Indian courts providing legal clarity for Web 3.0 and Metaverse

NFTs, along with cryptocurrencies, smart contracts and virtual reality, are generally viewed as core components of Web3 technologies. which are expected to shape the contours of the next generation of world wide web use.

In a recent landmark judgment delivered in the matter of Digital Collectibles v. Galactacus Funware in April 2023, the Delhi High Court had the opportunity to analyse the effects of non-fungible tokens or NFT-based digital player cards in relation to intellectual property rights in India. While the judgement appears to be limited in the scope to assessing the right of publicity in India, it has far-reaching implications for the regulation of NFTs, beyond just the skill-based online gaming sector and fantasy sports.

NFTs, along with cryptocurrencies, smart contracts and virtual reality, are generally viewed as core components of what is termed as Web3 technologies. These technologies are expected to shape the contours of the next generation of world wide web use. While many of these innovations are already seeing deployment across a variety of use cases, legal guidance on their use is extremely sparse. In fact, the Digital Collectibles v. Galactacus Funware case marks the first such instance of the Indian higher judiciary reckoning with the nuances of NFT technology through a legal dispute.

Record of Transactions

Despite these circumstances, the Delhi High Court managed to appreciate the key technical aspects of NFTs in a holistic manner and passed a well-reasoned decision rejecting the plea for injunction against a fantasy sports game for using NFT-based digital player cards. The High Court correctly understood that NFTs are merely an underlying technology designed to ensure security and authenticity as a means of proof of ownership and maintain an irrefutable record of transactions. The Court noted that this technology was freely available to anyone, and no person could claim to have an exclusive right over the use of NFTs. After all, the creation of an NFT does not by itself imply the existence of a valuable asset. Rather, it is the value of the underlying asset, to which the NFT corresponds, that determines the value. This can be understood practically from different NFT use case examples.

For instance, the New Town Kolkata Development Authority is reportedly incorporating unique NFT tokens as proof of authenticity or a certificate of ownership of land assets. Here, the value of the NFT would be directly tied to the value of the land, and would only be transferred along with the underlying asset. Similarly, musicians like Steve Aoki have also embraced NFT-based ticketing for their concerts. The NFT-based tickets, when purchased by fans, provide access to the physical experiences of the concert. However, NFTs can also be used in tamper-proof voting systems, where the NFT would not be connected to any underlying real-world asset, and would not have any inherent commercial value.

In this respect, the interpretation of the Delhi High Court is very progressive and has harmonised the existing legal rights with the new and innovative digital technology. However, the approach of the High Court is only one of two possible ways to regulate emerging Web3 technologies.

Need For a Legislative Framework

The alternative approach is the creation of a comprehensive legal framework composed of statutes, rules and regulations which accommodate concerns specific to Web3. This was the exact approach adopted in the 1990s when an Information Technology Act was brought into force with the advent of the internet.

The importance of having ex ante legislative and policy frameworks for the regulation of these spaces is already being appreciated by various governments across the globe. Countries such as the United Arab Emirates, Switzerland and Japan have been at the forefront of Web3 regulation initiatives. Presently, there is no legal framework in place within India for NFTs, cryptocurrencies or blockchain technologies like smart contracts. The Ministry of Finance has also recently acknowledged that cryptocurrency technology is borderless and requires international collaboration to prevent regulatory arbitrage. Therefore, any legislation for regulation or for banning can be effective only with significant international collaboration, which would also extend to an evaluation of the risks and evolution of common standards for regulation. However, as India has recently assumed the presidency of the G20 international forum, it is well placed to initiate such collaboration, set the narrative, and develop such standards for cryptocurrency and across the entire gamut of Web3 technologies.

Returning to the present, there is no doubt that there remains a gap in the regulation of upcoming Web3 technologies, along with the Metaverse. In such an environment, Indian courts will be expected to evolve regulation through judicial precedent in a gradual piecemeal manner, by applying existing legal principles. Whatever regulatory approach is eventually adopted, it is certain that NFTs and other technologies will eventually be assimilated into our legal framework. The landmark decision of the Delhi High Court is an exciting signal that India is one of the few jurisdictions in the world where this process is already underway.

Dhruv Garg and Utkarsh Srivastava are lawyers with a practice in emerging technology and policy. Both have appeared on behalf of one of the intervenors in the Delhi High Court in ‘Digital Collectibles v. Galactacus Funware’. Views are personal, and do not represent the stand of this publication.