Explained: After Bitcoin and other cryptos, now comes NFT

Note to readers: Non-fungible tokens (NFTs) are the new emerging investment options and they are becoming popular by the day with multi-million-dollar sales this year on the exchanges. They have captured the attention of high net-worth individuals (HNIs) and ultra HNIs. But what is NFT really? Is it regulated? Moneycontrol’s two-part series demystifies NFTs and explores if they are worthy investments.

Non-fungible tokens (NFTs) are exotic new digital assets. After the rally in cryptocurrencies such as Bitcoins, Ethereum, and Dogecoin, NFTs too is considered by some as a way to get rich fast. In the last couple of months, NFTs have hit the headlines multiple times. For instance, in February, an animated GIF of Nyan Cat-a 2011 meme was auctioned for more than $500,000 as an NFT by its creator. Similarly, in May, 2007’s popular video on YouTube ‘Charlie Bit My Finger’ was auctioned and sold by the parents (original video creator) as an NFT for 500,000 pounds (Rs 5.15 crore approximately). The buyer is investing in NFTs to earn a higher value upon reselling these collectibles, digital art, music, GIFs, popular videos, etc. Let’s understand this instrument, see how the market for NFTs in India is evolving.

What is NFT?

Imagine an artwork that you have made yourself and now wish to sell. One way is to auction it. But for that, you need to be physically present at an auction site and the physical copy then goes out of your hand. But is there a better way to sell that art in such a way that, for instance, every time it exchanges hands, you earn a little royalty?

One way to do is to take a photocopy and sell it. But that will not be the original copy, and hence can be of little value. Here’s where an NFT or Non-Fungle Token comes in. Once the digitized art is tokenized, it becomes a certified original copy. Think of an NFT as a certificate to a digitized property. An NFT is, additionally, a digital program. In simple words, using an NFT, you could also earn a royalty every time this token (your digitized artwork) exchanges hands.

Even tweets are sold as an NFT. For instance, Twitter co-founder Jack Dorsey sold his first-ever tweet as an NFT for more than $2.9 million. These digital assets are bought and sold online from the exchanges that allow NFT trading with cryptocurrency. NFTs have been around since 2014, but are gaining popularity now.

NFT has unique properties, so these digital assets cannot be easily exchanged. For instance, it could be a painting of Mona Lisa. You can download and print the photo from the website or take a photo of the painting while visiting the Louvre Museum in Paris, but there will be only one original painting. Similarly, you have your unique music creation and one of its kind in the world. You can list your music as an NFT on the exchange and can earn good value by selling it.  Any asset that is unique and can be made non-fungible can be certified by an NFT and sold.

How do NFTs work?

NFTs can be bought and sold, much like other assets on the exchanges, but they have no tangible form of their own. There are two parties involved: the creator of digital content and the buyer on the exchange. Now, these NFTs are like a physical collector’s items, but in digital form. So, instead of purchasing an actual painting that you can hang on the wall at home, the buyer gets a digital file in a token form which is saved in the buyer’s wallet linked with the NFT exchange. For instance, on WazirX, the NFT Marketplace creator and buyer need to have a decentralized metamask wallet. It's more like a bank account for cryptocurrencies.

The buyer has ownership rights, which could be for a limited period or a lifetime as per the contract. At any particular point in time, an NFT can have only one owner.

Each digital asset in NFT is distinguished by a unique code that is recorded on the blockchain. It's like a ledger with details of the creator and buyers. This code helps in tracing back the creator (owner) of the NFT.

"With blockchain technology in NFT, digital arts cannot be forged by the creator on the exchange as the records are digitally maintained," says Sandesh Suvarna, VP of WazirX NFT Marketplace.

NFTs listed on exchanges have contracts and give the creator (artist), a royalty for a lifetime or limited period as per terms of any future sale of the token. For instance, if a creator of the digital asset on the WazirX NFT marketplace mentions 10 percent royalty in the contract of digital art, then she will keep earning royalty every time the product gets sold.

Are NFTs regulated?

In India and global markets, NFTs are treated as derivatives of cryptocurrencies. “The standard cryptocurrency regulatory issues apply. If the cryptocurrencies get banned, then crypto assets such as NFTs will also get banned in the country,” says Swapnil Pawar, Founder of ASQI Advisors.

“Legally, there is no framework for investing in NFTs, so they are governed by the law of contract of the country,” says Mukul Shrivastava, Partner, Forensic and Integrity Services, EY.

At present, if you lost money while investing in NFTs due to a fraudulent transaction, you cannot raise a complaint with the Reserve Bank of India (RBI). You will have to rely on the exchange to resolve the issue.

How are the trading prices arrived at?

An NFT’s price is derived in two ways: auction and price fixed by the creator. International NFT exchanges such as OpenSea allow creators to choose any of the pricing methods. In India, NFT is listed only on WazirX marketplace. It allows the selling of NFT at a fixed price in the exchange.

Can I invest in NFT using the INR currency?

No. You can’t invest in NFTs directly through INR currency. You require transactions to be completed in cryptocurrencies on the NFT exchanges. For instance, on WazirX you can invest in NFT only through WRX crypto. The buyer has to convert the INR currency into WRX crypto in the digital wallet before investing in a particular NFT.

On OpenSea, you can invest in NFT using multiple cryptocurrencies – Ethereum, DAI, USDC, REVV, Whale and wBTC.

What charges are levied for trading by NFT exchanges?

OpenSea charges 2.5 percent of sales. Other international exchanges charge up to 7.5 percent of sales. In India, WazirX charges 5 percent of sales from the creator. They are yet to decide on charges for the following resale of the NFT.

At OpenSea and WazirX there are no service fees for buyers, while others charge up to 3 percent on top of the sale price.

Is investing in NFT a bubble?

Even genuine NFTs are hyped up on the exchanges with multi-million-dollar sales of a popular or budding artist. “But, it is a pure scam, as nothing is underlying and buyers (investors) are merely speculating for the fun of it,” says Pawar.

“Investing in NFTs may or may not become a fad, like the GameStop or AMC entertainment holding stocks listed on Nasdaq stock exchange. I doubt that people may invest similarly in NFTs considering it as an indirect way of gambling for quick gains. So, one should be cautious, understand this space first before deciding to invest,” says Rishabh Parakh, a chartered accountant and founder of NRP Capitals.