Million Dollar Meme: Non-Fungible Tokens and their Regulation


            A non-fungible token (NFT) refers to a unique and non-replicable entry on a cryptographic blockchain ledger that points to the metadata of a particular digital item on the web,[1] and is the newest mysterious entity to pop out of the complex world of financial technology. The idea of fungibility, however, and thus, the notion of non-fungibility practically creaks with age. The Roman system of private law distinguished between res fungibiles and res nec fungibiles[2]. Res fungibiles translates to fungible (interchangeable) things, while res nec fungibiles translates to the very opposite, that is, items that are not interchangeable. Key to the distinction, in both the modern world and in the sphere of Roman law is that uniqueness confers additional value to an item. Fungibles are fairly common – if one exchange one $10 note for another, there is no change in the amount of cash one holds. Similarly, cryptocurrencies are fungible as well – one bitcoin is interchangeable with another without any change in the value or utility derived. Conversely, one pink diamond may not be interchangeable with the other due to differing cuts and crystal structures – diamonds are non-fungible. A further layer of complexity to the idea of fungibility is the operation of NFTs entirely in the digital sphere. Here, the article first considers, in Section II the technological underpinnings of NFTs, as understanding their technological nature is key to how we understand them via a legal prism. In Section III, it goes over the modern application of NFTs as digital collectibles before addressing questions about ownership and rights in Section IV. This work then devotes itself to constructing a legal understanding of NFTs in the Indian context by considering various areas of law that different stakeholders from artists to governments to NFT marketplaces might find useful and interesting. In order to ascertain their precise legal nature, the article analyses their treatment in the USA and UK to develop an understanding of what NFTs should be considered under law in Section V. The USA and UK are then used as examples of jurisdictions which have partly (though by no means fully) addressed the copyright (Section VI), tax (Section VII) and adherence to financial regulations aspects of NFTs (Section VIII), and use their example to consider how India may deal with the challenges NFTs throw in these areas. This work also briefly considers what ought to be done if an NFT is lost or deleted in Section IX before tying the threads together in the concluding section, Section X. In sum, NFTs require a new regulatory architecture to be appropriately dealt with in the Indian context and attempt to highlight key areas of law for regulators and interested parties to consider. In stating the case for reasonable regulation, this article advances the thesis that NFTs, while raising some concerns, can prove to be perfectly benign if regulated appropriately, keeping the interests of all stakeholders, from exchanges to buyers to artists to the state in mind.

 The technology behind NFTs

            NFTs and cryptocurrencies are often lumped together. In part, this is because both are revolutionising our conception of financial markets and of the role technology has to play in them. However, they also share a deeper connection at the scientific level – they are both based, at their core, on blockchain technology. Without entering into unnecessary technical discussion, a blockchain is a digital, additive ledger[3]. It is a means of storing data in a decentralised manner that also prevents deletions or modifications to previous entries. The data is duplicated and distributed across all network participants. The NFT is stored on a blockchain, which is a system of “nodes” (the computers on which the blockchain exists), which are spread all over the world and the entry exists on all of them. Every piece of data is stored in sequential batches which are referred to as blocks[4]. Once a block is filled i.e., reaches its storage capacity, fresh data is entered into a new block which is then connected or chained to the previous block. Once information is recorded it is safe and secure as each block has its own fingerprint or hash and each block also stores the hash of the previous block. All records are also individually transcribed and time stamped. An additional layer of security is provided by combining two hashes into a single hash. The process is repeated several times so that ultimately there is only one hash for the entire set of blocks (the root hash or the Merkle root – the whole data structure being referred to as the Merkle tree)[5]. Changing data in any previous block will change its hash as well as the hash of all subsequent blocks. As the full record of all data stored on the blockchain is available on all computers on the network (nodes), hacking or changing the recorded information is almost impossible as such a change will not go unnoticed and will be rejected. Of course, a hack is technically feasible if a majority of the blockchain is altered, but the massive amount of data and decentralised nature of the blockchain make this expensive and currently extremely difficult[6].

            Importantly, blockchain technology, due to its secure nature and fingerprinting (unique identifier) function, provides a means of storing multifarious items of data in an efficient way. Initially used to store cryptocurrency transaction history, it quickly came to store information relating to diamonds for the DeBeers group[7], smart contracts[8] and even election data in Sierra Leone[9]. The link from blockchains to NFTs, however, comes courtesy of that most human of acts, collecting.

NFTs as digital collectibles

            People collect everything, barbie dolls, coins, stamps, ancient weapons, autographs, sports memorabilia, paintings and more. With the impact of the information technology revolution on our lives, it is only natural that soon enough, people would begin to collect digital items too.

            There is only one Mona Lisa in the world, and it is in the collection of the Louvre in Paris. You may only see the physical painting at the Louvre. However, anyone may, at any time and from anywhere view a tweet, an image or a meme on the internet. But how does one collect a digital item that anyone can view? Enter the NFT. The NFT serves as a unique certificate minted on the blockchain that proves ownership of a digital item[10]. Each digital item on the internet is linked to a particular URL (Uniform Resource Locator) with a unique metadata. As a traditional URL may break down, or face hosting problems, NFTs are increasingly turning to the IPFS (InterPlanetary File System)[11] where a number of hosts ensure that the digital files remain online. The NFT is coded to this (publicly available) metadata, and also contains details about the transaction history[12]. In its current avatar, an NFT may be linked to some item on the internet, usually digital art, but also non-art collectibles like tweets. In this sense, NFTs are analogous to the title deed to a piece of real estate. However, unlike land documents that are often intractable, difficult to verify and may be forged, NFTs are easier to verify, and importantly, are nigh upon impossible to duplicate or forge, making them highly secure. The embarrassing issue of fakes in high end collections (in everything to art to spirits to antiques) is unlikely to raise its ugly head in the land of digital collectibles because NFTs link to the metadata, which is both easily verifiable and non-editable. Therefore, they provide a convenient and suitable means of “owning” a digital collectible: the purchaser of the relevant NFT possesses, in essence, a token that serves as evidence that they “own” the piece of digital work[13] – much as the French Republic owns the Mona Lisa or a private collector owns a valuable, one-of-a-kind stamp. The difference, of course, is that the private collector is the only person who can enjoy her stamp in all its glory whereas anyone can download a piece of digital art, tweet or indeed any other URL. Importantly, the NFT only holds value if the link from the entry on the blockchain sold (the NFT) to the digital collectible is whole and undamaged. If the digital collectible in question no longer exists at the given URL, or is no longer stored on the IPFS then the NFT indicates ownership of the metadata to a file that no longer exists – it is without meaning.

            Like so many recent innovations that took, and are taking, investors by storm, NFTs too germinated from the humble meme. From Coloured Coins in 2012 (not quite NFTs) to Rare Pepes on Counterparty in 2016, NFTs began to gain real traction with CryptoKitties (online, collectible digital cats) in late 2017[14]. From these humble beginnings on esoteric corners of the internet, some NFTs are now selling for eye-watering amounts – the NFT corresponding to Jack Dorsey’s first ever tweet (and thus the first ever tweet on twitter) sold for nearly 3 million US dollars[15], the artiste Grimes sold works of digital art for approximately 6 million US dollars[16], and Christie’s auctioned the NFT for some of Beeple’s work for a truly staggering 69.3 million US dollars[17]. Of course, it is not all smooth sailing – some liken NFTs to a speculative bubble[18] in the style of the Dutch tulip mania, others note that a NFT must be maintained – it is worthless if the URL it points to is broken or it is not hosted anywhere on the IPFS network.

            Nevertheless, NFTs raise important legal questions about regulation, copyrights, taxation and more, and as platforms to trade NFTs proliferate and NFTs themselves become more and more mainstream, it is essential to think about how law and policy should respond to this new dimension of collecting and the new paradigm of ownership it creates.

NFTs: Ownership and rights

            An NFT, as defined above, is a token created on the blockchain that records ownership of a particular digital object. However, its legal standing is somewhat more complicated. Understanding their legal standing and nature, and in particular the rights they confer unto their owner, is of prime importance in dealing with issues like copyright and taxation. The newness of NFTs and the complex nature of financial and regulatory law means that there is little clarity. The issue is further complicated by the fact that ownership of an NFT does not confer a distinctive and set group of rights[19]: what rights the purchase of a particular NFT grants depends upon the underlying smart contract. Thus, buying an NFT of a work of digital art may only grant the owner limited rights such as the right to non-commercial uses. In many cases, the owner of the digital asset might be entitled to royalties on all future sales. Most NFT sales only convey a licence.[20] For copyright and commercial use, separate contracts will have to be entered into. Essentially, there are three issues that arise in the context of NFT ownership, which this work will touch upon in order: first, that the rights so conferred are not fixed and depend upon the underlying contract, second that a sale of an NFT is the sale of an entry on a blockchain additive ledger and not necessarily the work itself and third, that an NFT may be created by anyone (not necessarily the creator of the digital work).

            Therefore, it is imperative that the buyer of an NFT must be mindful and aware of the terms and conditions of purchase, because different NFTs confer different rights, for example, some might provide for the transfer of intellectual property rights if the copyright owner so provides[21], while others may not. The NBA top shot prohibits commercialisation of the purchased material (Moments). The owner of the NFT is not permitted to trade mark, copyright, or otherwise acquire additional intellectual property rights[22]. What is granted is a worldwide, non-exclusive, non-transferable, royalty-free licence to use, copy and display the art for the purchased moments for personal, non-commercial use. The purchased moment can be further sold, swapped or given away[23]. Therefore, as ownership of an NFT does not provide for a certain defined distinct set of rights to be transferred, regulations made must be cautious of this unique feature of ownership in NFTs, bearing in mind the difference between this and other forms of ownership which do provide a distinct set of rights, for example, land ownership.

            Ultimately an NFT is only a digital entry pointing at the metadata which records the details of the digital asset. There is no restriction on the public at large to view the creative work. Owning an NFT does not place a restriction on who can see, print, screenshot or even download the work, nor does it mean owning the digital asset to which the NFT points to[24]. The owner of the NFT pointing to Jack Dorsey’s first ever tweet owns a digital certificate in the form of an NFT. The tweet still remains in servers owned by Twitter and is owned by the owner of the particular Twitter account – in this case Jack Dorsey. The digital asset creator can create more than one copy of the same digital art, and thus more than one NFT[25]. The NFT is not the actual tweet or image but metadata – an entry on the blockchain, that points to the tweet or art. However, this is not always the case, as sometimes the artist may upload a copy of the artwork itself on the blockchain which results in the uploaded artwork being sold. Comprehensive ownership rights are sometimes, but not always, part of the NFT traded.

            Importantly, NFTs, which are generated via technology, require no assent from the owner or creator of the digital artefact to produce. Several artists are reporting their works being sold as NFTs without their permission[26]. There are reports of public works such as paintings by acclaimed masters being tokenised in the form of NFTs[27], showing how widespread they have become. NFTs can be created by anyone of anything, as the issue of ownership does not arise during the creation process. Currently, there is no insurance policy which covers the risk involved. The only consolation is that an NFT not verified by the artist is not worth much. Although some trading platforms have tightened regulations, this is by no means a standard practice[28]. This makes NFTs different from other classes of assets, where ownership and property rights are key issues – the shares of a company may only be initially issued by the company itself, but an NFT may be created by anyone, even someone the artist does not know. This can create a problematic situation in terms of ownership, wherein a buyer who purchases an NFT in good faith might have bought an NFT created without the artist’s or copyright owner’s permission.

            Indeed, the decentralised nature of NFT marketplaces means that different NFT trading platforms have wildly different policies, with some introducing significant checks and others being a free-for-all[29]. As an example, Nifty Gateway tends to focus on, and checks for work by relatively high-profile individuals while Rarible is far less selective and has fewer checks[30]. Regulators must thus strike the fine balance between protecting the rights of all concerned whilst not smothering the operation of NFT marketplaces in red tape. Importantly, red tape and bureaucratic checks in emerging areas can be based in conceptions that are somewhat outdated with respect to the interaction between technology, finance and cryptographic assets[31]. Equally, care must be taken to avoid vitiating the rights of artists, and to include a system of regulation to minimise any incidence of fraud or hacks, considering that KYC (Know Your Customer) processes may be insufficient to address irreversible transfers in the event of account takeovers[32].

A possible legal classification of NFTs

            At present, there is no Government guidance (be it an act or a notification) on the treatment of a NFT, and speculating about what the Government might or might not do, and what rules it could theoretically bring is a futile exercise. However, the issue is of fundamental importance. Over the last few months, there has been a phenomenal increase in the coverage and recognition of NFTs as a tradable commodity[33]. Niche marketplaces are cropping up dealing exclusively with the sale of NFTs. Recently, ebay[34] has decided to allow the sale of NFTs on its platform. In India certain marketplaces exclusively for Indian NFTs are being built by cryptocurrency exchanges such as WazirX[35] and BuyUcoin[36]. Therefore, it is necessary for the Union to have some form of policy on the matter.  As in every such scenario the options, with respect to the NFT market available to the Government are:

  1. ban trading in NFTs altogether;
  2. let the market regulate itself;
  3. amend the existing framework so as to regulate the NFT market; or
  4. develop an entirely new regulatory framework specific to NFTs.

            As of today, there has been no statement expressly stating the intention of the Government as far as NFTs are concerned. As and when the position with regard to cryptocurrencies becomes clear (there is not, currently, a law on the statute books), the Government would also be required to make a decision as to the creation and trading of NFTs in India.

            The concerns of the Government as expressed in the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 are not applicable in the case of NFTs. NFTs are fundamentally different from cryptocurrencies – NFTs are, definitionally, non-fungible and cryptocurrencies are fungible. There is no similarity between the two, other than the reliance on blockchain technology and the fact that both operate in the digital sphere. Furthermore, as NFT trading runs on crypto internet markets and there is no centralised control, making the activity unlawful will only drive the market underground or to offshore marketplaces, as has taken place for other cryptoassets[37]. Therefore, a ban would not be effective, as there exist a number of ways of getting around any such legislation without the authorities finding out, due to how difficult a ban might be to enforce, in part because NFT marketplaces use cryptocurrency to trade, and banning cryptocurrency is implausible.[38]. In addition, a ban may be actively harmful because encouraging this market to move underground would create an additional outlet for financial crime, or financing crime.

            Moreover, while the rights of the buyer are built into the marketplace, it is unlikely that each and every auction site/marketplace has a formal or structured mechanism for handling consumer disputes/grievances, especially as NFTs begin to be created on blockchains other than Ethereum[39]. The operational and technical standards, the duties of the seller or the marketplace will vary across marketplaces. The rules and regulations private marketplaces set would, in most instances, simply not be enough.

            Some argue that treating NFTs as derivatives[40] could help in developing a regulatory framework within the existing rules and regulations. The Securities Contracts (Regulation) Act, 1956[41] provides for recognised stock exchanges to be established that regulate and control contracts for or relating to purchase and sale of securities. The term “securities” includes “derivative”. This Act defines a derivative as follows in Section 2(ac):

  1. a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security;
  2. a contract which derives its value from the prices, or index of prices, of underlying securities;
  3. commodity derivatives; and
  4. such other instruments as may be declared by the Central Government to be derivatives42

            The primary, apparent issue is that the value of the derivative is determined from the value of certain financial assets, whereas a NFT is a non-financial asset. Therefore, it is difficult to see NFTs as fitting into categories defined by (A) and (B). A commodity derivative, as in (C), is based on primary products like gold, crude oil and soybean – certainly not digital art. This is because one piece of digital art substantially differs from another and SEBI (The Securities and Exchange Board of India) considers commodities to be both fungible and tangible43, which is not the case here. There is no question of defining NFTs as commodity derivatives because the digital work itself does not count as a commodity, due to its intangible nature.

            A monetary contract between two parties which can be traded and settled is a financial instrument. The Central Government may class NFTs as derivatives using the powers under Section 2(ac)(D) thereby paving the way of NFT trading through recognised stock exchanges with SEBI acting as the regulator. Here, however, a fundamental mismatch between the nature of stock exchanges and NFTs emerges as the former trades in fungibles and the latter in non-fungibles.  Shares of a particular company, even if listed on multiple exchanges, are interchangeable with each other. All the listed shares of a company have the same value. An investor looking to buy a single particular share can purchase a share from any of the many sellers in the market. An investor wishing to buy shares worth 10,000 rupees in a company could be handed any of the shares in that firm to the value of 10,000 rupees. Moreover, the number of shares issued by any company are fixed. The companies themselves are subject to regulations.

            On the other hand, each NFT is unique. Someone wishing to buy a particular NFT could only acquire it if the current owner is willing to sell. This is not the case with all other securities, as these are fungible in nature. For example, shares of a given firm may be acquired from any seller in the secondary market, and there is no difference between the shares bought from two sellers. However, there is only one owner of a given NFT, and as NFTs are unique, they are not suitable to be traded on such an exchange, as stock exchanges trade in fungible shares. Trading occurs assuming that each unit of a particular item traded is identical: that is, two entities can exchange shares worth a certain amount and see no real change in the assets they hold. This is not the case with NFTs as each NFT has unique characteristics and thus is not perfectly substitutable for another. Moreover, the number of NFTs that can be generated is massive and may be practically impossible to keep track of.

            In addition, there is only one original issuer of shares in a company, but while a given digital asset can only correspond to a unique NFT, there are dozens of actors, any one of which could create the NFT for a given digital asset. The nature of an NFT: the fact that it is a unique token representing the metadata of a digital collectible on the blockchain – makes it less suitable for trading on an existing stock exchange bourse, as noted above. Also, there is no real asset backing an NFT – unlike in the case of shares and traditional derivatives. This is because the digital collectible in question may be enjoyed by others (so long as it is hosted on the internet), and acquisition of the NFT may or may not indicate the transfer of additional rights, depending on the smart contract. The conceptual basis of a derivative indicates that its value arises from some real asset, and it is not clear what, if any asset lies behind the NFT – digital art may still be enjoyed by all on the internet, generating utility for them, and (as in the case of NBA moments) owning an NFT does not guarantee any commercial rights to the underlying digital collectible44. After all, all an NFT really is an entry on the blockchain, and its sale is the sale of an entry on a digital ledger. As such, considering the limited scope of rights available, it is not credible to argue that NFTs count as derivatives.

            For these reasons, it cannot be considered appropriate to define an NFT as a derivative in India. Therefore, even if NFTs are somehow brought under the definition of “derivatives” for regulation purposes the existing stock exchange framework will still need to be revamped and separate infrastructure and rules will have to be created to facilitate such trading. Therefore, the third option, like the first and second, is no option at all.

            A better alternative would be to develop an entirely new regulatory framework specific to NFTs. Importantly, a part of the problem in arriving at a set definition, and hence a cogent regulatory framework for NFTs and their trading is that while they are currently used to trade digital collectibles, they have a vast field of potential applications such as real estate45, which could create complications in years to come, as applications diversify. Moreover, their grey area status between commodity and security poses further issues and demands a more thorough scrutiny by institutions in order to create a legal definition that fits neatly within the current framework. As such, it is instructive to evaluate how other jurisdictions, here, the United Kingdom (UK) and the United States of America (USA) have attempted to deal with defining NFTs in legal terms before arriving at a conclusion about how India ought to define, and hence administer NFTs.

(a) NFTs in the USA

            In the USA, NFTs may be treated as commodities or as securities depending on, amongst other factors, whether they are marketed as collectibles or as an investment opportunity with the promise of profits. In the first case, NFTs could be considered commodities under Section 1(a)(9) of the Commodities Exchange Act46 (CEA):

“… and all services, rights, and interests (except motion picture box office receipts, or any index, measure, value or data related to such receipts) in which contracts for future delivery are presently or in the future dealt in.”

            Here, as an NFT could be considered property (in the sense that it proves ownership if made out correctly) and thus confers some rights, it could be considered as a commodity under the remit of the Act. The Commodity Futures Trading Commission (CFTC) that regulates the USA’s bitcoin and ether markets define cryptocurrencies as commodities and could also potentially regulate NFTs, as they are similar in the sense that both cryptocurrencies and NFTs use blockchain technology to be bought, sold and held47.

            The US Supreme Court in Securities and Exchange Commission v. W.J. Howey Co.48  provided a four-part test for a security – “The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others.” However, mere appreciation due to market forces does not result in an asset being classified as security. The underlying qualification is the efforts of others.

            In 2019, the SEC released a framework49 analysing the application of Howey50 and subsequent case law to digital assets. This framework, keeping in mind that the test specified is fact-based lays down scenarios wherein the SEC is likely to see the prongs of the test satisfied. In particular, it finds that, while the first two prongs (an investment of money and a common enterprise) generally exist, the test tends to be fulfilled when purchasers reasonably expect to derive a profit from the efforts of others. NFTs may well be marketed as a security if they were sold with the expectation of the buyer making, as a result of the effort of others, a profit. This is presently unlikely in the application of NFTs as “deeds” to digital art.

            However, the issue is further complicated because the purchase of an NFT may also provide additional rights beyond the licence mentioned in the previous section. For example, an NFT may be considered a security when, as part of the underlying smart contract, or as part of the sale, the issuer has rights to a royalty in perpetuity51, as this would make the particular NFT similar to a security under the test in Howey52. On the other hand, if fluctuations in the value of an NFT are largely due to the operation of market forces, as opposed to the efforts of others, the test is unlikely to be satisfied. Decisions in the aftermath of Howey53, notably Gary Plastic Packaging Corpn. v. Merrill Lynch, Pierce, Fenner and Smith Inc.54 further note that a non-security asset may be treated as a security when the marketing of the asset is such that it permits investors to make a profit, and when such a profit is made via the effort of others55.

            A recent trend to allow fractional ownership of NFTs as available on platforms like NIFTEX and NFTX leads to fungibility amongst such f-NFTs (shards: fractions of an existing NFT) as each f-NFT of a particular digital asset is interchangeable with the other. In this case, small investors come together to buy an NFT – each owns a certain percentage. Owners can break their NFTs on some trading platforms and the fractions can then be traded56. These shards can then be traded on the market, and investors expect a gain. Such transactions raise the question of market transactions in f-NFTs qualifying as an investment contract under the Howey57 test as laid down by the US Supreme Court and therefore being classified as securities.

             F-NFTs could also be thought of as securities under the Howey58 test provided f-NFTs are sold to the general public with the promise of returns, or if the issuer provides services to increase the value of the f-NFT or influences the secondary market. The investors themselves did not generate either the f-NFT or the work it proves ownership of. Therefore, f-NFTs traded on markets could easily be classed as securities, as distinct from full NFTs bought at auctions or by other means which are closer in nature to property (collectibles). The reality of f-NFT trading shows this to be the case, meaning that SEC (Securities and Exchange Commission) regulations could come into the picture. Indeed, SEC Commissioner Hester Pierce warned creators and promoters of f-NFTs to be careful, lest they create a security59.

            It is essential to note that Howey60 is an old case, the original relating to the existence of an investment contract in the context of citrus groves in Florida. The test has since been extrapolated to all manners of financial instruments, and in the process has become a mainstay of the legal analysis of securities. Nevertheless, the complexity and diversity of NFTs and the smart contracts behind them means that Howey61 is only applicable after an exhaustive review of the facts, and even then on a case-by-case basis. This further complicates the classification of NFTs because NFTs may simultaneously be marketed as both an investment to make a profit from, and as a collectible. There being no standardised rights transferred on purchase, and the efforts of others playing a role of variable magnitude and importance in the value of each NFT, an analysis of NFTs under Howey62  is hardly generalisable. As such, while Howey63 remains a valuable test for courts and authorities, it, and its successors are not fully sufficient to form a basis for an entire regulatory architecture surrounding NFTs, particularly in a sector which is still in a rapid state of flux, and when they were based in facts and times so different from the context of NFTs. The same has been acknowledged by SEC Commissioner Hester Pierce, who notes that the basic logic of Howey64 does not apply in the same way to digital assets65.

            As such, it is important to note that even in the USA, there currently exists only partial clarity on the legal status and treatment of NFTs: in April 2021, a prominent figure in the realm of financial technology, Arkonis Capital CEO Vincent R. Molinari wrote to the SEC66, requesting clarification on the treatment of NFTs, particularly relating to whether they are securities or not. Moreover, there is a lawsuit presently before the Supreme Court for the State of New York67 (Jeeun Friel v. Dapper Labs Inc), the decision in which is (at the time of writing) forthcoming, which should hopefully provide additional clarity on the US position.

            While the methodology adopted by the USA is valuable in considering how NFTs may, or ought to be treated in India, it is by no means complete. Transposing the American regulatory framework wholesale to India would create its own set of issues, not the least of which is the fact that India lacks a body which is as empowered, or which has a mandate as wide-ranging as that of the SEC, and the wholesale implementation of the US modus operandi is unlikely to fit into structural features of the Indian legal and regulatory landscape. Moreover, the American method seems to be based on a case-by-case assessment of facts, which is hardly conducive to a sound and generalisable regulatory framework, which India does require if it wishes to control and make use of NFTs and related developments in cryptographic assets. The utility of the US method is further undermined by several investors in the USA who have noted the need for clear guidance69. There is further uncertainty created because US institutions are not entirely clear on if Howey70 will apply to NFTs, and the overarching tone seems to be one of requiring clarifications71. As such, despite Howey72 itself finding some application in Indian courts, with the Allahabad High Court holding in Paramount Bio-Tech Industries Ltd. v. Union of India73 that the test in Howey74 would be applicable in India, it does not provide a sufficient amount of scaffolding to a framework on NFTs to be treated as a starting point. Therefore, the US method is not suitable for adaptation to the Indian context.

(b) NFTs in the UK

            The United Kingdom, meanwhile, deals with NFTs under its broader architecture relating to crypto assets. It classes tokens under two broad heads: regulated (by the UK Financial Conduct Authority) and “unregulated” tokens. Regulated tokens (security tokens and e-money) are defined as below, and all other tokens fall in the unregulated category:

(i) Security tokens: These are tokens that amount to a “specified investment” under the Financial Services and Markets Act, 2000 (Regulated Activities) Order, 2001 (RAO), excluding e-money. These may provide rights such as ownership, repayment of a specific sum of money, or entitlement to a share in future profits. They may also be transferable securities or other financial instrument under the EU’s Markets in Financial Instruments Directive II (MiFID II). These tokens are likely to be inside the FCA’s regulatory perimeter.

(ii) E-money tokens: These are tokens that meet the definition of e-money under the Electronic Money Regulations (EMRs). These tokens fall within regulation75.

            As such, NFTs are unlikely to count as e-money, because e-money, being money, is, by definition fungible, and NFTs are not. As far as security tokens are concerned, NFTs may fit into this category and thus fall into the FCA’s ambit when they share key characteristics with one of the categories of contracts of insurance in the FCA handbook, including shares and securities76. NFTs are unlikely to fulfil this criterion unless they have particular special provisions in their smart contracts (though such NFTs are not the most common) or they are f-NFTs, as these are fungible shards, numbering in the thousands77 and are traded with the aim of making a profit. The UK Government notes that the FCA’s scrutiny is not as necessary for NFTs, since the value of an NFT is dependent upon the satisfaction it grants unto the owner and the peculiar characteristics of each NFT78. As such, NFTs require less scrutiny than fungible cryptoassets which raise consumer protection issues, as these are expected to be both relatively stable in value and easy to sell79.  The UK Government analysis here holds substantial water as NFTs, while raising new issues in their own right, are all distinct and so not used as cryptocurrency or stablecoins, which raise more regulatory concerns. However, as the use cases of NFTs diversify, it is likely that they will require more scrutiny, particularly as they become more mainstream, and may raise concerns depending on the rules concerning the marketing of utility and exchange tokens80. NFTs are also likely to require more regulation when they acquire more and more security-type characteristics81.

            As a result of the UK’s classification of tokens, the UK framework seems to be more generalisable than the test in Howey82 that forms the basis of the American framework and lays down clearer analytical rules more suited to the digital age. Indeed, it expressly acknowledges the non-fungibility and the uniqueness of NFTs, and makes this a key differentiating criterion in setting rules, rendering the framework more sound. Therefore, this framework is suitable for adaptation in India as far as NFTs are concerned. That is, NFTs, unless linked to a smart contract which provides the owner a certain yield (for example, a percentage of all royalties) ought not to be regulated as security-type assets, while f-NFTs ought to be. Other cryptoassets, such as cryptocurrencies might raise concerns unique to the Indian context which are beyond the scope of this paper, but the UK framework seems sound enough to form the scaffolding for India’s regime on NFTs. This is because it does not rely on any one institution having excessively broad powers, and because it sets forward generalised definitions which have a reasoned nexus in the nature of the cryptoassets they govern. The definitions seem broad enough and general enough to make clear the extent of regulation that any new and developing cryptoasset would face, which is essential in such a rapidly changing frontier of technology. However, because NFT regulation does not seem to slot neatly into the business of existing regulatory authorities and boards, which have clearly defined statutory mandates and exhaustive duties, and thus recommend the establishment of a new body responsible for regulating NFTs and practices relating to them. In particular, this body ought to scrutinise the trading and creation of NFTs which are closer in nature to securities than to collectibles (including f-NFTs), and consider new developments in this emerging field.


            As far as the copyright is concerned, as discussed, owning an NFT does not imply that all intellectual property rights stand transferred to the buyer. NFTs can be created without permissions from the owners or infringe copyrights83; NFTs can infringe upon copyrights even when created with the owner’s consent, depending on the owner’s relationship with the artist. The issue of intellectual property rights in the NFT context is particularly vexed because most NFTs traded today concern some creative work, some intellectual property. However, as discussed previously, decentralised and practically unregulated NFT market places are open to malpractices, or at the very least going against the “moral right of attribution”84 by hosting NFTs created without the permission of the artiste(s) who created the digital collectible. On the face of it, copyright law in the USA, UK and in India is well developed, and is empowered to protect the artiste(s) behind the digital collectible whose metadata is linked to the NFT.

            In the USA, the Digital Millennium Copyright Act (DMCA)85 which amended the US Copyright Law provides for legal protection against unauthorised access to copyright owners and makes it unlawful to provide false copyright management information. Section 512 of the Copyright Act86 enables copyright owners to have infringing material removed and shields online service providers from liability. Using the notice and takedown system the copyright owner can make a request to an online service provider to remove material that infringes their copyright-protected work. Section 1201 of the Digital Millennium Copyright Act of 1998 prohibits circumventing technological protection measures used by copyright owners to control access to their works and Section 1202 makes it unlawful to provide or distribute false copyright management information. Similarly, copyright laws in India and the UK protect the intellectual property rights of the content creator [or the owner(s) of the copyright]. Similarly, the UK Copyright, Designs and Patents Act, 198887 gives creators the right to control, per the UK copyright service “broadcast and public performance, copying, adapting, issuing, renting and lending copies to the public”88. In India, Section 14 of the Copyright Act, 195789 provides the creator with a bundle of rights, including the right to adapt or reproduce their work, and this provision, in effect, acts to prevent reproductions of work without the copyright-holder’s permission. Prima facie, the laws in all three jurisdictions seem sufficient to protect the creator’s moral right of attribution, and to protect them against copyright infringement.

            However, these are, in their present form, insufficient for the NFT age. Recently, an artist filed legal notices with NFT marketplace OpenSea after an NFT of her work was created and listed on the site without her permission, calling it “insane and pointless copyright infringement”90. The NFT was delisted, although it is unclear whether OpenSea did so to avoid adverse publicity, to avoid litigation or for other purposes. However, the point in law is not, as the artist would have us believe, a straightforward issue of copyright violation. It is important to realise that the sale of the NFT is not the sale of the digital work itself but rather the sale of an entry on the blockchain, where the entry points to the metadata of a given URL or file stored on the IPFS system. The metadata is a technological artefact, and a piece of data. Therefore, it falls outside the domain of copyright. Therefore, the sale of a unique token representing the metadata corresponding to a digital file is no infringement of copyright at all. The NFT may thus be minted and sold without the content creator’s permission or their knowledge. What is protected by copyright law, however, is the use of the content itself, and thus if the image or digital file is used sans authorisation on an NFT marketplace, a takedown notice may be issued.

            Another, related issue that arises is that of copy fraud, wherein NFT minters pass off acclaimed works of art in the public domain as items to which they claim to own the copyright to91. Once again, it is essential to note that not all minters of NFTs linked to images of works in the public domain are committing copy fraud. A notable example is the collective GAM minting NFTs of notable works in the Rijksmuseum in Amsterdam as a “social experiment”. Since GAM did not claim to own the copyright to these public domain works, they had not committed any copyfraud92.

            Nevertheless, the present state of events is far from satisfactory. Owing to the lack of standardised rules between numerous marketplaces, artists may wait months, even years to find out that an NFT of their digital work has been created93. As such, the most common technical standard for minting NFTs is ER-721, on the Ethereum blockchain, which sets out the minimum requirement as “a smart contract must implement/contain to allow unique tokens to be managed, owned, and traded”94. Note that there is no requirement at this stage for tokens to have been created while respecting the moral rights of content creators. Indeed, anonymity features of the blockchain can make it difficult to identify the original owner of the copyright of the underlying work95. As a result, NFT minters could profit off the work of artists, operating behind the veil that the production and sale of the NFT is not a commercialisation of the work but rather a sale of the metadata. NFTs, regulated to protect artists and creators from such less than ethical practices allow them to benefit from the sale of NFTs they have authorised, hence enriching the digital ecosystem and the nation culturally96. The sale of NFTs linked to notable works of art and artefacts in India’s public domain (particularly in the collection of Government run museums) could be used as an alternative stream of revenue for the maintenance of these invaluable collections. Consequently, the regulatory body governing the NFT market ought to require a declaration from the copyright-holder and original creator of the work authorising the minter of the NFT to produce and sell the NFT before it can be listed on any NFT marketplace operating in India. Moreover, such marketplaces, in order to remain abreast of intellectual property law, and to address concerns raised by users of the marketplace, creators and the Government, amongst others, ought further to have a dedicated set of intellectual property law professionals to guide them.


            In both the USA and the UK, there is some guidance on how NFTs are to be taxed, and an Indian framework to tax trading in NFTs can be clearly developed.

            The IRS (Internal Revenue Service) in the USA views transactions in cryptocurrencies as property transactions and not currency transactions97. General tax principles applicable to property transactions apply. While filing their tax returns, taxpayers have to answer the question as to whether they have received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency98.

            NFTs are usually purchased using cryptocurrency and the purchase of NFT creates a taxable event. Selling or trading an NFT for another NFT creates another taxable event. However, the purchase of NFT using fiat money creates a taxable event only when the NFT is sold99.

            Most NFTs are likely to be considered as commodities under Section 1(a)(9) of the Commodities Exchange Act (CEA) and hence property101. As a collectible, NFTs are subject to short-term or long-term capital gains tax102. High income earners are subject to a higher percentage rate of tax on collectible gains under Section 408(m)(2) of the US Tax Code103.  F-NFTs, or NFTs with non-standard smart contracts and rights transfers that cause the SEC to view them as securities are also likely to be subject to capital gains tax, as securities are subject to capital gains tax, although the precise levy depends on various factors, including whether returns are filed as a single filer or married filers. The issue of indirect taxation in the USA is more variable, because the federal nature of the USA means that different States have different indirect tax norms. Some US States do indeed have broad enough tax norms to “encompass NFTs, if the NFT can be viewed (such as artwork or trading cards) or heard (such as a musical work)”104. The schematics of such State tax law lies far beyond the scope of this paper.

            In the UK, a Her Majesty’s Revenue and Customs (HMRC) tax manual distinguishes between NFTs and cryptocurrency tokens on the grounds that NFTs may not be pooled for capital gains tax considerations (as they are unique) but the latter may. Further, they explain a chargeable asset as under:

Tokens are digital and therefore intangible, but count as a “chargeable asset” for capital gains tax if they are both:

  1. capable of being owned;
  2. have a value that can be realised.105

            Thus, the UK thus sees trading in NFTs as a form of investment activity. NFTs today exist as a form of digital collectible, and the Financial Conduct Authority (FCA) defines a cryptoasset as below:

cryptographically secured digital representation of value or contractual rights that uses a form of distributed technology and can be transferred, stored or traded electronically106.

            Clearly, the UK sees NFTs as cryptoassets as they use distributed technology (blockchain), can clearly be traded electronically (via crypto exchanges), are cryptographically secured (hashes and Merkle trees) and represent some rights. Selling of cryptoassets held by individuals is subject to capital gains tax107 and in case of businesses to corporation tax. The issue of indirect taxes in the UK is somewhat more complicated as its statutes understand collector’s items and art as defined in Section 21 of the VAT Act 1994108, with the definition of art restated in the statutory instrument Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations, 2017109, which do not contain digital assets within their definition of art or collectibles.

            Broadly, therefore, the UK and the USA both see NFT trading as an activity which may be subjected to capital gains taxes. However, the UK situation with respect to indirect taxes is somewhat of a grey area. However, there are calls to move NFTs into the definition of art110. In its decision in Lucasfilm v. Ainsworth111, the Chancery Division of the High Court of Justice found that the purpose for which a work is created is key to determining what counts as art, and NFTs created as collectibles, linked to the metadata of creative works could conceivably be counted as such.

            Within India, high value transactions such as cash deposit of more than rupees ten lakhs in savings bank account, rupees one lakh or more payment in cash for settling credit card, purchase of shares worth ten lakhs are reported to the Government under Form 26-AS112. In addition, TDS and TCS (tax deduction at source and tax collection at source) are used as tools to minimise tax evasion.  0.1% of the transaction value for transactions over 50 lakhs is to be collected as TCS113 by the seller if its turnover is above 10 crore rupees in the previous financial year. However, while the transaction is facilitated by the NFT marketplace, said marketplace does not have access to the consideration as the sale is executed via a smart contract, and the marketplace does not collect the sale consideration. Thus, the marketplace might not be liable for TCS purposes114, however, as the marketplace collects gas fees, it may be asked to collect TCS alongside the gas fees. Therefore, a clarification on the same is needed. While as of now there is no provision to capture crypto earnings data, it does not mean that any gain is exempt from income tax. The taxable income includes all income except exempt income115. The source of taxable income is immaterial. Applying the same corollary, any gain from NFT transactions will be subject to tax.

            Similarly, services, unless specifically exempted, are taxable under GST116, and each service has a unique SAC or service accounting code. Since crypto exchange or NFT marketplace is providing a service, it is therefore liable to pay GST. However, no specific SAC has been assigned for cryptocurrencies or NFTs. Until the same is assigned, the Government will not be able to ascertain the exact amount collected as GST on account of services provided by such exchanges or marketplace.  Moreover, under the Finance Act, 2020, e-commerce operators engaged in e-commerce, both defined as below by the CGST Act are to pay a 2% equalisation levy, assuming they do not fall into certain exception:

(44) “electronic commerce” means the supply of goods or services or both, including digital products over digital or electronic network;117

(45) “electronic commerce operator” means any person who owns, operates or manages digital or electronic facility or platform for electronic commerce118.

            It can be thought that NFT marketplaces will be liable to pay the equalisation levy under Section 165(A) of the Finance Act, 2020 provided that the NFT transactions in case of marketplaces not headquartered in India are brought under the term specified circumstances.

While taking such a decision, policymakers should note that the smart contract involved in the sale of the NFT executes a direct transfer of cryptocurrency from the wallet of the buyer to that of the seller; thus, at no point does the marketplace have access to the full consideration119. However, the Government could nevertheless bring such marketplaces into the ambit of equalisation levies for policy reasons if it so wishes. Once again, clearer guidance is needed.

            There may well be other items of tax complexity that could arise in the context of NFTs. As such, in attempting to offer a brief look at direct and indirect taxation of NFTs this work recognises that the full gamut of taxation is beyond the scope of this paper. Like many others, this paper notes the pressing need for Government guidance on NFTs and taxation, particularly as complicated issues, including those of cross-border taxation and jurisdiction could arise.

Compliance to financial regulations

            This section attempts to briefly consider the money laundering and other related activities implications of NFTs and how State intervention attempts to correct these wrongs which might be committed using the NFT medium.

            There are a few features of NFT-related transactions that can be exploited by money launderers. Firstly, buyers and sellers are “usually functionally anonymous”120 as transactions take place using a number of cryptocurrencies and over a number of blockchains (although Ethereum is the industry standard) over marketplaces which allow the registration of participants without extensive anti-money laundering checks121. Moreover, while valuable transaction histories are visible on the blockchain as cryptocurrency coins have their transactions recorded, the process of cryptocurrency tumbling, which complicates the transaction history and therefore obscures the ownership history122. NFTs could be purchased using tumbled coins or could be used in a similar fashion to tumbled coins to launder money. Due to the lack of an underlying asset in this speculative market, prices fluctuate significantly, which could allow bad actors to purchase and sell high value NFTs and spread the cryptocurrency across accounts, distancing the proceeds from criminal activity123.  The potential money laundering applications of NFTs become even more feasible when one notes that some high profile NFT trading platforms lack know your customer (KYC) procedures124.

            While there has not been any guidance issued dealing with NFTs in particular, there are indications that both the USA and UK could bring NFTs into their monitoring framework. Under the  Money Laundering and Terrorist Financing (Amendment) Regulations, 2019 (MLRs)125 which amended the 2017 statutory instrument Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations, 2017126, cryptoasset exchange providers, including NFT marketplaces (as they exchange NFTs for cryptocurrencies) may well be required to register with the FCA, similar to the EU’s Fifth Anti-Money Laundering Directive (AMLD5), effectively making it national law in the UK127. The MLRs also require scrutiny of participants in the market for high value of works of art by HMRC, and while NFTs do not fall within the definition of art as discussed earlier, placing them into this category would allow scrutiny of participants in the NFT realm, which is valuable because NFT markets could be used like traditional art markets to funnel funds and launder money, which is a real cause for concern128.

            As far as the USA is concerned, there have been a number of recent moves to tighten the noose on money launderers. Despite the absence of guidance, regulators could attempt to monitor NFT transactions in a number of ways, including by shoehorning NFTs into the definition of antiquities under the Anti-Money Laundering Act, 2020 or, less convincingly by using the National Defence Authorisation Act if NFTs are treated more like cryptocurrencies129. Moreover, the Financial Action Task Force (FATF) came out with new guidelines in 2021, which state that “some items—or tokens—that on their face do not appear to constitute VAs (virtual assets) may in fact be VAs that enable the transfer or exchange of value or facilitate ML/TF (money laundering/terrorist financing)”130. While FATF is an intergovernmental body, as opposed to a regulatory agency, it has been an active player in guiding the evolution of policy. The expanded definition of “money transmitting business” and “financial institution” gives the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) additional power with respect to novel asset classes like NFTs, and while FinCEN is yet to issue guidance specific to NFTs, the high value of NFT transactions, money laundering risk factors and current interests may prompt regulatory intervention soon131.

            As far as India is concerned, these are valuable schema indeed, and will only improve in utility as more and more clarifying guidance is provided. Nevertheless, it is indubitable that there needs to be standardisation of information and documents required for opening and operating an account as per Indian KYC norms, requiring proofs of identity and address such as the Aadhar and PAN card. This becomes especially important when NFTs can become a means of money laundering or even financing terror, due to the relative anonymity of the transaction. Keeping cross-border use of the technology in mind, the details of a particular transaction will be difficult to ascertain. Any regulation should specifically contain provisions for call for information. The marketplace should follow anti-money laundering (AML) processes, combating of financing of terrorism (CFT) precaution norms and the Foreign Exchange Management Act (FEMA)132, and be able to trace all users on the basis of verified identity documents. Wash trading has been identified as a particular concern with NFTs,133 and identification of players in the marketplace reduces the difficulty of identifying such activity and taking appropriate action, including blacklisting from NFT marketplaces. In addition to established KYC norms, blockchain analytics firms ought to be working in concert with the state for the purposes of monitoring wallets and their holders involved in NFT theft134.

Loss of the NFT 

            Burning an NFT removes it from the blockchain. This process is irreversible, and means that the asset is permanently lost135, to the detriment of its owner. There is therefore an urgent need to bring a law to ensure that once an NFT has been sold it continues to be hosted. Any regulation which the Government brings is likely to be welcomed. Only the Government is empowered to do so, as the NFT trading marketplace is decentralised in the extreme. Regulation of a trade or business through reasonable restrictions imposed under a law made in the interests of the general public is provided for by Article 19(6) of the Constitution of India136. A possible solution might be to regulate burning by prohibiting the act after a token has been purchased unless it is found to be in violation of previously made law or regulations, or of those with retrospective effect enacted after the purchase. The seller ought to be entitled to remove the NFT from the marketplace and to burn the token at will, effectively withdrawing it from sale, provided that the NFT has not been sold.

            Alternatively, the file whose metadata is linked to the NFT may disappear: the URL may be redirected, or it may be taken down if server dues are not paid, and even IPFS file storage may become non-operational, although this is less likely than with a traditional URL137. Consequently, marketplaces should charge, alongside the gas fees they charge for the energy costs of processing and validating transactions138, a nominal amount, which the marketplace can then use to ensure that URLs and IPFS systems continue to be hosted. In addition, regulations need to be put into place to ensure that URLs linking to purchased NFTs are not redirected.


            Despite being a relatively new phenomenon, NFTs have become increasingly important and have turned into a sector with fast accelerating growth; the global market for NFTs touched the $2.5 billion mark in the first half of 2021, up from $13.7 million in the first half of 2020139.  Regulatory oversight is urgently required, as NFTs have the potential to be used in money laundering and terror funding applications, perhaps alongside other financial crimes which are beyond the present scope of this paper. An analysis of US and UK law, as well as the FATF draft guidelines shows that these could well be adapted by Indian policymakers as the scaffolding on which to build an indigenous regulatory edifice; as more clarifications are made in London and Washington DC, New Delhi should take note and prepare rules aimed at preventing financial crime while not throttling the marketplace completely. As regards the issue of NFT loss and burning, strong and fair regulations by the Government serve to protect buyers against unscrupulous actors and should be brought forth with speed. While taxation is a complex and vexed issue indeed, a unified and clear government stance, combined with regular guidance on new developments as they emerge will prove valuable to both those involved with NFTs and to the financial ecosystem generally. As regards copyright, Indian Government policy needs to be more proactive than that in more developed countries such as the USA and UK, as an NFT market regulated in a way that protects the moral rights of creators could allow Indian creatives to gain real prominence in the wider world. Our consideration of the legal nature of NFTs shows that they cannot neatly be classed as either of securities or goods, which is one of the key reasons behind why a new body ought to be set up with broad powers to regulate NFT marketplaces, particularly in deciding the precise legal nature of new developments, in monitoring transactions and in monitoring the smart contracts used for trading. Underlying all these recommendations is the idea that NFTs deserve such effort to be put into their regulation; the effort will pay off in the long term as NFTs look set to be part of long run Web 3.0 development and India has the opportunity to be ahead of the curve.

* First year student, BA Tripos (Law), Trinity College University of Cambridge.

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