NFTs and Intellectual Property: Legal Protection of Digital Art in India

Introduction

Digital assets have begun to rise at a rate that has never been seen before, making the concept of ownership, creativity, and intellectual property completely change their notions. The shift has shattered conventions held for so long on authorship and protection, which copyright law had thus far regulated. One of the most intriguing aspects of the continuing digital revolution is the growth of NFTs-non-fungible tokens, a kind of digital asset recorded on a blockchain, which authenticates the ownership of such digital art, music, videos, and even properties etc.

Cryptocurrencies are homogeneous, while NFTs are distinguishable representing a specific digital asset with a provable origin. This has disrupted the way artists interact with monetising rights to intellectual properties. In fact, NFTs are beset with serious implications relating to rights under the Copyright Act, 1957 in India, which has already statutorily provided rights to reproduction, distribution, making available to the public, and displaying certain works. The said rights essentially protect fair compensation for intellectual labour. NFTs are thus disrupting these rights by decoupling the NFT (digital token) from the copyright.

Consequently, a degree of ambiguity has been generated with regard to what exactly is bought when one purchases an NFT-whether it is the artwork per se, as a digital art piece, or simply a token that is linked to the blockchain. The generated legal ambiguity surrounding this concept of digital artwork is serious enough that it requires an analysis of how pre-existing laws would apply to this disruption.

Literature review

The emergence of NFTs has generated a significant amount of academic debate on the intersection of NFTs with Intellectual Property Rights. Sharma (2022) affirms that NFTs have brought a paradigm shift in the concept of digital scarcity, which allows artists to monetise their work in a decentralised marketplace that doesn't require intermediaries. Conversely, Deshmukh (2023) argues that NFTs don't have proper legal recognition within the expanse of IP law in India, rendering artists prone to illegal copies[1]

Internationally, O’Connor (2021) and McGinnis (2022),[2] amongst others, pose questions on how the provenance of a digital work is secured on a blockchain, but not on how it is capable of transferring a copyright. Findings from this thesis show that NFTs are merely a proof of ownership but not ownership of the work itself. In the current Indian legal setting, literature available on the subject is limited.[3] It is a common consensus that while NFTs provide a provable chain of ownership, they do not necessarily confer copyright and moral rights on the NFT owner. There is a consensus on the given point that India must facilitate a regime of legal certainty regarding NFTs, either through an amendment to the existing law setting or a judicial determination, in a manner that protects the rights of creators.

Relevance of the Study

This particular study has a massive relevance, as the matter it is dealing with pertains to a sector of law which remains largely unregulated in India. The development in the digital economy has led to a large number of artists from India, as well as collectors, entrepreneurs, creating NFTs on a massive scale, with a lack of clarity on what implications the NFTs might have.

The above research has attempted to fill the lacunae that exist between technological innovation and legal frameworks on the discussion of how the Indian Copyright Act, 1957, and similar frameworks on intellectual properties are relevant to NFTs. This has therefore attempted to fill the lacunae that exist in the existing frameworks, as well as providing recommendations, with the implications of such a synergy existing not only within the realm of art protection but also in ensuring that transparency, trust, and accountability are yielded within the environment that is created by NFTs within India.

Objective of Study

1. To analyse the legal status of NFTs in the context of intellectual property law in India.

2. To analyse whether the provisions available under the Copyright Act, 1957 are sufficient to protect the rights of digital artists.

3. It is necessary to examine the diverse legal approaches to NFTs worldwide, which can later be used in the Indian legal structure.

4. Recommend legal changes that might make protection available to digital artists as well as NFT artists.

 

Research Methodology

This study has been relying mostly on a qualitative and a doctrinal research methodology. It has largely depended on secondary sources, statute, case law, literature, reports, and government publications. The in-depth analysis on the Copyright Act, 1957, critical insights, and a comparative insight from the United States of America, the United Kingdom, and the European Union has been provided in the following sections. This research is on the brink of a legal tenet of a blockchain transaction, apart from technological development. In addition to that, it has been aimed at disputes, practices, and developments as per the changing lawful environment.

[Image Sources: Shutterstock]

Technical Foundation: Blockchain, Smart Contracts, and NFTs

The NFT phenomenon is highly related to the utterly new way of possessing a certain digital item, which has been substantially rooted in the technological context of the blockchain and smart contracts. In an attempt to properly define what an NFT is, there is a need to briefly describe what a blockchain is because NFT represents the result of a certain technological background, which is actually a decentralized digital ledger recording all certain transactions in a certain transparent way, which is irreversible. Every transaction is called a block, which is significantly connected with the previous one, meaning that a certain continuous string cannot be changed without the agreement of a certain significant number of individuals on a certain network[4] and therefore, intermediaries' presence is not needed in a certain process, which is relevant from a certain point of view.

In the field of digital art, it is through the use of blockchain technology that the modus operandi behind NFTs has been made possible. If there is something that really sets them apart from other forms, it is that NFTs are not similar to any other kind of cryptocurrency for instance Bitcoin or Ethereum. These latter ones are fungible tokens and largely considered interchangeable. On the other hand, every NFT has been assigned a unique digital identity that differentiates it from every other NFT on that blockchain. It is this uniqueness which allows the NFTs to have the potential ability to house within them the digital demarcation of ownership for a wide range of assets: artwork, music, videos, and even plots of land placed virtually. The idea of NFTs on a blockchain creates a method for creatives to "token" their creative work; this in turn establishes a method whereby verifiable proof of the authenticity can be infinitely tracked in times past. This would not only provide creatives with the means to protect themselves against unauthorized copies but also provide a collector with the ability to check the authentication of a purchased NFT.

Smart contracts play a very important role in the NFT sphere. In this respect, smart contracts are "self-executing contracts with the terms of the agreement coded directly into the blockchain, such that the terms of a smart contract are actually encoded within the computer program.” Smart contracts are used in the NFT space to facilitate not only the creation and minting of digital assets but also their resale and secondary sale. In fact, smart contracts can even provide for the payment of royalties as a way to ensure the artist is paid a certain percentage of the return on every resale of his work within the secondary markets. This is, in fact, a break from the paradigm set up until now by copyright law, which pays creative compensation once upon the sale of a work. The meeting of blockchain technology and smart contracts has led to a shift in the definition of ownership and authenticity in the online world. NFTs were prone to copies, with no way to discern whether a particular piece is authentic or not. The incorporation of the immutable ledger within the blockchain has now provided the foundation for the development of the notion of digital rarity, which is on a precipice to bring about a shift in the definition of ownership, value, and art. Despite this, this technological shift is not only challenged but has a myriad of problems within it. The incorporation of intellectual property rights, especially on the divide within the ownership of NFTs and the copyright on the art, is still ridden with uncertainties.

Despite all these challenges, the merging of blockchain, smart contracts, and NFTs is one of the most prominent innovations happening in the modern digital era. This innovation has been successful in creating a decentralized system that provides a way for artists to make money from their art, the owner to authenticate the artwork, and the marketplace to run in such a way that doesn't require interactions with the third party But because the pace of development of such technologies is quite brisk, with advancements in the legal frameworks of India, the United States of America, and the UK, the future of NFTs is, in a way, dependent on how the need to develop such technologies, protect the planet, and protect intellectual property rights is balanced.[5]

Intrinsic nature of NFTs

NFTs give a new dimension to the traditional concept of "ownership" or "provenance" in the digital domain, considering the technological and creative environment. Unlike other forms of cryptocurrency, NFTs represent unique digital assets that cannot be replaced by each other. This uniqueness is what the use of “blockchain technology” [6]ensures. An NFT possesses some sort of digital signature and other metadata, representing the critical data of the author of that particular digital work, the date of creation and transactions carried out to verify that the NFT is related to that certain digital object. NFTs have qualities of non-fungible properties that provide the rarity of artworks such as of Picasso's painting, which can never be replaced by an original copy such as a photocopy. It is their distinction that makes NFTs both technological instruments of verification and legal units of economic property in digital terms.

NFTs address this challenge of originality through the power of the decentralised, reliable, and untamable ledger that is blockchain. This therefore, means that NFTs for the first time make it possible for authors to actually claim their work in the digital realm since it is possible to replicate digital works ad infinitum without degradation. This is no longer the case with NFTs since it is now possible for the same authors who get exploited by their works to actually get paid for every resale of their works through the implementation of smart contracts that are inherent in NFTs. This is unlike in the past when it would be hard for authors to get paid for their works since they would get paid only once for their works, unlike in the current scenario with NFTs that make it possible for authors to get paid with each resale of their works. This self-executing marriage of technology and contract law therefore pushes forward the front of a self-executing copyright system that is not reliant on court for the determination of ownership or entitlement but on code itself. This self-executing copyright system therefore has far-reaching implications for the enforcement of copyright since NFTs, while not necessarily ending copyrights, make it possible for authors to get their copyrights more quickly through the expediting of their proof of ownership of their works.

NFTs as unique digital assets

The most relevant thing about NFTs is embedded in its capability for giving digital assets the attributes of scarcity, provenance, and authenticity, which were thought to be unachievable within a virtual space. Although it would be easy to replicate the digital asset itself, maybe an image or a clip, still it would be unique because it would be marked on the blockchain. The NFT would be like a certificate of authenticity, and the digital file would be like its subject. It would be like stating that a deed would be separate from its subject. A possession of an NFT would not be about possession regarding its intellect but would be about possession itself.

Furthermore, blockchain’s transparency and immutable nature presents a reliable platform for documenting the chain of title, which has been an issue for a considerable period of time within the area of art and copyrights. Furthermore, with NFTs, every subsequent transaction will be permanently logged, with no discrepancies presenting themselves within provenance and reproduction. The metadata that presents itself within an NFT with information on artist wallet address, date and time created, and an immutable digital signature within it presents an unimpeachable document within copyrights and originality. As a result, NFTs present a “decentralized database” for intellectual property rights, and it aligns perfectly with democratized access for intellectual property within the agenda on the digital economy.

From an economic and legal standpoint, NFTs introduce a revolution wherein digital assets acquire a value equivalent to that of physical assets. Artists, musicians, and creative people have been set free with NFTs as they have introduced new sources of income. However, on the flip side, given that NFTs have grown so exponentially, there appear serious issues with regards to consumer protection and nation-specific rules[7] Nonetheless, NFTs introduce an imbalance and revolution with which society at large perceives value and possession in an information age.

The Indian Legal Landscape: Where We Stand

However, in the current situation, there is no real situation created by the NFTs themselves that any Indian law is struggling to keep up with. Therefore, in dealing with regard to such NFTs, entwined with digital works, it is yet to be determined by the imperative of the general legal tenets, in other words, on behalf of the Copyright Act, referred to as “the Act” with regard to the discussion that ensues. This Act supra is casinos like silent with regard to digital coins via the application of blockchain technology, subsequently with regard to the implication with regard to the sales of non-fungible tokens, with sole regard to clarifying the tenets of any decision with regard to the principles of property, licensing, and copyrights transfers.

Talking about the Indian judicial system, Copyright is basically the body of rights of authors in respect of original literary, artistic, musical, or dramatic works, et al. This is kept entirely distinct between the author himself and one who possesses only the file of the same. This is as important as in the discussion of NFTs too. Copyrights rest with the author himself since it is not necessarily explicitly mentioned otherwise through copyrights and licensing agreements through the Smart Contracts of the platforms, until it is explicitly transferred otherwise. However, no judicial opinions remain with the Indian Courts with respect to the acquisition of NFTs on copyrights either. As there is no judgment of NFTs on their implications with respect to IPs by the Courts, an ambivalence is witnessed, especially with respect to who is to be held responsible for the same, namely the NFTs’ purchaser themselves who would necessarily require the same for their own commercial purposes with respect to digital assets. Though certain portions of the Information Technology Act of 2000 seem to remain important in this context, no such legislation remains developed by the Indian Parliament, as of yet, that is specially developed with respect to NFTs in context with respect to IPs either. As would remain the need of the hour in this context that agreements are entered into in these regards.

Copyright Act of 1957: This would examine the welfare of authors relative to their own production with regard to pictorial works of art, music, literature, cinematographic works, and photographs. It must be noted that if any work of art (digital or for that matter any form of music, or for that factual matter the MP3 file), itself would be converted into NFTs, then it belongs to him for as long as it does not state otherwise on paper.

Trade Marks Act, 1999: This Act states that trade name, trade mark, and trade name, which are various constituents of trade name, are trademarks.

Information Technology Act, 2000: Firstly, NFTs are purely electronic in nature. Hence, NFTs fall within the purview of the Information Technology Act of 2000, as it deals with issues related to electronic records and cyber affairs.

Indian Contract Act, 1872: Legislation related to smart contracts and contracts for NFTs was brought through this Act.

Consumer Protection Act 2019: It shall also apply to the current situation in the event of any cheating or fraud with respect to the purchase of non-fungible tokens.

Legal Dimensions of NFTs In the Context of Copyright

Before embarking on a discussion of the legal problems that may arise concerning non-fungible tokens, a distinction must be made concerning the ownership of such a token and that of the copyright of the particular digital work that is embodied within that non-fungible token. This is because they are two different things altogether. Basically, a non-fungible token is merely a type of proof, that is, a cryptographic proof that is established on a certain blockchain, with a purpose to verify a particular owner’s possession of a specific digital asset that is distinct from the rest. This can be sold, traded, or transferred in a similar way as is any other asset that is recorded on a certain blockchain. In most instances, though, that non-fungible token is certainly not storing the digital file itself.

On the other hand, copyright is a legal right that is a matter of intellectual property rights conferred upon an author by law with exclusive rights of copying and distributing the produced work. Regarding India, the rights on a creative work are generated the moment that work is brought into existence with a tangible form; no registration is required. The authorial rights under Section 13 and Section 14 of the Copyrights Act, 1957[8] are generally considered rights of the work, but this is subject to assignment, which is under Section 19 of the Copyrights Act. The assignment of copyright should be in writing, signed by the owner, for a valid transfer to occur. The implication is that, in most cases, in the NFTs that were sold, the buyer ended up with ownership of the NFT but certainly not the copyright rights or commercial rights regarding the content that is behind such NFTs. In most cases, unless such rights are donated by the creator of the NFTs, the buyer is not capable of making copies, licensing, or commercially using such NFTs but is rather limited to uses that are accepted by the NFT platforms or the rule of fair use.

Having said that, even with the supposed transparency on ownership that the blockchain provides, it is still significant that ownership is, in fact, a matter that is largely set in more traditional notions of copyright. This is such that the buyer and seller should have their own situation supported in a way that is encouraged with clearly stipulated rights that are specifically expressed. On the contrary, a school of thought believes that free trade as compared to protectionism, is helpful in making an economy more productive in the long run.  

Author:  Srishti Dongre, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

[1] Gulyani, Nexus Between NFTs and Intellectual Property Law, International Journal of Law, Management & Humanities (2023).

[2] Corinne Tan, Rights in NFTs and the Flourishing of NFT Marketplaces, 32 International Journal of Law and Information Technology (2024)

[3]NFTs in India: The Saga Continues, Bar & Bench (Jan. 10, 2022)

[4] Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System 3–4 (2008)

[5]  World Intellectual Property Organisation (WIPO), Blockchain White Paper for IP Ecosystems (2022)

[6] Ibid

[7] Government of India, No timeline fixed for Virtual Digital Assets regulation, says Minister of State for Finance, Business Standard (Dec. 16, 2024)

[8] Copyrights Act 1957, S 13 &14