Scope of NFTs in the Real Estate Industry: Need for a Better Regulation of NFTs? Part I
[Sneha is a student at National Law University, Odisha. The following post is the first part of the two-part article, the second one being available here.]
With the presentation of the Finance Bill 2022, the Finance Minister Nirmala Sitharaman announced a major development with respect to the regulation of digital currencies in India, stating that “Income from the transfer of cryptocurrencies and non-fungible tokens will be taxed at the rate of 30%. Any loss incurred from such transfers cannot be set off against any other income or carried forward to subsequent years.” Further, it was stated that the tax deducted at source (TDS) will be charged at 1% for any payments made on the transfer of digital assets. However, there is a divided opinion in the market with regard to the legality of trading in non-fungible tokens (NFTs) and cryptocurrencies in India. Some are of the view that by taxing the NFTs and cryptocurrencies, the government has provided legal status to their existence, while others are of the opinion that mere taxation of the returns from trading in the digital assets does not necessarily confirm their legal status in the financial market. Furthermore, while some view cryptocurrencies as belonging to the asset category, others do not quite agree. Moreover, the Financial Bill 2022 has classified crypto assets to be taxed and surcharges to be levied on the same in the manner similar to how winnings and speculative transactions are treated under the Income Tax Act 1961 (IT Act). In any case, the IT Act is not concerned with the nature of the manner or means of acquiring the income (i.e., whether illegal or legal source), and therefore the taxation of returns from cryptocurrencies or NFTs does not confirm the legal status of such digital currencies. In current times, it has become important to study the nature of the NFTs and cryptocurrencies because of a two-fold reason: the nature of every digital asset particularly cryptocurrencies and NFTs is different from one another, and there is no definite regulatory framework governing the same.
This post has been divided into two parts wherein the first part aims to cover the nature and scope of NFT and crypto usage in the real estate industry through judicial rulings and market trends. The second part presents a perspective on whether regulatory frameworks should be strengthened for their governance in the Indian financial market, through the lens of the practical functioning of the real estate industry.
Overview of the Nature of Cryptocurrencies and NFTs
A cryptocurrency is a digital currency, which is fungible, meaning one type of cryptocurrency can be exchanged for another. Unlike currencies that are regulated by a central authority and are therefore legal tenders, cryptocurrencies are free from such regulation. Cryptocurrencies are based on blockchain technology which is a decentralized and trustless data storage protocol, to create unique assets and bring it to the art business’. Crypto collectibles on a blockchain are unique creatures (in the form of images, art, etc.) that may help trace the cryptocurrencies to the rightful owner for every transaction that is made on the blockchain platform. Alternatively, NFTs are non-interchangeable (alternatively known as non-fungible) units of data, which are stored on a blockchain, in the form of a digital ledger, and can be sold and traded in the market in its digital form. As metadata is known to provide information/data describing what the data is (i.e., data about the data), the NFT metadata facilitates information about the content stored on the blockchain is being continuously used to represent different types of assets (in various forms like digital, real, etc.). Developers have the power to limit the number of items, and technology helps to prove one’s ownership. Overall, NFT’s ledger system is beneficial in fraud prevention as it helps in certifying the owner of the digital asset.
Tracing the Market Trend on the Use of NFTs
NFTs offers several opportunities to monetize a wide spectrum of assets. The real-world artworks are tokenized to promote authenticity and offer ownership to the artist in artwork and pictures. The in-game elements or items are allowed to be tokenized and exchanged with other partners in the gaming/sporting events. For collectibles, various unique features like algorithms and value-added features to identify are possible through NFTs. For articles and news posts, licenses, and certifications to authenticate and preserve the ownership of documentation is tokenized. In Sports, game tickets issued on hyper ledger platforms can be tokenized to prevent counterfeit merchandise. Crypto addresses are offered as NFTs where users can buy and sell crypto name services. Virtual assets like virtual land and various virtual world elements can be owned, created, and monetized too.
Some of the recent usages of an NFT in various industries are as follows: Marvel released their NFTs with an image of the powerful Iron Man and the Avengers Logo; AT&T Software is offering high quality NFT marketplace to its customers; Weaver Labs is converting physical assets into NFTs designated to its owner enabling telecom network providers to mount antennas on top of buildings, traffic lights or streetlights; Nonvoice a leading 5G app agency has launched Authentic Digital Collectibles (ADC) as NFTs in Thailand. Experts from consultancy. Additionally, there are sector-specific and service-specific NFT opportunities worth exploring, such as the below:
Digital content distribution: Piracy is a major concern in modern internet space that can be overcome using digital ownership, so that content can be traced to the course.
Lot allotment via NFTs: With the chip shortage affecting consumers worldwide, scalping can be tackled by making every order using NFTs which results in fair distribution.
Artists’ NFTs: The artists associated with Sony, for example, can release their premium merchandise via NFTs which draws in the premium segment from their customer base.
Equipment tracking via NFTs: Expensive equipment can be tracked via NFTs to minimize theft and prevent duplicity from the original product.
Information leak prevention: To prevent information spillage from sensitive decisions, information can be marked with NFTs to make the parties liable in case of leakage.
Digital collectibles as NFTs: Digital Artworks, comics, experiences, stories, performances in Facebook, Instagram can be converted into NFTs.
Building connection through NFTs: A prime use case for offering NFTs on Facebook and especially Instagram is to give users a reason to open Meta’s Novi digital wallet.
Metaverse using NFTs: Through NFTs, one can buy experiences, luxury, within the Metaverse. LVMH-owned Louis Vuitton is one of the first brands within the fashion industry to launch a metaverse game called “Lous” where players can collect NFTs.
Way Forward: Analyzing the Current Legal Standpoint
It may be reiterated that NFTs are categorized as, among others, digital artwork, and therefore, the nature of their ownership can be understood through the Indian Copyright Act 1957 (Copyright Act). On purchasing an NFT, the copyright in the NFT does not automatically transfer to the purchaser. Such rights can be transferred during the sale of NFT if the contract specifically contains a provision to this effect. In that view, trading of NFTs under contract would also fall under the purview of the Indian Contract Act 1872 and the Information and Technology Act 2000.
Furthermore in this context, it has been argued by some that NFTs are either derivatives or contracts. However, while the independent contractual aspect of NFTs has been discussed earlier in this paper, it is quite uncertain whether NFTs can be regarded as a contract in derivatives under Section 2(ac) (B) of the Securities Contract (Regulation) Act 1956 (SCR Act). Pursuant to Section 18A of the SCR Act, such contracts in derivatives must be traded on legally recognized stock exchange platforms to be considered legal and valid, which is not the case with the status of NFTs under the law. In any case, the latest development in the Finance Bill 2022 requires the taxation of the income earned from digital assets which include NFTs to be classified under the different categories of assets under the IT Act.
The subsequent part to this of this blog will aim to discuss the scope of NFT usage and the need for strengthening their regulation through the lens of their uses and possible implications therein in the real estate industry.