Understanding NFT and its legal status in Bangladesh and south Asia

Introduction

In this era of the 4th Industrial Revolution, technology is also booming faster than ever. The emergence of new technological innovations like Web3, Metaverse, NFT, Augmented Reality, Virtual Reality, IOT, decentralization, tokenized economy, and blockchain technology is shaping the digital landscape of the world in a completely new manner.

Cryptocurrency and NFT are overwhelming the world economy and altering the old monetary concept. In this article, we’ll dip our toes in the water, to understand what is NFT and what are the regulatory framework in Bangladesh and the other two south Asian economies, India and Singapore.

What is NFT?

NFT stands for Non-Fungible Token. The term “Fungibility” is an economic term, which means inter-changeable. A product, art item, or asset of the same type or class can be changed to each other known as fungible. For example, a hundred-taka note can be easily changed by two fifty-taka notes, yet the value will remain the same. In most cases gold is also considered fungible goods, for instance, you can change a 100 grams 24 caret gold bar with another two 24 carets 50 grams gold bars.

But when the interchange between the like-kind product or asset is not possible that is called non-Fungibility. For example, the original portrait of ‘Monalisa’ at the Louvre, Paris or the ‘David of Michelangelo’ in Florence, Italy, or the ‘Symphony’ of Mozart is unique in the world and not fungible by any means.

When you apply the same idea to a digital product or asset, that is called an NFT (Non-Fungible Token). For example, a soft copy of a photograph, a piece of music, a digital art or illustration, a video clip, a tweet, even a virtual apartment or island, writing, etc. Here is the big question, digital content can be easily copied and downloaded, then why someone shall buy it?

Let’s think of it this way, you know that the original “Monalisa” painting has at louvre museum, yet you can still buy a fake copy of it from the market. In the same way, think of a photograph or music or video, it can be copied millions of times, but the original one, the first one, is the main copy, which is unique. It is more like buying a certificate of ownership of an asset that lives on the blockchain. In NFT the original copy binds with an encrypted digital signature, linked through a blockchain network. In NFT the buyer actually just buys the bragging right of the underlying product and that can be resold later. NFT uses blockchain technology to authenticate, prove, and preserve the ownership of digital assets. A person who creates and sell these items or products is called the creator or seller and another person who buys them is called the buyer in an online space where the seller showcases the products and the buyer purchase, which is called the marketplace. The consideration the seller or marketplace take is called money but in NFT transaction, they don’t use conventional money (I.e., Fiat money), instead they use cryptocurrency such as bitcoin, Ethereum, ripple, Monaro, etc.

Why regulation of NFT is necessary?

NFT regulation is necessary because of the large volume of money involved with it. Larva Labs sold “CryptoPunk #5822” in February 2022 at $ 23.7 million, A digital artist Mike Winkelmann AKA Beeple March 2021, sold one of his NFT art named “”Everydays – The First 5000 Days” at $ 69.3 million.  According to different online sources, it has been forecasted that the NFT market hoping to reach $ 130.35 billion by 2028.Thing to consider for Regulating NFT

There are many things that need to consider before crafting regulations for NFT

The NFT transaction takes place in various online marketplace or platforms, registered in various countries globally, every country has its own jurisdiction and legal system. Some countries banned NFT and Cryptocurrency and some countries regulate them.

NFT transaction traded in cryptocurrency and cryptocurrency is decentralized and untraceable. So, if the buyer and seller make transactions anonymously, then it’s difficult to identify.

People can use NFT transactions as a means of money laundering overseas, so the financial Intelligent Unit needs to develop a special strategy to trace and prevent that.

NFT seller or platform doesn’t provide copyright protection. So, regulation needs to enact how a digital asset can be protected as intellectual property.

It’s also a matter of concern, how NFT can be protected from hacking and financial crime through insurance.

A huge volume of money transactions is involved in an NFT transfer, and how government can frame an NFT asset in taxation. Shall they impose a tax on it like physical money or cryptocurrency? The price of cryptocurrency keeps fluctuating, it is unstable and extremely volatile, so what amount of tax shall be deducted? Does amendment to existing income tax law is enough or a new specialized law is required? Shall it fall under a double taxation treaty with any other country?

NFT Regulation in Bangladesh, India and Singapore

Bangladesh

Cryptocurrency is inevitable to buy and sell NFT. Using cryptocurrency is not recognized by Bangladesh, it’s neither legal nor a crime.

The Bangladesh Bank circulated a warning on its website to discourage trading cryptocurrency. Foreign Exchange Regulation Act, 1947, and the Money Laundering Prevention Act, 2012 don’t have any clear provisions for cryptocurrency. Cryptocurrency has not been defined as a currency under section 2b of the Foreign Exchange Regulation Act 1947 or any other Bangladeshi law.

The legal standing of Bangladesh Bank’s warning or declaration is cloudy because it’s just a caution, not any law, which is enforceable by a court. The ICT division enacted and published National Blockchain Strategy 2020. The Authorities are also thinking of launching their own digital currency as an alternative to cryptocurrency. which is a good signal for crypto enthusiasts.

But right now, Bangladesh has no specific regulation for NFT or any Virtual Digital Asset.

India

Section 2(47A) of the Income Tax Act, 1961 has been defined VDS (Virtual Digital Asset), which includes, any information, token, code, or not Indian or foreign currency, which has been generated by means of cryptography or other is known as VDS.

Section 194S of the Income Tax Act 1961 has been inserted with a provision for 1% TDS (Tax Deduction at Source) in transfers of VDS, if it exceeds Rs 10K/year.

Section 115BBH of the Income Tax Act 1961 has been inserted with a provision to impose a 30% income tax on, income from transfers of VDS.

Singapore

Currently, Singapore doesn’t regulate NFT. But In May this year, The High Court of Singapore has given an injunction to stop the illegal selling and transferring of an NFT from its owner, a Singaporean citizen. This is a trailblazer in Asia.

Conclusion

NFT and Virtual Digital Assets, are complex to regulate and their legal status is ambiguous in most countries. Because of its underlying blockchain technology, it’s can maintain absolute anonymity, which can be used to commit big financial crimes. On the other hand, NFT and Metaverse are a new evolution, artists can authenticate and monetize their work by making NFT, and there are numerous positive possibilities. It is the current tendency and its use is increasing rapidly, so Bangladesh needs a proper legal framework to regulate digital assets, cryptocurrency, and NFT.

The Writer Abdullah Al Mamun is an apprentice lawyer, District and Session Judge Court, Dhaka