If you’ve been to any social media sites over the last month, chances are that you have come across the term NFT (or non-fungible tokens to give them their full name). From Twitter founder Jack Dorsey selling his very first tweet to Elon Musk selling a song about NFTs through NFT – it is safe to say that NFT is set to become a mainstay in the modern digital zeitgeist. And with promises of ensuring that artists, musicians and other creators can use it to be properly compensated for their work, it’s easy to see why NFT has become such an appealing prospect online.
Despite this sudden boom, however, India might miss out on the NFT revolution. With the government set to pass legislation that would ban private cryptocurrencies, it is unclear whether technology such as NFT would be legal in the near future – leading to the question, should NFTs be banned?
What is NFT?
One of the defining features of the digital content economy is that, due to the reproducibility of digital content and media, it is close to impossible to identify the original owner of a piece of content or media. This replication also results in devaluation of the original piece of content. Furthermore, even if you were able to identify the owner, oftentimes the proof of such ownership would be dependent on a centralised institution that maintains records of purchases and ownership. NFTs seek to solve these problems – that is of ownership tracking, value storage and decentralisation.
In the simplest of terms, an NFT acts as proof of ownership over a piece of digital content or a digital asset.
NFT’s are unique (aka non-fungible) digital tokens that represent specific digital assets that can be bought, sold and traded between individuals. These tokens can represent a range of digital assets ranging from digital art to music files to books. The aim of the technology is to ensure that should that piece of digital content be duplicated or shared, the claim of the legal owner over the original remains clear and transparent – thereby also working to secure the value of the original asset. The technology does this by maintaining the records of all owners and transactions related to the NFT in a distributed ledger known as the blockchain; in most cases, this is the Ethereum blockchain.
The technology has been proposed as a means whereby digital artists can ensure that the value of the art that they produce is maintained during its sale, while also ensuring that they are able to track future sales and collect any royalties that they may be owed.
What is the government’s stance on NFTs?
While the government has not expressly stated its desire to ban NFTs, uncertainty over the details of the upcoming private cryptocurrency Bill have cast doubt on its potential legality. In the absence of these details, one can examine the draft of the ‘Banning of Cryptocurrency & Regulation of Official Digital Currency Bill’ of 2019 to determine the strategy that the government is likely to adopt in 2021.
Section 2(a) of the act defines a cryptocurrency as:
“any information or code or number or token not being part of any Official Digital Currency, generated through cryptographic means or otherwise, providing a digital representation of value which is exchanged with or without consideration, with the promise or representation of having inherent value in any business activity which may involve risk of loss or an expectation of profits or income, or functions as a store of value or a unit of account…”
Under such a definition, it is possible to imagine a scenario where NFTs could be considered to be both a representation of value that is exchanged on the basis of having an inherent value in business activity (for example, proprietary code could be sold to a business as an NFT) and as a store of value (for example, buying artwork).
Section 3(3) of the Bill seems to outline an exception to this, laying down that the use of Distributed Ledger Technology would be permissible in instances of “creating a network for delivery of any financial or other services or for creating value, without involving any use of cryptocurrency, in any form whatsoever, for making or receiving payment.” However, it is unclear whether NFTs would fall within the scope of ‘services’ as laid out by the exemption.
Ultimately, what is apparent is that given the ambiguity within the draft Bill, any future Bill would have to specify the legality of cryptocurrency-related assets such as NFTs. This would require the government to make a dedicated decision on NFTs.
So should NFTs be banned?
Absolutely not. NFTs present numerous opportunities for digital creators, and there exist two main reasons why they must not be banned.
Firstly, NFTs by virtue of being more similar to assets than cryptocurrencies are not subject to some of the concerns that the government has with cryptocurrencies. Chiefly, NFTs are unable to develop into an unregulated currency that would be opposed to the rupee, which is a definite possibility in the case of cryptocurrencies. The reason NFTs can avoid this possibility is due to one of their defining characteristics – lack of fungibility, or interchangeability.
What this means is that you and I could exchange Rs 10 notes and there would be no change in the value that we possess, since all (genuine) Rs 10 notes are interchangeable and indistinguishable from each other. The outcome would also be the same if we were to swap cryptocurrencies like Bitcoin.
If we were to exchange NFTs however, due to their unique nature, they would neither be interchangeable nor indistinguishable from each other, that is, they would be non-fungible. This lack of standardisation leads to NFTs being unable to facilitate transactions across the scale of society and would not develop into a new unregulated system of currency. Allowing NFTs would, therefore, have no effect on the role of the rupee as the sole legal tender in India.
Secondly, NFTs can serve to ensure that digital creators are afforded their proper royalties from resales or uses of their creations. Due to the transparent nature, transactions take place on the blockchain such that every instance of an NFT being resold can be tracked by the copyright holder, who is often the creator. This is in stark contrast to traditional physical or digital art forms, where collecting royalties can prove incredibly difficult.
Need to regulate and not ban
None of this is to say that NFTs are perfect. They are far from perfectly secure and are definitely not permanent as of now. They also present a clear ecological challenge. Furthermore, NFTs currently find themselves the subject of immense speculation, especially from wealthy individuals and corporations who have been riding the crypto wave. As such, it is imperative that going forward, citizens should be made aware of the potential for a bubble emerging in NFT markets and must be cautioned about the dangers involved in purchasing NFTs.
However, the benefits that NFTs provide for digital creators cannot be ignored in favour of a blanket ban. Rather, treating NFTs as a new asset class that requires dedicated legislation would be a far superior strategy in the long run.
Ultimately, banning NFTs without at least attempting to implement a regulatory framework to address these challenges is simply setting up India and its digital creators to fail.
Aman Nair is a researcher at the Centre for Internet & Society, specialising in financial technologies, data governance and alternative models for the digital economy