India: Blockchain And Smart Contracts – Indian

Legal Status
Blockchain Technology is one of the latest technologies in the era of technology.
Technology which carries the potential to change the outlook of the way things
are done till now and all the orthodox methods which our human brain is habitual
to. In simple words, Blockchain as every other technological advancement is
created for the purpose of reducing an individual's effort and increase the role of
technology to amplify the efficiency for the concerned task.

What is Blockchain?

Like the name of the technology suggests, this technology is based on a chain of
blocks. This technology traces back its origin to the year 1991. Stuart Haber and
W. Scott Stornetta were the first set of people who thought of developing a
technology that will inscribe information in small digital blocks using
cryptography. These blocks are made up of codes, protecting the information not
only for the purpose of security but also time stamp the data for future
reference. Hence, not only the data is protected but the duration, date and
chronological aspects of the data can be cross-checked as well.

How secure is Blockchain?

Blockchain functions on a peer to peer distributed ledger-based system. It is very

unlikely that someone can tamper with the data secured. In other words, peer to
peer system means that the information uploaded to the ledger is in access and
stored to every computer system that is part of the network. Further, as
information is encoded into these digital blocks, any information if needs to be
amended, would require the individual to not only change one particular block
relating to that piece of information but would require a change in all the blocks
attached to that chain.

If we further discuss the technical aspects for better understanding it is essential

to understand a simple term called Hash Function. Hash Function refers to a
function that when fed an input generates out an output which is in the form of
code being unique for every input. This particular function is applied to the
blocks created under Blockchain Technology. Hence, changing a block that has
its own hash function and simultaneously changing the hash function pertaining
to other blocks of that chain is a different ball game altogether. The idea of
information being tampered with under Blockchain Technology cannot be
executed without the help of multiple individuals or an extraordinary level of
skills in this field.

Smart contracts and Blockchain

A technology like Blockchain having such multidimensional capabilities could be

channelized for different uses in our day to day lives. This brings us to the
second topic of our article which is Smart Contracts. Blockchain is a large sphere
under which "Smart Contracts" is one small head under its uses.

Smart Contracts are not defined in any of the Indian Legislations till date, but for
a general idea it can be extracted from one of the notifications 1 released from
Telecom Regulatory Authority of India (TRAI) in the year 2018.
According to the notification Smart Contracts refer to the digitally encrypted
agreement codified through Cryptography. Smart Contracts are smart because
they function on the execution of predetermined commands along with
regulatory compliance. Also, they specifically exclude space for human
intervention or human error of any sort. All of these steps and procedures are
recorded, processed carried on all the systems simultaneously. Therefore, every
party can check the stage on which the agreement is functioning right now and
whether it has been honored properly or not.

The contracting party benefits from such contracts for multiple reasons which
will be discussed later in this article in detail. One of the prima facie advantages
of Smart Contract is that even if the party intends to change or alter the
agreement in his favor, he cannot do so once the agreement is codified in
finality.

Traditional Contracts V/S Smart Contracts

For a better understanding of Smart Contracts, one must understand the

difference between Smart Contracts and Traditional Contracts. The term
'traditional contracts', simply refers to the most basic form of a contract. In which
the parties come to an agreement on the terms of their contract, keeping in
mind the intention and the final goal of the whole transaction. These contracts
provide a very flexible approach to the parties pertaining to the amendment of
their contract. This is surely not the case with Smart Contracts. Traditional
contracts can be in written form (hard copy) or electronic form as well.

The fundamental differences between the two are mentioned below:

Traditional Contracts Smart Contracts

Function on the performance of legal Self-executing computer Program

terms agreed upon.

It can be modified anytime with the It cannot be modified according to

consent of both parties. the parties' will.

These contracts entertain the possibility These contracts cannot be

of being manipulated and tampered with. tampered.

These contracts are based to execute These contracts strive to restrict

contracts through human participation. human participation to the
minimal.

These contracts use simple codification of These contracts use complex

the terms agreed upon. distributed ledger-based
technology.
Advantages of Smart Contracts

 Speedy Process- Smart Contracts have the advantage of completing

tasks swiftly and with great efficiency. Smart Contracts focus on reducing
human intervention hence, it eliminates the human errors like time spent
 in processing paperwork, correcting error in documents and etc. Computer
codes eliminate such errors.
 Reliable- Smart Contracts are based on pre-determined commands which
are automatically executed at every stage of a contract. Also, the record
of every such transaction is directly fed into the system of every
participant simultaneously through the network. Hence, it eliminates every
chance of such transaction being manipulated or tempered with.
 Secure- Security is the USP of Smart Contracts. Data encrypted through
cryptography and functionality of the distributive ledger system ensures
data protection. Each block contains information and for altering that, one
will have to hack all the blocks in a chain as they are related to each
other.
 Reduce Operational Cost- With the benefit of eliminating human errors,
the adjacent cost like commissions, fees, procedural costs, costs relating
to various formalities and paperwork are also eliminated. Basically when
the role of an intermediary is set aside the cost relating to such
intermediaries also extinguish.

Indian Scenario for Smart Contracts

Before discussing the Indian scenario pertaining to Smart Contracts one must
know that acceptance of Blockchain as a form of technology and Smart Contracts
as one of its uses are two different things. If a country has a positive attitude
towards Blockchain technology will not ipso facto mean that it will also accept
Smart Contracts with open arms.

India as a developing nation is not lacking behind in recognizing the potential of

Blockchain technology. Rather various government institutions have started to
include "Blockchain" as a part of their research and development programs. For
reference some of them are cited below:

Department/Board/Authority Program

Ministry of Electronics and Information National Policy on Software

Technology Products (2019)2

Telecom Regulatory Authority of India In exercise of powers conferred by

section 36 and section 11of the
Telecom Regulatory Authority of
India Act 19973

Press Information Bureau Government of Integrate to Innovate Programme

India: Ministry of Commerce and Industry for energy Startups4

Department of Banking Regulation Enabling Framework for Regulatory

Banking Policy Division Sandbox5

Press Information Bureau Government of Coffee Board Activates Blockchain

India: Ministry of Commerce and Industry Based Marketplace in India6
In addition to the above programs there are few cases which recognize the
importance of Blockchain technology and are slightly tangent to the idea of
patenting it. A writ petition7 was filed and allowed in the High Court of Delhi for
registration of a patent. The patent claim was earlier rejected by the Patent
Authorities on the ground that it falls under the category of things which are not
considered as inventions. As software under section 3(k) 8 of The Patents Act,
1970 is not patentable per se and Blockchain is a kind of software. Hence, this
petition mentions that just because of the fact that an invention is a kind of
software does not mean that it is not patentable on the face of it. Rather in the
modern age of technology where our everyday tasks are based on software
developments over the years. It is very orthodox and harmful to not consider
technological advancement based on Blockchain, Artificial Intelligence, etc.

Statutory Dichotomy

The Indian Contract Act, 1872

The Indian Contract Act, 1872 casts out certain essentials for a valid contract.
These essentials are basically the golden scale or the yardstick that every
agreement should match for being a valid contract. Essentials stated under
section 109 of The Indian Contract Act, 1872, explains that an agreement which
are made by the free consent of competent parties for a lawful consideration
with a lawful object is a valid contract.

 Analysis in reference to Smart Contracts

Smart Contracts fulfills all the criteria under section 10 of the Contract Act.
Hence, as far as validity of Smart Contracts is concerned, they are proper
and valid contracts under The Indian Contract Act, 1872.

Information Technology Act, 2000

IT Act, 2000 specifies various provisions which deal with the importance, usage,
authentication and creation of "Digital Signatures10". IT Act elucidates that under
any law when a document or information furnished, needs authentication
through affixation of signatures shall be deemed to have been fulfilled if such
information is authenticated by the means of digital signature 11. Hence, digital
signatures are used as authentication devices. In simple words, in a court of law,
consent to an electronic document can be easily established if digital signatures
of the parties are affixed to it12. Although, the act specifically does not prohibit
using self generated digital signatures with the help of your own software but it
is pretty clear, if that's what our Government would have wanted, why would
they go through the pain of enacting powers for Central Government regarding
digital signatures?

Then power of certifying authorities, procedure to grant license, duties of such

certifying authorities. Further, rules regarding grant, suspension and revocation
of such license and digital signatures. Author's intention behind mentioning
various kinds of procedure for digital signature is, to communicate the idea that
government is insinuating through these provisions that self generated digital
signatures are uncertified and hence, not valid.

 Analysis in reference to Smart Contracts

Smart Contracts as mentioned above use cryptography for coding into the
ledger based system. Smart Contracts also use digital signatures for
authentication and secured limited access. The only point of concern is
that, digital signatures created under the Blockchain Technology are not
the kind authorized under IT Act, 2000. Digital signatures under
 Blockchain technology are self generated.
This means that, all such purposes for which any document, information or
forms submitted require an authentication through affixation of signatures
can be performed by Smart Contracts but are not certified under the
regulating statute. The effect being invalid.

2018 RBI Notification on Cryptocurrency

On 6th of April 2018 RBI published a notification 13 pertaining to Virtual Currency.

In this notification RBI strictly prohibited all the regulated entities to deal in or
provide services for the facilitation of virtual currencies.

 Analysis in reference to Smart Contracts

Any contract for being a valid contract needs a valid and lawful
consideration. Like any other contract even in Smart Contracts if you are
rendering a service or selling a product you expect a payment in return.
One of the key features of Smart Contracts is that it helps in making
payment across the globe swiftly in form of cryptourrency. Cryptocurrency
is a form of Virtual Currency. Parties convert their currency into
cryptocurrency through an exchange and then deposit it into an escrow
account. As soon as you receive the goods sold or receive the service
rendered, payment automatically gets sanctioned from that escrow
account into the payee's account.
Therefore, RBI notification leaves Smart Contracts high and dry. Neither
RBI clears its stance on the status of cryptocurrency as valid form of
currency or not. Neither any statute is available to clarify such status even
after 2 years have passed after such notification.

Conclusion

The functioning, importance and role of Smart Contracts under Blockchain

Technology is pretty clearly explained above. Whereas, the legal predicament of
Smart Contracts in India is pretty dubious. There are two main reasons for such
uncertainty.

Firstly, the question on validity of cryptocurreny and the implied bar over
uncertified digital signatures, makes it a very dicey affair for all the potential
users of such technology. It's not like government is unaware of the transactions
and crimes14 taking place through cryptocurrency. It's just that government is
taking a lot of time in formulation of statutory provisions clearly defining terms
like Smart Contracts, virtual forms of currency and the legal aspect attached to
it.

Secondly, along with a great deficiency of statutory provisions governing the

concept, government institutions are simultaneously promoting and accepting
the use of Block chain. The Telecom Commercial Communications Customer
Preference Regulations, 201815 goes to the extent of defining Smart Contracts
and permit its use. Now, the main question is what about the virtual currency
which might be used as a fuel for such contracts. These are some questions
which we need answer to as soon as possible. There are countries like
Switzerland which recognize cryptocurrency and have made legislative
developments regarding the same. New Nevada legislations recognize Smart
Contracts and Blockchain as well. So it's high time India clear its stance
pertaining to Blockchain and Smart Contracts.