India Shouldn’t Throw Out the NFT Baby With the Crypto Bathwater

If you’ve been to any social media websites over the past month, likelihood is that you’ve come throughout the time period NFT (or non-fungible tokens to present them their full identify). From Twitter founder Jack Dorsey selling his very first tweet to Elon Musk selling a song about NFTs through NFT – it’s protected to say that NFT is ready to turn into a mainstay within the fashionable digital zeitgeist. And with guarantees of making certain that artists, musicians and different creators can use it to be correctly compensated for his or her work, it’s straightforward to see why NFT has turn into such an interesting prospect on-line.

Despite this sudden increase, nonetheless, India may miss out on the NFT revolution. With the federal government set to move legislation that will ban personal cryptocurrencies, it’s unclear whether or not know-how reminiscent of NFT could be authorized within the close to future – resulting in the query, ought to NFTs be banned? 

What is NFT? 

One of the defining options of the digital content material financial system is that, because of the reproducibility of digital content material and media, it’s near not possible to determine the unique proprietor of a bit of content material or media. This replication additionally leads to devaluation of the unique piece of content material. Furthermore, even in the event you have been capable of determine the proprietor, oftentimes the proof of such possession could be depending on a centralised establishment that maintains data of purchases and possession. NFTs search to unravel these issues – that’s of possession monitoring, worth storage and decentralisation. 

In the only of phrases, an NFT acts as proof of possession over a bit of digital content material or a digital asset. 

NFT’s are distinctive (aka non-fungible) digital tokens that characterize particular digital belongings that may be purchased, bought and traded between people. These tokens can characterize a variety of digital belongings starting from digital artwork to music recordsdata to books. The purpose of the know-how is to make sure that ought to that piece of digital content material be duplicated or shared, the declare of the authorized proprietor over the unique stays clear and clear – thereby additionally working to safe the worth of the unique asset. The know-how does this by sustaining the data of all homeowners and transactions associated to the NFT in a distributed ledger referred to as the blockchain; usually, that is the Ethereum blockchain. 

The know-how has been proposed as a way whereby digital artists can make sure that the worth of the artwork that they produce is maintained throughout its sale, whereas additionally making certain that they can monitor future gross sales and accumulate any royalties that they could be owed. 

What is the federal government’s stance on NFTs? 

While the federal government has not expressly acknowledged its want to ban NFTs, uncertainty over the main points of the upcoming personal cryptocurrency Bill have forged doubt on its potential legality. In the absence of those particulars, one can look at the draft of the ‘Banning of Cryptocurrency & Regulation of Official Digital Currency Bill’ of 2019 to find out the technique that the federal government is more likely to undertake 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’s potential to think about a situation the place NFTs could possibly be thought-about to be each a illustration of worth that’s exchanged on the idea of getting an inherent worth in enterprise exercise (for instance, proprietary code could possibly be bought to a enterprise as an NFT) and as a retailer of worth (for instance, shopping for art work). 

Logos of in style cryptocurrencies. Photo: Name Coin/Flickr

Section 3(3) of the Bill appears to stipulate an exception to this, laying down that the usage of Distributed Ledger Technology could be permissible in cases 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’s unclear whether or not NFTs would fall throughout the scope of ‘services’ as laid out by the exemption. 

Ultimately, what is obvious is that given the paradox throughout the draft Bill, any future Bill must specify the legality of cryptocurrency-related belongings reminiscent of NFTs. This would require the federal government to make a devoted resolution on NFTs.

So ought to NFTs be banned? 

Absolutely not. NFTs current quite a few alternatives for digital creators, and there exist two major explanation why they need to not be banned. 

Firstly, NFTs by advantage of being extra just like belongings than cryptocurrencies aren’t topic to a few of the issues that the federal government has with cryptocurrencies. Chiefly, NFTs are unable to turn into an unregulated foreign money that will be against the rupee, which is a particular risk within the case of cryptocurrencies. The purpose NFTs can keep away from this risk is because of one among their defining traits – lack of fungibility, or interchangeability. 

What this implies is that you just and I might trade Rs 10 notes and there could be no change within the worth that we possess, since all (real) Rs 10 notes are interchangeable and indistinguishable from one another. The consequence would even be the identical if we have been to swap cryptocurrencies like Bitcoin.

If we have been to trade NFTs nonetheless, because of their distinctive nature, they’d neither be interchangeable nor indistinguishable from one another, that’s, they’d be non-fungible. This lack of standardisation results in NFTs being unable to facilitate transactions throughout the dimensions of society and wouldn’t turn into a brand new unregulated system of foreign money. Allowing NFTs would, due to this fact, haven’t any impact on the position of the rupee as the only real authorized tender in India. 

Secondly, NFTs can serve to make sure that digital creators are afforded their correct royalties from resales or makes use of of their creations. Due to the clear nature, transactions happen on the blockchain such that each occasion of an NFT being resold may be tracked by the copyright holder, who is commonly the creator. This is in stark distinction to conventional bodily or digital artwork varieties, the place gathering royalties can show extremely troublesome.

Need to manage and never ban

None of that is to say that NFTs are excellent. They are removed from completely safe and are definitely not permanent as of now. They additionally current a transparent ecological challenge. Furthermore, NFTs at the moment discover themselves the topic of immense hypothesis, particularly from rich people and companies who’ve been using the crypto wave. As such, it’s crucial that going ahead, residents must be made conscious of the potential for a bubble rising in NFT markets and should be cautioned concerning the risks concerned in buying NFTs. 

However, the advantages that NFTs present for digital creators can’t be ignored in favour of a blanket ban. Rather, treating NFTs as a brand new asset class that requires devoted laws could be a far superior technique in the long term.  

Ultimately, banning NFTs with out no less than trying to implement a regulatory framework to deal with these challenges is solely establishing India and its digital creators to fail.

Aman Nair is a researcher on the Centre for Internet & Society, specialising in monetary applied sciences, knowledge governance and different fashions for the digital financial system


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