India: Smart Contract In The Indian Crucible

Last Updated: 19 June 2018
Article by Anirudha Bhatnagar

Smart Contracts- First Impressions

Few words have caused as much bewilderment in the Indian setup as "blockchain" and "smart contracts" have. Much excitement has been generated by the coverage of cryptocurrencies in mainstream media, and the general aspiration towards digital transactions. But, the lack of understanding of the workings of the systems has stalled the growth rate of these entities. Currently, Ethereum is one of the most popular platforms that are specifically built for creating smart contracts, while bitcoin was only limited to currency usage.

Before we jump into the question of regulation of smart contracts in India, we need to first understand what smart contracts are and how exactly do they function. Smart contracts, just like standard contracts, contain a set of terms and conditions which are encoded, saved and replicated in the system, and by virtue of the blockchain, administered by the network of computers that run it. And smart contracts are garnering as much attention as they are owing to the benefits they bring in. The foremost of those are that they take out the middleman from the transaction and hence lowering the costs, and making a contractual agreement faster. Smart contracts are also much easier to form as they mostly contain standard contingency terms, which are if in case of an event, or fulfilling of a condition, an obligation must be performed, and are automatically performed in exact accordance with how the user formed the contract. As these contracts are self executing, there is no place for indistinct clauses like uncertain jurisdictions. This makes smart contracts perfect for multiple applications. They can act as a standard agreement between a user and a service provider, for example insurance. They can also act as in instrument for multi party agreements, and come into action whenever the requisite amount of signatures are obtained.

Smart Contracts- Global Regulations

How these smart contracts have been regulated and integrated into the market globally brings out some very interesting things. The US, generally the world leader in regulating new technologies has seen a lot of states rapidly tried to codify smart contracts into law. Arizona set the tone by passing laws to legally identify smart contracts and a few other states like Tennessee followed suit, aiding to the already existing Uniform Electronic Transactions Act, 1999. These laws, as has been passed in a haphazard manner, have come under heavy criticism from few of  the corners of the tech community, who believe that these laws only act as a patchwork and different states having different laws is just a facilitator for pandemonium, adding to the already existing confusion. It has also been said in the MIT Technology Review that smart contracts are meant just to facilitate some of the actions of the actual contract, while a contract remains a much more multi faceted instrument, including standards like reasonability which can't be a part of a smart contract1.

This is not to say that some participants have accepted blockchain and smart contracts with open arms. Depository Trust and Cleaning Corporation (DTCC), who run the clearing operations for a vast majority of Wall Street Operations declared their plans to handle trade of about 11 Billion USD worth of credit derivatives in blockchain through smart contracts2. Barclays Corporate Bank is already using blockchain to digitize transaction documents and use the technology for improving workflow management and moving an asset of value around. They also see the potential of cryptocurrencies being a part of the mainstream banking system in the next 15-20 years3. Japanese telecommunications conglomerate KDDI Corporation has joined the Enterprise Ethereum Alliance and are planning to test how blockchain-based smart contracts can be used for facilitating payments between companies.4

The Indian Scenario

The situation in India is no less complex. While blockchain as a technology has been accepted with aplomb, with SBI launching 'BankChain' for sharing of KYC data among banks using blockchain, and pharmaceutical sector using blockchain to maintain their records5 amongst several other applications; the acceptance has been limited to maintaining records and information sharing. Cryptocurrencies haven't had the same level of acceptance as it is neither a recognized currency nor it is illegal, which makes it  a roadblock for smart contracts. The smart contract has a huge potential in India, with regard to the  payments related to household activities and their monitoring like supplies, e-commerce, the something as fast paced as securities markets, where it could work in tandem with algorithms to make trading systems even more efficient, etc. Any relatively straightforward transaction can use smart contracts to make the whole process much faster, bringing down the costs substantially.

There is no clarity regarding how the smart contracts shall be codified in the Indian Law, if at all they are. The most common questions amongst the legal fraternity involve the status of cryptocurrencies being undefined in any law, and the questions of their taxations. It is a pertinent legal question whether cryptocurrencies can be treated as non monetary consideration for a contract, akin to Commodities Futures Trading Commission recognizing bitcoin as commodity and taxing it accordingly. The dispute resolution mechanism and important aspects like the conscionability of the terms, as covered in the 199th report of the Indian Law Commission6 which are very essential to the Indian Contract Law remain unclear, and the potential of idea of the terms for award and damages be constituted in the smart contract itself might fail the test of conscionability. Further challenges are provided by the system of validation of the smart contract which is to be done through digital signatures. The Indian IT Act, 2000 puts a limitation on obtaining these digital signatures, and provides that they can only be obtained through a government designated certifying authority as per Section 35. This stands in complete variance with blockchain technology as it uses a hash-key for authorization as an individual identifier and authenticator. This disparity is also extended to the Indian Evidence Act, section 85B which states that an electronic agreement would be considered valid only if it has been authenticated with a digital signature. These two legal checkpoints not only corrupt the authentication process in blockchain through hash-key generation but also disallow any admissibility in the court as evidence.

In conclusion, it is undoubted that even though smart contracts aren't completely self-sustaining systems, they have tremendous potential in reduction of costs and time worth billions, and making the whole process more secure as all the contracts will leave a clear audit trail. This saving shall benefit both the firms and the customers engaging with them. And concerns regarding regulations exist on multiple fronts. The introduction of smart contracts will pose fresh challenges for the legislature and it remains to be seen whether legislature is able to keep pace with the ever expanding paradigm of blockchain and smart contracts.

Footnotes

1 https://www.technologyreview.com/s/610718/states-that-are-passing-laws-to-govern-smart-contracts-have-no-idea-what-theyre-doing/

2 https://www.reuters.com/article/us-dtcc-blockchain-repos/dtcc-completes-blockchain-repo-test-idUSKBN1661L9

3 https://www.siliconrepublic.com/enterprise/barclays-blockchain

4 https://blog.jincor.com/the-japanese-evolution-of-smart-contracts-b9ff463493f5

5 https://www.innoplexus.com/index.php/blog/five-use-cases-for-blockchain-in-pharma/

6 199th report of Law Commission of India on Unfair (Procedural & Substantive) Terms of Contract

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions