Open Access Research Article
NON-FUNGIBLE TOKENS AND PROPERTY LAW: THE LEGAL CONUNDRUM IMPOSED BY THE CUTTING-EDGE PROPRIETARY PARADIGM BY: - TANMAY AVINASH DESHMUKH
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Article Details
NON-FUNGIBLE TOKENS AND PROPERTY LAW:
THE LEGAL CONUNDRUM IMPOSED BY THE CUTTING-EDGE PROPRIETARY PARADIGM
AUTHORED
BY: - TANMAY AVINASH DESHMUKH
COLLEGE: -
ABACL, MUMBAI.
ABSTRACT
The rise of Non-Fungible Tokens
(NFT’s) has captivated the digital sphere, generating widespread attention and
substantial financial investments akin to the fervor surrounding
cryptocurrencies. At the core of these digital revolutions lies blockchain
technology, a decentralized system of distributed public ledgers[1]. NFT’s, as unique
digital assets, present novel concerns, particularly pertaining to property
transfers. By leveraging blockchain technology, NFT’s authenticate ownership
and ensure the genuineness of items such as artwork, music, and even tweets,
enabling their buying, selling, and trading akin to physical assets.
Currently, the global NFT market
stands at approximately $40 billion, with India estimated to possess an NFT
business worth $3.3 billion. With a cumulative average growth rate of 61.6
percent, this industry is expected to expand to $27 billion by 2028[2].
Such immense potential emphasizes the necessity for robust laws and regulations
governing these assets. The legal questions surrounding NFT’s, particularly in
relation to property laws, are intricate and multifaceted. The inherently
ambiguous nature of NFT’s initially complicates their classification as
properties and raises uncertainties regarding their governance under existing
property laws. This paper seeks to address some of these questions by
constructing archetypes and drawing connections to other related assets, while
examining the applicable laws governing them. Given the scarcity of specific
legal precedents or orders related to NFT’s, much of this paper's analysis will
be derived and hypothetical in nature. It is essential to recognize that the
legislative system's lack of empirical evidence on NFT’s should not be
construed as ignorance, but rather as a delay in comprehending and exploring
these novel digital assets. Through a comprehensive exploration of various
facets of NFT’s, this paper aims to shed light on their potential applications
within the context of existing property laws.
LEGAL
IMPLICATIONS BOUNDING NFT’s
NFT’s,
which are distinctive digital assets underpinned by blockchain technology,
possess a remarkable characteristic their intricate working system coupled with
robust encryption. This feature grants them a significant advantage, yet it
also renders the task of deciphering their inner workings highly challenging.
Similar to cryptocurrencies, each NFT is endowed with a unique digital
signature and operates within the intricate framework of blockchain technology[3].
The utilization of blockchain as the underlying infrastructure for NFT’s
empowers individuals to securely possess and transfer their assets at their
discretion. While NFT’s have gained widespread recognition for their ability to
serve as vehicles for artistic expression, such as innovative art and graphics,
their scope extends beyond that and can encompass a diverse array of digital or
tangible objects.
Property,
in its essence, grants individuals an exclusive and sovereign control over
tangible or intangible assets[4].
The objects that can be subject to possession and ownership encompass a diverse
range and are subject to distinct treatment under various legal frameworks[5].
NFT’s, as tokens, possess their own unique set of data that serves as a
validation and authentication of ownership. The intricate blockchain technology
on which NFT’s are built ensures the viability of their transfer from one owner
to another. With the establishment of a concrete and authentic ownership
system, one may question the rationale behind not classifying NFT’s as property
and consequently subjecting them to governance under existing property laws. To
explore the status of NFT’s under India's property laws, it is crucial to
analyze the existing legal framework, as there are currently no specific laws
directly addressing the classification of NFT’s as properties. In the absence
of explicit provisions, a prudent approach is to derive the meaning of property
from other applicable laws. By examining these laws, one can reasonably argue
that NFT’s can be categorized as corporeal property, as they possess a
materialistic nature and represent something tangible.[6]
Section 22
of the Indian Penal Code aptly defines movable property as any corporeal
property, excluding land and its attachments[7].
NFT’s undeniably fit within this definition, as they can be bought, sold, and
traded, much like physical assets or real estate. Moreover, they serve as a
means to establish ownership and transfer rights over digital assets such as
art, music, and videos, thereby aligning with the traditional understanding of
property. Furthermore, legal provisions such as Order XXI of the Code of Civil
Procedure, 1908[8],
which address attachment, custody, and recovery of movable properties, can be
utilized to craft comprehensive and robust laws pertaining to NFT’s. These laws
provide a strong foundation for the governance of NFT’s under standard property
laws applicable to immovable property. However, it is important to note that
the treatment of NFT’s under Indian law will heavily rely on the specific
circumstances and facts of each case, as well as the nature of the underlying
assets and the rights associated with them. Additionally, the legal landscape
may evolve in response to new technologies and changing market conditions,
warranting possible changes in the treatment of NFT’s within the Indian legal
system.
THE
INCLUSION OF NFT’S WITHIN PROPERTY LAW: CHALLENGES AND IMPLICATIONS
The
emergence of NFT’s not only promises to revolutionize various industries,
particularly the art world, but also gives rise to a host of legal and ethical
considerations. These include issues related to intellectual property
ownership, the taxation of NFT sales, and the environmental implications
stemming from the energy-intensive process involved in creating and verifying
NFT’s on the blockchain. NFT’s, as unique digital assets, rely on blockchain
technology to establish and certify ownership and authenticity. This
groundbreaking innovation has the potential to reshape property law by
introducing new forms of property that are purely digital and can be
effortlessly bought, sold, and traded. This paradigm shift challenges
conventional notions of property ownership, especially in terms of ownership
transfers and the safeguarding of property rights within a digital context. The
widespread adoption of NFT’s also brings about legal complexities surrounding
the ownership of digital assets and the enforcement of property rights within a
decentralized environment[9].
As NFT’s continue to gain traction and permeate various sectors, it becomes
imperative for property law to evolve in order to address these novel
challenges and offer clarity to NFT owners and the broader digital ecosystem.
By adapting to the changing landscape, property law can effectively navigate
the intricacies posed by NFT’s and provide a solid legal framework that
protects the interests of stakeholders in the digital realm.
The allure
of sensational narratives may captivate public attention momentarily, but the
lasting impact of any technological revolution hinges on the seamless
integration of legislation. Non-Fungible Tokens (NFT’s) present an array of
intricate questions that intertwine with India's conventional property laws,
giving rise to noteworthy considerations:
1. Recognition
in the legal realm: NFT’s represent a relatively novel concept, lacking a
dedicated legal framework for their recognition in India at present.
2. Ownership
and transfer complexities: While NFT’s can be freely bought, sold, and traded
on blockchain networks, the legal ramifications surrounding these transactions
remain nebulous.
3. Ambiguity
in Intellectual Property Rights: Determining ownership of intellectual property
rights associated with NFT’s can be enigmatic, as existing laws may not furnish
sufficient protection or clarity in this context.
4. Taxation
dilemmas: The taxation of NFT’s and their transactions is a subject of ongoing
debate, with existing tax laws struggling to provide unequivocal guidance on
how NFT’s should be taxed.
5. Regulating
the decentralized landscape: NFT’s operate in a decentralized manner, thereby
presenting a formidable challenge when contemplating how to effectively
regulate them within the Indian legal framework.
These
multifaceted concerns necessitate a comprehensive restructuring of traditional
property laws to accommodate the unique characteristics and implications of
NFT’s. By proactively addressing these challenges, India can forge a harmonious
synergy between NFT’s and established legal structures, fostering a conducive
environment for their growth and development.
ADVANCEMENTS
IN RECOGNIZING NFT’S WITHIN THE CURRENT LEGAL LANDSCAPE
The unique
nature of Non-Fungible Tokens (NFT’s) has resulted in the absence of a distinct
and comprehensive regulatory framework governing their transactions. As a
consequence, much of the regulatory landscape surrounding these innovative
digital assets is either derived from existing laws or based on assumptions.
NFT’s are designed to facilitate decentralization, track ownership, and serve
as a means of storing value. Additionally, they aim to establish verifiable
proof of ownership for original works,[10]
offering creators a form of "digital bragging rights" and legal
recourse in case of unauthorized duplication. These tokens strive to provide
tangible evidence of ownership, granting individuals the ability to validate
their rightful claim over a digital asset.
While the
Indian courts have not specifically addressed the trading of NFT’s, we can draw
insights from the legal treatment of cryptocurrencies, which share similarities
in terms of online trading using blockchain technology. For instance, the
Supreme Court of India, in the case of Internet and Mobile Association
of India vs. Reserve Bank of India,[11]
ruled that the trading of cryptocurrencies like Bitcoin was legal and
invalidated the guidelines issued by the Reserve Bank of India that restricted
banks from dealing in virtual currencies.[12]
By extrapolating
from the legal framework surrounding cryptocurrencies, which encompasses
securities laws, income tax regulations, copyright laws, and more, we can
derive the current state of NFT’s within the Indian context. However, the
critical aspect that requires attention is that of Property Law. Although it
has been theoretically established that NFT’s can be considered valid forms of
property, there is a lack of specific legal precedents in India to substantiate
this claim. To understand the current relationship between property law and
NFT’s, we can examine the Supreme Court's approach to analogous elements such
as cryptocurrencies and observe the trends in their rulings. International
jurisprudence serves as a valuable reference in this regard. For instance, the
High Court of Singapore has recognized NFT’s as property, citing their
fulfillment of the necessary legal requirements[13].
Furthermore, there have been unreported cases in English courts where NFT’s
were declared as properties and treated accordingly within the legal framework.[14]
It is important to note that while there is a dearth of empirical evidence
within the Indian legal system, the judiciary has shown a willingness to
consider rulings from other jurisdictions and adapt them to similar circumstances.
As the legal landscape evolves, it is crucial to monitor international
developments and draw insights from other courts' recognition of NFT’s as
properties to shape the legal understanding and treatment of NFT’s within
India.
CONCLUSION
NFT’s, the
cutting-edge digital assets propelled by the robust infrastructure of
blockchain technology, have recently witnessed remarkable feats, exemplified by
the sale of "The First 5000 Days" for a staggering sum of over 69
million dollars. This notable event highlights the undeniable value and
significance of NFT’s as a groundbreaking digital phenomenon.[15]
However, within the Indian legal system, there appears to be a conspicuous lack
of regulation surrounding these assets, reflecting a concerning disregard for
their governance within the realm of property law. Throughout this discourse,
we have explored the legal landscape surrounding NFT’s, attempting to establish
their classification as properties under the Indian legal framework and
advocate for their regulation through existing property laws. However, it is
essential to acknowledge that these arguments remain derivative and assumed,
based on the prevailing legal disposition. To truly solidify the position of
NFT’s within the legal domain, it becomes imperative for the courts to
recognize their existence and proactively formulate definitive regulations
encompassing not only property laws but also other pertinent legal aspects.
India can draw inspiration from countries like Singapore, China, Japan, and
Switzerland, which have already established reasonable, legitimate, and
administrative frameworks to govern NFT’s.[16]
In the
absence of specific regulations, the Indian legal system could turn to existing
laws and international best practices as a guiding compass to address the
unique challenges posed by NFT’s. For instance, NFT’s may be deemed a form of
digital property, subject to the principles of contract law governing their
ownership and transfer. Likewise, the creation and distribution of NFT’s could
be addressed within the framework of copyright law. Considering the rapid
evolution of NFT’s and their potential for substantial economic impact, it is
only a matter of time before the Indian legal system develops a comprehensive
regulatory framework tailored specifically for NFT’s. It is imperative that a
comprehensive evaluation of NFT’s takes place, leading to the pragmatic
construction of a robust regulatory framework. We stand at a crossroads where
we can either continue to overlook the rapid modernization ushered in by this
futuristic technology or embrace its transformative potential and build a
brighter tomorrow by harnessing its capabilities.
In
conclusion, the recognition of NFT’s within the legal realm is not just a
necessity but an opportunity for India to position itself at the forefront of
technological innovation. By embracing this new frontier and developing a
progressive regulatory framework, India can foster an environment conducive to
the flourishing of NFT’s and shape a future where digital assets are seamlessly
integrated into our legal system, thereby unlocking limitless possibilities for
creativity, ownership, and economic growth.
[1] Poorvi Sachar, NFT’s: How India Can
Emerge as a Frontrunner, ABP Live, available at https://news.abplive.com/india-at-2047/nft-india-frontrunner-user-market-popularity-bored-ape-bayc
cryptopunk-azuki-tezos-blockchain-poorvi-sachar-1546840
[2] Abhay Aggarwal, NFT’s in the
Indian Market: How Investable are Digital Tokens, Entrepreneur India, available
At
https://www.entrepreneur.com/en-in/technology/NFT’s-in-the-indian-market-how-investable-are-digital/436812
[3] akshat Kolhatkar, What is an NFT
and how does it work? Understand the technology behind NFT’s, BQ Prime,
available
at https://www.bqprime.com/business/what-is-an-nft-and-how-does-it-work-understand-the-
technology-behind-NFT’s
[4] Thomas Merrill & Henry Smith,
Property: Principles and Policies, Thomson Reuters, 2nd Edition (2012).
[5] A.P Singh & Ashish Kumar
Srivastava, Property Laws, LexisNexis.
[6] Wex Definitions Team, Cornell Law
School, available at https://www.law.cornell.edu/wex/corporeal_ownership
[7] The Indian Penal Code, 1860, §22.
[8] Code of Civil Procedure, 1908,
Order XXI.
[9] Prashant Kataria, NFT’s in India:
Legal Implications, Business Line, available at
https://www.thehindubusinessline.com/business-laws/NFT’s-in-india-legal-implications/article65636218.ece
[10] Prashant Kataria, Non-Fungible
Tokens in India: 6 Legal Implications buyers must consider, Mondaq, available
at
https://www.mondaq.com/india/fin-tech/1198948/non-fungible-tokens-in-india-6-legal-implications-buyers-
must-consider
[11] Internet and Mobile Association of
India vs. Reserve Bank of India, MANU/SC/O264/2020.
[12] Id.
[13] Jamie Crawley, NFT’s can be
considered property, according to Singapore High Court Ruling, CoinDesk,
available
at https://brill.com/view/journals/ilrc/5/1/article
p17_17.xml?language=en#ref_FN000015
[14] Sean Murphy, Are NFT’s a type of
property under English Law, Inside Tech Law, available at
https://www.insidetechlaw.com/blog/are-NFT’s-a-type-of-property-under-english-law.
[15] The most expensive NFT ever sold,
Crypto.com, available at https://crypto.com/university/most-expensive-
NFT’s#:~:text=1.,Merge%20%20US%2491.8M&text=Digital%20artist%20Pak's%20creation%20Merge,sold%20
by%20a%20living%20
artist
[16] Abhilasha D., Rule of Law: A
comparative Analysis of India and Pakistan, International Journal of law
management
and humanities, Vol. 5 Issue 1; 451.
Article Information
NON-FUNGIBLE TOKENS AND PROPERTY LAW: THE LEGAL CONUNDRUM IMPOSED BY THE CUTTING-EDGE PROPRIETARY PARADIGM BY: - TANMAY AVINASH DESHMUKH
Authors: TANMAY AVINASH DESHMUKH
- Journal IJLRA
- ISSN 2582-6433
- Published 2023/10/28
- Issue 7
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International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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