create, Purchase, and Sell NFTs?
NFTs usually reside on public blockchains like Ethereum, Algorand, Flow, Binance Smart Chain, etc. You can create them via developer tools or third-party NFT marketplaces like Rarible, OpenSea, or Nifty Gateway. For the beginner, it is simple to approach marketplaces to create and sell NFTS since it resembles listing a product on popular ecommerce marketplaces.
The transaction of NFTs usually happens with crypto-assets like Ether. Some platforms like Nifty Gateway allow people to purchase via debit and credit card as well. However, those platforms also have to perform crypto-asset transactions on a blockchain to the backend to allow an NFT transfer.
NFTs Dealing in India
Currently, no laws or regulations are prohibiting an Indian resident from purchasing or selling NFTs (12). In short, you can think of NFTS as a digitally signed certificate for the underlying asset, which can either be digital or physical. The treatment under law would depend on the treatment of the underlying asset. For instance, an NFT offering ownership of a land parcel would be treated differently from one offering ownership of an artwork.
It raises questions like are NFTs virtual currencies, and would they be affected by any future legislation prohibiting or restricting their transactions? A sweeping cryptocurrency definition may cover NFTs. However, a nuanced definition should ideally exclude them since they are non-fungible. On the other hand, currencies are fungible. NFTs are unique items and don’t act as an exchange mean, unlike crypto assets like Bitcoin.
Cross-border Transactions in India
As of now, the most prominent NFT marketplaces are operated by organizations established overseas. While FEMA, Foreign Exchange Management Act, 1999 governs cross-border economic transactions in the country, there are no guidelines from the RBI, Reserve Bank of India around NFTs or crypto-assets (13). Under existing FEMA provisions, they can be treated as intangible assets such as intellectual properties and software. However, determining an NFT location is an open query. Blockchains are global ledgers, and as per the apex court, crypto-assets “can’t be stored anywhere.”
Without going into many technicalities, NFT transactions are currently in an obscure position in India. Hence, until we gain further regulations and guidelines, the best route for entrepreneurs would be to establish an NFT marketplace for Indian residents to avoid overseas ambiguities.
Intellectual Property Issues with NFTs
An NFT doesn’t usually transfer the copyright ownership to the holder unless it is contractually agreed. Instead, the buyer of an NFT art would own that digital item but would not get the right to reproduce it.
With the surging NFTs market, combined with huge troves of digital art availability on platforms like Instagram, suspicion arises that bad actors may misappropriate creators’ work and commercialize their work without their knowledge on NFT marketplaces.
Notably, such instances have already come to light, and artists have had to clarify that they were not involved in those NFT (14). In such cases, artists may have claims for copyright infringement and should get advice for legal recourse. Similarly, suppose a creator sold an NFT representing a public figure without their approval. In that case, the public figure may have a claim under the right to publicity, which offers a person the right to control their identity’s commercial use.
Taxes on NFTs
Normally, NFTs’ tax terms should follow the nature of the underlying asset. For instance, a digital art NFT can be treated as an intangible asset for GST and income tax purposes. Taxes should be declared and paid accordingly.
However, the digital nature and cross-border transactions of NFTs can raise other tax issues. For instance, sales of NFTs by overseas sellers via an overseas NFT marketplace to Indian buyers can be subject to a 2% equalization levy on the NFT’s gross value and the marketplace’s income from Indian customers. In addition, sales of NFTs by Indian resident sellers via an overseas platform may get excluded from the equalization levy. However, there are still doubts whether the platform’s commission or income is also excluded in such a case.
In addition, foreign and domestic platforms may also face challenges under the withholding tax or tax collection provisions under GST and income tax laws. Sales by offshore and onshore sellers will have to be tracked and tax deducted by NFT platform operators as per those laws. And tracking such transactions can be complicated since income tax would apply to resident sellers, and GST would apply to all sellers on the platform (15).
Patents and NFTs
IP related to digital assets or NFTs is also rising. IBM has already filed over 80 patents in this space. Brands such as Nike have also filed over four patents in 2018 about “Cryptographically Secured Digital Asset.” The patents, in general, disclose about collecting a digital version of the shoe, a digital asset, also known as Cryptokicks. The owner of those digital assets can also use the shoe as a skin on a video game character developed or controlled by a user.
In general, brands are filing patents in this field. However, is it possible to buy or sell patents in an NFT?
One may own a patent as an NFT. It will give them complete ownership of the patent only once the patent rights are transferred. An essential detail worth mentioning here is that you can still be the patent owner even if it is expired. After the expiry of the patent, you won’t be able to enjoy the monopoly, but you can still collect them in the form of NFT. With an active patent, you get the right to stop people from using it.
However, there is a small but important catch. As per Forbes (16), out of more than 2.1 million active patents in the US, barely 5% have reached the market. About 90% of the patents fail to find investors, licensees, or get commercialized. The case is also similar in India, with less than 5% of patents reaching the market.
It means there is a huge gap when it comes to patent commercialization, and NFTs can potentially fill this gap. According to IP experts, NFTs can take the IP industry by storm and greatly impact the number of patents getting commercialized.
And looking at how the NFT market is rapidly rising, it would be interesting to see how IP experts take advantage of the NFT boom (17). Especially with the emergence of the metaverse, the possibilities are endless.
Would NFTs Be Banned in India?
NFTs offers multiple opportunities for digital creators, and there are two primary reasons why NFTs are not likely to be banned.
For starters, NFTs are more similar to assets than cryptocurrencies, as we mentioned above. Hence, they are not subject to most of the government’s concerns with cryptocurrencies like Bitcoin. NFTs are not an unregulated currency that can oppose the rupee, which can be a case of a cryptocurrency since NFTs are non-fungible.
For example, when we exchange 10 INR currency, there will be no change in the value we possess since all genuine currencies are interchangeable and indistinguishable. The outcome is also the same if we swap cryptocurrencies such as Bitcoin.
However, that is not the case with NFTs. Each of them is unique in nature. They are neither indistinguishable nor interchangeable since they are non-fungible. There is a lack of standardization, and it can’t develop into a new unregulated currency system. In short, allowing NFTs would not affect India’s legal tender, the rupee.
In addition, NFTs can ensure that digital creators get proper royalties from the reuse or resale of their work. Because of the transparent nature of blockchain technology, a copyright holder can track all transactions taking place for its creation. It is in stark contrast to conventional digital or physical art forms where collecting royalties can be challenging.
While NFTs are not perfect, the benefits they offer digital creators can’t be ignored in favor of a blanket ban. Instead, NFTs should be treated as a new asset class that needs dedicated legislation for long-term success (18, 19).
The non-fungible token market is extremely new and still in the nascent stage. The technology behind it is still undergoing significant improvements and changes. It seems that we will need tireless innovations to overcome the challenges and limitations of NFTs for their smoother usage and incorporation.
The first challenge is their inaccessibility to mainstream users because, in a way, they are currently only limited to early tech adopters and spectators using blockchain platforms.
Another challenge is building enough applications that can support huge transactions. Nonetheless, the future looks promising as the experts speculate that 40% of new crypto users, mostly Gen Z and Millenials, will use NFTs as an entry point (20, 21).
This article is for information purposes only. There are certain risks involved in purchasing NFTs and the potential for the emergence of a market bubble in India. Hence, individuals must go forward with caution and at their own risk.