“Salvator Mundi” (Latin for “Saviour of the World”) holds the record of being the most expensive piece of art ever sold at a public auction. The portrait, made by the famous Leonardo da Vinci, depicts Jesus in an anachronistic blue Renaissance dress with a sign of a cross on one hand while a crystal ball is held on the other hand. The piece sold for a whopping $450 million to Prince Badr bin Abdullah bin Mohammed bin Farhan Al Saud, the Saudi Minister of Culture.
With the rise of digital assets like bitcoin and technologies such as the blockchain, art is no more the forte of a Picasso or a Vinci or a Michelangelo. Today art does not involve the intricate expression of Vinci or abstractions of Picasso or perfections of Michelangelo. In fact, the very definition of art has broadened to include graphics interchange format (GIFs), in-game assets, digital art, videos, baseball hits, etc. Unlike traditional art, these do not exist in physical form. And unlike the owner of “Salvator Mundi”, the art is not in the sole possession of the owner. In fact, the whole world can have access to the content in the same form and manner as the creator/owner of the art. These ultra-modern arts are called non-fungible token or NFT in short.
Someone might argue that “Salvator Mundi” is also accessible to everyone. Just like digital art, anyone can see it with a simple search on the web. Yet the fact remains that even though we can easily have a look at “Salvator Mundi” on our devices, the physical art remains in the possession of the owner and for the same reason the art commands the price it does. On the other hand, digital art does not exist in a physical form and the owner has the same visual experience as anyone else. And therefore, the big question that arises is why do digital art command such a high price?
To answer it in simple words, digital art is not simply an art, it is also an instrument for investment. Many people do not buy digital art only because they want to be ascribed as the owner of the art. They buy it because they believe that the art has the potential to be sold at a higher price in the future. In that sense, it is a tool for investment. Historically, investments have been done through shares, bonds, and debentures. You might also be familiar with what is called commodity (gold, silver, aluminum, copper, and more recently oil) and recently mutual funds have also become popular. But what has recently created a hullabaloo in the world of finances is cryptocurrency. Experts are still divided on how prudent it is to allow trade in cryptocurrency. Some countries have tried to contain and regulate cryptocurrency while others feel that cryptocurrency is the future. Digital art, or what is popularly known as non-fungible tokens (NFT) has its roots in cryptocurrency. Almost all NFTs today are bought and sold using cryptocurrency. Both cryptocurrency and NFTs share the same technology i.e., blockchain. Both cryptocurrency and NFTs differ in that cryptocurrency is fungible while NFTs are not. To be fungible means that it is exchangeable easily and has the same value as others (a 1$ bill is fungible because all 1$ bills have the same value). NFTs are not fungible since each piece of digital art is unique and cannot be easily traded for another piece of art.
NFTs took birth in 2014 but never attracted as much traction as it is attracting in the last two years. “Everydays: The First 5000 Days”, an NFT sold for a whopping $69 million. The NFT market is still nascent with a value of $2.5 billion but offers huge potential for growth. In the first quarter of 2021, the NFT market grew extraordinarily by 2100%. In fact, many investors believe that the NFT is the new oil just like bitcoin was a few years ago. While there are others who are much more skeptical about NFT and believe the major drawback of an NFT is its non-fungible nature which the proponents believe is the biggest advantage.
But how does NFT work in practice? Suppose an artist creates a video that he believes has the potential to be sold as an NFT. He lists the video on a cryptocurrency platform for others to have a look at. In a digital auction, someone buys the work for, let’s say $1 million. This money goes to the artists. Now, in the future, someone believes that art is much more valuable. Suppose he offers to pay $2 million to the original buyer and buys it. At this stage, the original creator also gets a certain percentage of the sell amount from the second purchase. For the original buyer, it is a sort of good investment. The second buyer buys it because he thinks that the price of the NFT might further increase in the future. In fact, this manner of functioning of NFT makes it akin to shares and other similar securities. But unlike a share where the underlying basis for the rise in price is the performance of the company, in an NFT the underlying fundamental premise is what is termed as the “Veblen effect”. Veblen effect is an abnormal economic situation where the rise in the price of a commodity does not lead to a fall in demand. In fact, the more the prize, the more prestigious the commodity and the more its demand. Thus, if an NFT becomes more popular it will attract more prizes. We can say that popularity is the sole criteria for the determination of the prize of an NFT.
Simple. Right? Even though the process sounds simple and plausible yet it raises a whole range of unanswered commercial, regulatory, legal, and ethical questions?
The most important and unclear area is the legal ramifications of NFT in India. There are some specific legal questions that arise in regard to the sale and purchase of NFTs in India:
- Is the buying and purchase of NFT legal in India?
- What is the legal validity of “smart contract” and whether they are opposed to the Copyright Act, 19575?
- What are the legal rights that are transferred from the owner of digital art to the purchaser of the NFT?
 Is the buying and purchase of NFT legal in India?
To understand the answer to the first question, we might, first of all, discuss the legality of cryptocurrency since NFT shares the same technology as a cryptocurrency (i.e., blockchain) and mostly NFTs are purchased with a cryptocurrency. Cryptocurrency has been in existence from the beginning of the last decade but the real debate on its legality began with an RBI Circular6, issued in the June of 2018 directing banks not to deal in cryptocurrencies. This order of the Central Bank was challenged in the Supreme Court in Internet and Mobile Assn. of India v. RBI7. It was argued in this case that cryptocurrencies were legal traders because the right to trade is a fundamental right under Article 19(1)(f)8 of the Constitution of India. Even though reasonable restrictions could be imposed upon this right, it was held that the action taken to regulate cryptocurrency was not proportionate to the risks posed. From this, we can infer that the Court did not believe that trading in cryptocurrency fell within the restriction imposed on the right to trade. Since NFTs are bought and sold using cryptocurrency, the legality of the cryptocurrency should be upheld for NFTs to be legal.
On the question of whether cryptocurrency would qualify to be a currency, the Court held that they were neither traditional currency nor can we conclude that they are not currencies in “some special circumstance”. The Court denied accepting them as commodities which was the contention of the respondent. As far as NFTs are concerned, whether they are commodities or currency or security is currently not clear. From their nature (that they are non-fungible), we can conclude that they are not currency. But whether they are commodities or security is somewhat debated. The writers here believe that they should be categorised as commodities. Though there is an element of trading with NFTs, they might still be owned and exchanged. Just like land which is generally owned but can also be traded for making some profit.
Shortly after this judgment, the Government decided to form a panel of experts to regulate the cryptocurrency market in India. Recent updates from the panel have indicated that the Government is not in favour of allowing foreign cryptocurrency to operate in India and instead is contemplating on issuing a cryptocurrency regulated by the Reserve Bank of India (RBI). If this would indeed be the case, then cryptocurrencies like bitcoin would become illegal and the sale/purchase of the same would be restricted to that extent. To sum up, we do not know the exact legal status of cryptocurrency in India. Though it is being traded and the Government also deducting taxes for the same, the future stance of the Government is unclear. Similarly, we do not know the exact position of NFTs in India. Very recently, WazirX started an online marketplace for NFTs in India and the same has been functioning without any obstructions. But how the Government, the RBI, and the Securities and Exchange Board of India (SEBI) takes the issue will determine the ultimate faith of NFTs in India.
 What is the legal validity of “smart contract” and whether they are opposed to the Copyright Act, 1957?
The second important issue is that of copyright-related laws. The Copyright Act, 1957 is the premier legislation on the issue of copyrights in India. Under Section 139 of the said Act, the copyright will exist in the following works:
(a) original literary, dramatic, musical, and artistic works;
(b) cinematograph films; and
(c) sound recording.
Can we construe from the above categories of copyrighted work that NFT might qualify as a work that can be copyrighted in India? Even though we might say that a video clip or a sound recording might qualify as a work that can be copyrighted under the meaning of this Act, what about a GIF or for that matter a picture or a tweet? If we go strictly by the Copyright Act, a tweet or a GIF might not qualify as a work capable of being copyrighted. Then how would a creator of a NFT claim copyright to his work? At present, it seems that all NFTs might not qualify to be eligible for copyright. Thus, there is a need to expand the purview the scope of works that can be copyrighted under the Indian jurisprudence.
 What are the legal rights that are transferred from the owner of a digital art to the purchaser of the NFT?
But even if, for the time being, we assume that the NFT is eligible for copyright under the Indian law (let’s say an amendment is brought to that effect) what are the rights that the creator transfers to the first buyer of his NFT? Obviously, the law is not clear on this but from foreign experience, it seems that the creator of an NFT does not transfer all his rights in the work. Largely the questions of what rights are transferred and what rights are held are decided by what has been termed as a “smart contract”. These contracts are framed by the platform itself and typically transfer many rights to the purchaser but the original creator is always the maker of the NFT. Some trading platforms claim that the copyright rests in the company and the creator of the NFT has no right whatsoever in the NFT after the sale of the same. Since the NFT market is at a very nascent stage in India, we do not know exactly what rights does the creator transfer to the buyer. But it seems that transfer of complete ownership, unlike in many western countries, might not be a problem from the point of view of the Copyright Act. Section 1710 of the Copyright Act provides that if the creator of a copyrighted work so wish he can transfer all his rights in the work to the buyer of the work. Should the NFT platform require the complete transfer of the copyrights, it might be possible to do so.
For Instance, WazirX, India’s first NFT marketplace, under its terms and conditions has given complete ownership rights to the creators of NFT. When someone buys the NFT, they are given complete ownership of the NFT. The owners have “a worldwide, perpetual, exclusive, transferable, licence to use, copy, and display”. But ostensibly, the platform permits the selling of the NFT only of its platform.
But whatever the future of NFTs, at present, in India and abroad, the NFTs are sold through “smart contract”. “Smart contracts” are nothing but a predefined contract, usually drafted by the platform itself, which is accepted by both the parties for the sale and purchase of the NFT.
NFTs are a new area and are rapidly expanding. Just like other technological growth, it has created new unanswered questions. It will take some time before these issues are clarified either by the courts or through legislation. For now, there is limited clarity on NFTs.
† 3rd semester student, National Law University, Odisha.
†† 3rd semester student, National Law University, Odisha.
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 Thanawala, H., Explained: After Bitcoin and other Cryptos, Now Comes NFT, Moneycontrol (14-6-2021).
 What is the Difference between NFTs, Cryptocurrency and Digital Currency? NDTV (1-9-2021).
 Kastrenakes, J., Beeple Sold an NFT for $69 Million, The Verge (11-3-2021).
6 Nair,V., RBI Bans Regulated Entities From Dealing in Virtual Currencies, Bloomberg Quint (5-4-2018).