Demystifying Non Fungible Tokens
Dr. Meera Mehta
Academician & Researcher • Contact: meeramehta17@gmail.com
(Dr) Arun Julka
Academician & Financial Scholar • Contact: eboard@icai.in
“Non Fungible Tokens (NFT) are the game changers in the world of decentralised digital currencies. NFT are the ownership claims of the virtual assets created by their owners. NFT is a proof that uses the blockchain to record the ownership of the digital asset. In India, the NFT craze is picking up as many celebrities have recently joined the NFT club to launch their digital memorabilia. With the increasing popularity of NFT, this paper tries to demystify these digital assets. This conceptual paper develops an understanding about NFT, their future in India and an analysis of the strength, weaknesses, opportunities and challenges these virtual assets will create. Read on…”
In February 2021, the meme of The Nyan Cat was sold for $600,000, and Jack Dorsey, founder of Twitter, auctioned his first Tweet for $2.5 million. These benchmark transactions highlight assets existing purely in the virtual domain where items possess intrinsic individuality without identical substitutes. Ownership claims of such unique virtual assets are minted through Non-Fungible Tokens.
1. Understanding Non-Fungible Tokens (NFTs)
Non-Fungible Tokens represent non-flexible, unique cryptographic assets deployed on a blockchain network, predominantly the Ethereum blockchain (Kugler, 2021). While NFTs are minted and sold over the internet in a manner similar to Bitcoins and other cryptocurrencies, there is a fundamental economic distinction between them:
Fungible Tokens (e.g. Bitcoin, Fiat Currency)
An asset that can be replaced with an identical one in terms of both quality and quantity is deemed fungible. A fungible token is equal to every other token of its kind and capable of mutual substitution; one unit can be freely traded or exchanged for another unit of the same kind (Panel et al., n.d.).
Non-Fungible Tokens (e.g. Digital Art, Rare Collectibles)
An asset is non-fungible when it is impossible to replace it with a similar item due to the good’s inherent individuality and uniqueness. Each token contains unique metadata and cryptographic proof establishing original provenance and non-interchangeable ownership.
Research Methodology & Objectives
This study is a conceptual study undertaken in three structured stages:
- Stage 1: Deciphering the technical, cryptographic, and economic concepts underlying NFTs;
- Stage 2: Analyzing the market expansion, legal framework, and future trajectory for NFTs in India;
- Stage 3: Executing an exhaustive Strengths, Weaknesses, Opportunities, and Challenges (SWOC) analysis.
2. Scholarly Literature Review
The global academic literature provides profound insights into the evolution, tokenomics, and limitations of NFTs:
Wang et al. (2021) – Technical Foundations & Market Scale
Discusses technical dimensions, explaining NFTs as unique identifiers tied to virtual/digital properties. Reports that “till May 2021, the total amount spent on completed NFT sales was 34,530,649.86 USD, which was a ten-fold return on its growing market”, attracting global investor attention while noting that underlying protocols remain in their infancy.
Lau (2020) – Blockchain Convergence & Adoption Barriers
Highlights how decentralized blockchain creates provably rare, legitimate tokens across collectibles, gaming, virtual assets, and real-world tokenization. Concludes that widespread adoption is currently hindered by technology newness, inaccessibility, unpredictable gas transaction fees, and regulatory ambiguity.
Kugler (2021) – Digital Art Provenance & Creator Economics
Emphasizes that prior to NFTs, “there was no widely accepted way to determine the ‘original’ piece of a digital artwork, nor any widely accepted way to prove or transfer its ownership”. NFTs transform creator livelihoods by enabling artists to mint verified digital scarcity.
Trautman (2021) – Virtual Property Evolution & Digital Real Estate
Explores expanding digital art markets, virtual property evolution, blockchain/crypto history, unresolved legal conflicts affecting NFT property rights, and potential frameworks for tokenizing virtual real estate.
Valeonti et al. (2021) – Digital Scarcity & The openGLAM Sector
Demonstrates that NFTs introduce verifiable scarcity into the digital sphere, creating innovative fundraising mechanisms for Galleries, Libraries, Archives, and Museums (GLAM) through sales of digitized historical masterworks.
Bao (2021) – CryptoKitties Phenomenon & Volume Explosions
Documents the historic December 2017 Ethereum congestion caused by CryptoKitties. Notes that after a stable period ($60,000 daily volume until mid-2020), “daily volume topped $10 million in March 2021, surging 150 times over eight months” across art, gaming, metaverse, and utility sectors.
3. The Indian Landscape: Market Growth, FEMA Legality & Double Taxation
Globally, the total market capitalization of NFTs stood at $18,369,471.87 as on December 1, 2021 (CoinMarketCap), jumping 28.49% in 24 hours. In India, adoption is surging as Bollywood celebrities and cricketers enter the space to launch tokenized memorabilia, digital collectibles, and exclusive fan access passes.
Are NFTs Legal in India? FEMA and Regulatory Ambiguity
As of today, there is no blanket prohibition restricting Indian residents from buying or selling NFTs. However, the Foreign Exchange Management Act of 1999 (FEMA) creates significant ambiguity:
- NFTs are non-fungible unique goods, whereas currencies (both fiat and crypto) are fungible mediums of exchange. Therefore, prospective rules prohibiting cryptocurrency trading should ideally exempt NFTs.
- Contracts vs. Derivatives Dilemma: In the absence of an explicit legislative definition in India, intense debate persists regarding classification: “Some argue that NFTs are contracts, while others argue that they are derivatives. If classified as derivatives, trading in NFTs would be prohibited in India under the Securities Contracts (Regulation) Act (SCRA).”
The Double Taxation Exposure: GST + 2% Equalisation Levy
Despite exploding consumer interest, Indian purchasers of digital collectibles face severe dual fiscal burdens: when acquiring an NFT on international decentralized marketplaces (such as OpenSea), the transaction may attract Goods and Services Tax (GST) alongside a 2% Equalisation Levy, a direct tax mechanism traditionally reserved for foreign e-commerce operators supplying to domestic consumers.
4. Critical Vulnerabilities: Carbon Footprint & Cybersecurity
Severe Environmental Carbon Footprint
There is mounting concern that NFTs generate millions of tonnes of CO2 emissions via proof-of-work blockchain transactions:
- One single Ethereum transaction consumes approximately 178.89 kWh (surpassing 1,000 Visa card transactions).
- In April 2021, Ethereum consumed 33 Terawatt hours (TWh) of power—equivalent to the national energy consumption of Serbia.
- As of December 2021, Ethereum’s annualized power burn clocked 94.1 TWh per year.
Cybersecurity Threats & Attack Vectors
As a nascent digital ecosystem, the NFT marketplace exposes users to sophisticated threat vectors:
- Blockchain-Based Attacks: 51% consensus breaches and smart contract re-entrancy bugs.
- Tampering & Metadata Spoofing: Hijacking off-chain server storage links pointing to digital images.
- Denial-of-Service (DoS) Attacks: Crashing marketplace exchange servers during high-demand auction mints.
5. Exhaustive SWOC Analysis of Non-Fungible Tokens
A comprehensive SWOC analysis evaluates the internal capabilities and external market dynamics governing NFTs:
Strengths (S)
- Unique & Non-Fungible: No two NFTs are alike; characteristics recorded immutably in token metadata.
- Digitally Scarce Resources: Generates provable mathematical scarcity in virtual goods.
- Indivisible: Cannot be broken into smaller fractions or bought partially.
- Fraud-Proof Provenance: Stored on decentralized ledgers; transparent, verifiable chain of title.
Weaknesses (W)
- Technology Complexity: Difficult for laymen and retail users to navigate wallets and gas.
- Accessibility Barriers: Steep learning curve for acquiring cryptocurrencies to mint tokens.
- Volatile Transaction Fees: Gas fees fluctuate unpredictably during network congestion.
- Non-Exclusivity: Buying an NFT does not prevent public copying or viewing across the web.
Opportunities (O)
- Digital Art & Collectibles: Global monetization platforms for independent artists and creators.
- Gaming & Metaverse: Interoperable in-game assets, avatar skins, and virtual land parcels.
- Fashion & Luxury Goods: Tokenized wearable collections and digital twin authenticity verification.
- Real Estate & Identity: Tokenizing physical deeds, title records, and personal credentials.
Challenges (C)
- Security & Cyber Threats: Smart contract vulnerabilities, phishing, and wallet hacks.
- Carbon Footprint: Enormous environmental toll of fossil-fueled Proof-of-Work mining.
- Art Theft & Copyright Plagiarism: Unauthorized minting of artists’ work without consent.
- Legal & Regulatory Void: Absence of harmonized statutory definitions and tax guidelines.
6. Conclusion: The Rise of an Uncorrelated Digital Asset Class
NFTs are unique, traceable, rare, and indivisible, combining non-fungible assets with the finest features of decentralized blockchain technology. Unlike traditional digital assets that are issued, governed, and revocable at any moment by centralized corporate platforms, NFTs confer verifiable, sovereign ownership directly to their holders.
Overall, NFTs represent a young asset class with the potential to evolve into a powerful, uncorrelated asset class—a highly desirable characteristic for institutional and retail investors seeking alternative instruments to preserve monetary worth and hedge traditional market exposures.
7. Exhaustive Bibliography & References
- Martinod, Nicolas J., Kambiz Homayounfar, Davi Nachtigall Lazzarotto, Evgeniy Upenik, and Touradj Ebrahimi. 2021. “Towards a Secure and Trustworthy Imaging with Non-Fungible Tokens.” 47. doi: 10.1117/12.2598436.
- Bao, H. (2021). Recent Development in Fintech: Non-Fungible Token. FinTech 2021, 1, 44–46. https://doi.org/10.3390/fintech1010003.
- Kugler, L. (2021). Non-fungible tokens and the future of art. Communications of the ACM, 64(9), 19–20. https://doi.org/10.1145/3474355.
- Lau, K. (2020). Non-Fungible Tokens. Research and Insights Macro Report, November.
- Panel, E., Penedo, A. C., Brussel, V. U., Authority, I., & Siadat, A. (n.d.). NFT – Legal Token Classification. 1–14.
- Trautman, L. J. (2021). Virtual Art and Non-fungible Tokens. SSRN Electronic Journal, 1–76. https://doi.org/10.2139/ssrn.3814087.
- Valeonti, F., Bikakis, A., Terras, M., Speed, C., Hudson-Smith, A., & Chalkias, K. (2021). Crypto collectibles, museum funding and openGLAM: Challenges, opportunities and the potential of non-fungible tokens (NFTs). Applied Sciences (Switzerland), 11(21). https://doi.org/10.3390/app11219931.
- Wang, Q., Li, R., Wang, Q., & Chen, S. (2021). Non-Fungible Token (NFT): Overview, Evaluation, Opportunities and Challenges. http://arxiv.org/abs/2105.07447.
- Outlook India (2021). Cryptocurrency regulation affects NFT in India. Available at: Outlook India Report (accessed on 30/12/2021).
- NLUJ Law Review (2021). Non-Fungible Tokens: Examining its Legal Validity in India. Available at: NLUJ Law Review (accessed on 31/12/2021).
- IndiaCorpLaw (2021). Non-Fungible Tokens: An Indian Perspective. Available at: IndiaCorpLaw Analysis (accessed on 1/1/2022).