Smart Contract In The Indian Crucible

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 contract[1].

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 contracts [2]. 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 years [3]. 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 records [5] 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 Commission [6] 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.

Author: Anirudhha Bhatnagar, Intern at Khurana & Khurana, Advocates and IP Attorneys. Can be reached at swapnil@khuranaandkhurana.com.

References:

[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

[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

Leave a Reply

Categories

Archives

  • October 2024
  • September 2024
  • August 2024
  • July 2024
  • June 2024
  • May 2024
  • April 2024
  • March 2024
  • February 2024
  • January 2024
  • December 2023
  • November 2023
  • October 2023
  • September 2023
  • August 2023
  • July 2023
  • June 2023
  • May 2023
  • April 2023
  • March 2023
  • February 2023
  • January 2023
  • December 2022
  • November 2022
  • October 2022
  • September 2022
  • August 2022
  • July 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • February 2011
  • January 2011
  • December 2010
  • September 2010
  • July 2010
  • June 2010
  • May 2010
  • April 2010