Legal Considerations Before Launching An NFT Platform In India
Updated: Sep 4, 2022
Non-Fungible Tokens (“NFT”) are the buzzword of today. Each NFT represents a unique certificate of ownership. These tokens can be transferred among individuals and the ownership of a NFT may pass hands from one person to another. NFT platforms enable the transferring of NFTs digitally. Once you buy a NFT through a platform, a smart contract gets executed adding you to the ownership chain. The entire transaction gets executed using blockchain technology. The fact that NFTs bestow one of a kind ownership, make these tokens valuable. Everything from paintings to video game features are being sold digitally as NFTs these days. Recently, even Bollywood actors like Amitabh Bachchan, Salman Khan announced the launch of their NFTs.
In India, the regulatory jargon around NFTs is still being untangled. We do not have a regulatory regime governing NFTs. In the absence of a dedicated law, regulating NFTs, it becomes difficult to navigate the maze of regulatory compliance, while launching NFTs in India.
We discuss, some legal considerations, you should keep in mind if you want to launch a NFT platform in India.
Legal Considerations to take note of before launching NFT Platform in India.
A. Which Law Regulates the Trading of NFTs?
In order to determine the applicability of legal provisions, one first needs to determine, the nature of an NFT. One common question that has been recently debated regarding NFTs is that whether a NFT is a traded security or a derivative? A security, in simple terms refers to shares, scrips, bonds etc. and also includes a derivative within its ambit. A derivative is a contract which derives its value from an underlying security. Such underlying securities are typically financial in nature such as stocks or commodities such as gold. However, a NFT may derive its value from a non-financial instrument as well. In fact, NFTs derive a lot of their value from the reputation of their content. For instance, if someone sells Thor’s hammer as a digital asset, it may yield a great value. How would Thor’s hammer fall under the definition of an `underlying security’? Would it satisfy the definitions of ‘security’ or ‘derivatives’ as given under the Securities Contracts (Regulation) Act, 1956? In the absence of clear regulations and/or amendments in existing laws, one still cannot be certain that under which regulation would the trading of NFTs be regulated.
What you may do:
make sure that your terms and conditions policy reflected on your website, clearly mentions the fact that there is no exclusive law regulating the trading of NFTs in India and that there may be risks involved if a user wishes to participate in the trade of NFTs.
Remain compliant with all applicable laws including but not limited to Contracts Act, Anti-Money Laundering regulations, Consumer laws etc.
B. Intellectual Property Considerations
An NFT confers on you exclusive ownership rights of that specific NFT and not of the NFT content. For example, if you bought a digital asset representing Thor’s hammer, you will exclusive ownership of the NFT representing that digital asset, but you cannot stop anyone else from minting a NFT containing that specific asset.
What you may do:
Mention clearly in your terms and conditions document that it is only the ownership of the NFT that may be transferred and not the ownership of NFT content.
The NFT content may still be owned by the actual owner and it is important to apprise the users of the same. For instance, buying a particular painting does not give you copyright over that painting but just an exclusive certificate of ownership over the painting.
C. E-Commerce Regulations
A NFT Platform may be covered under the definition of an e-commerce marketplace under the E-Commerce Regulations, 2020. The E-Commerce Regulations mandate a number of obligations on e-commerce marketplaces such as having clear refund, return and exchange policies, require sellers to undertake that the information regarding their products are genuine etc. However, the non-traditional nature of NFTs, again pose an issue in the compliance of the E-commerce Regulations by NFT Platforms. The nature of transaction through which NFTs are traded/sold, may make issuing refunds/exchanges difficult.
What you may do:
A blanket representation from the sellers, through separate terms and conditions, stating that they are legally permitted to sell the NFTs and that in the process of them offering NFTs for sale through the Platform, no laws would be breached, should be obtained.
If possible, publish the ownership chain or the Smart contract link on the Platform for users to verify.
D. Anti-money laundering regulations:
NFTs may also be sold anonymously and hence, can be used by anti-social elements for illegal activities such as money laundering. Hence, a NFT Platform, needs to have a strict Anti-Money Laundering Policy in place.
E. Contractual Requirements
Apart from the smart contract that would get executed between the seller and the buyer, the NFT platform should have a list of policies ready and published, such as (illustrative not exhaustive):
Terms and conditions for buyers
Terms and conditions for sellers
Anti-money laundering policies
NFTs are still a largely unregulated realm. With the world looking towards cryptocurrencies and NFTs as the future, India too has an unbridled enthusiasm pertaining to it. However, it becomes important to keep the aforementioned legal considerations in mind, before you decide to launch a NFT Platform.
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