Smart Contracts Blockchain and India

Smart Contracts Validity in India

Smart Contracts Blockchain and India
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Introduction to Smart contracts and block chain, Issues in India , recommendations and suggestion and conclusion.

Proposed by Nick Szabo in 1994, an American computer scientist, the concept of Smart Contracts in the Indian context aims at providing a more secure, efficient and transparent way of execution of electronic contracts using the Block Chain Technology.

The terms and conditions in a smart contract are converted into a software code and the contract is floated on a block chain. Each transaction/clause is capable of being partially or fully self-executing, self-enforcing, or both. The block chain technology creates a transaction database with a clear audit trail which is difficult to wipeout thereby acting as a backbone for smart contracts.

In comparison to traditional contracts, the smart contracts provide enhanced security and also reduce transactional costs. These kinds of contracts are useful for the Insurance and the Financial Services Sector where the terms and conditions are encoded and an If-Then situation is created. The obligations get self- executed on fulfillment of conditions of the contract.

Although the block chain technology allows smooth transition from traditional to smart contracts, thereby reducing transaction costs and making it less expensive and simpler, the introduction and penetration of smart contracts in India on a large scale is difficult due to the current regulatory framework and the ongoing controversy on crypto currency and its validity. 

Key Issues relating to Smart Contracts

There are certain key issues which hinder the enforcement on smart contracts in India.

1. Current Regulatory Framework

The current regulatory framework in India is not flexible for the adoption of smart contracts.

There are no fixed regulations governing smart contracts. The Information Technology Act, 2000 allows validation of contracts or records but only through electronic signatures obtained by designated certifying authorities. In case of smart contracts, the block chain technology generates hash key which is used as an individual identifier and authenticator.

However, this poses a problem as it is difficult to provide signatures authenticated by block chain as substantial evidence before the Court as per the Indian Evidence Act, 1882.

2. Ambiguity

There are certain clauses in contracts which are ambiguous thereby making it open to a number of interpretations.

For example- Good faith obligations

When smart contracts are executed, such clauses would lead to confusions and chaos between parties difficult to stop transactions midway or modify them.

3. No Specific Regulations and Jurisdiction

There are no laws and regulations catering specifically to smart contracts in India which further creates a problem when conflicts or disputes arise between parties in such cases and the jurisdiction of courts which would admit, hear and decide such matters as transactions take place over the internet.

4. No Legal status to Crypto currency

The major issue underlying adoption of smart contracts in India is that no legal status has been granted to crypto currency in India. Cryptocurrency is not defined under Foreign Exchange Management Act, Reserve Bank of India Act or Coinage Act.

Moreover, there is a huge debate at present regarding Bit coins in India. Bit coin trading should be designed in a way where the payment mechanism is handled through the block chain as per the terms of the Smart Contract. The government has been receptive to Block chain technology but is reluctant to grant legal status to bit coins fearing the anonymity of transactions.

Bit coins use peer to peer transactions where no institution is involved. Therefore, the source of the transaction or currency is untraceable and cannot be encrypted. Moreover, there is no trail of transactions or its source as there is no authenticated payment gateway.

There is uncertainty as to the taxation on Cryptocurrencies and it being a subject of the Centre or the State.

1. Increase in Financial Crimes

Since these contracts are self-executed without human intervention, there is high risk of terrorism financing and money laundering and non compliance of related laws.

2. Audits

Security audits for smart contracts can be very complex in certain cases relating to the transactions and its functions and also expensive as compared to smart contracts.

3. Lack of Skilled Developers

Smart contracts are developed on block chains using special programs and codes but since this concept is very new in India, there is lack of skilled developers thereby making weak source codes vulnerable to hacking.

4. Ethical Challenges for Lawyers

Smart contracts would entail ethical issues related and greater responsibility of lawyers. Legal ethics allows lawyers to engage in practices which are authorized by law. Therefore, the legality of these transactions and its aspects would pose a question upon the involvement of lawyers in such process.


Though there are a number of issues involved in the implementation of smart contracts and bit coins in India, there is no doubt that the smart coins if implemented with additional legal and regulatory framework and a few other policies, would ensure a smooth transition from traditional contracts thereby making the process easier and faster.

With regards to the Indian Evidence Act 1882, a dual integration mechanism should be incorporated which should include both code and paper to be produced as evidence before the Court in cases of conflict between parties. The Information Technology Act, 2000 should include regulations relating to the authentication of hash key generated on the block chain.

Specific regulations for Smart Contracts should be made and implemented which would combat problems of compliance with laws relating to money laundering and terrorism financing. International Treaties such as Article 3 and 8 of International Convention for Suppression of Financing of Terrorism should be incorporated and specific laws should be made for beach of such contracts.

The Specific Act designed to regulate smart contracts should clearly spell out the jurisdiction of courts in case of disputes. There should be recognized forms of Alternative Dispute Resolution mechanisms for settlement outside the Court. Measures for involvement of external arbitrators and incorporation of award in terms of the contract should be taken.

Help from the Reserve Bank of India and Government should be sought in respect of logistical and regulatory changes and additions to be made.

Fixed interpretations should be given for clauses which have different connotations and are ambiguous in nature which would eliminate unnecessary chaos and confusion between parties and the clauses would be interpreted in a single manner.

The source codes should be smartly written in order to prevent parties and reduce their liabilities to minimum. For this, the developers should be trained over the entire concept of smart contracts and block chain technology, its implications and scope for improvements. Specific courses should be designed for the same. The codes written should be a blend of code and natural language.

The greatest debate surrounding implementation of such contracts in India is the involvement of bit coins as a consideration for the contract as it has not been granted legal status in India. Moreover, the Reserve Bank of India has explicitly denied the legal status to virtual currencies. Banks like Citibank have prevented users from bit coin trading using credit or debit cards and have removed such options considering the economic, financial and social risks involved.

However, there isn’t complete anonymity with regard to the transactions involving bit coins. ‘Miners’ are individuals who authenticate such transactions and earn in exchange of the services they provide and determine the amount by the buyer and the seller. Moreover, the risks associated with bit coins and crypto currency should not be the only ground for its non-recognition as a legal tender. There are other forms of existing legal technology which are used for wrongful purposes such as black money, money laundering and for financing terrorism and other frauds. This does not mean that these banking platforms should be declared illegal.

Efficient systems should be developed in place to mitigate the risks involved for parties entering into transactions through smart contracts. The investigation agencies should develop trackers for illegal activities on block chin technology. The regulatory authorities should attempt to define crypto currencies.

India’s Initiatives

  • Since India has been receptive to the block chain technology as an emerging platform for execution of transactional services, it has taken initiatives to develop and promote the same. Setting up of the First block chain technology Academy at the Indian Institute of Information Technology and Management.
  • State Bank of India’s initiative to introduce ‘Bankchain’-a blockchain platform formed by a consortium of 27 banks, proposed to be used to share e-KYC information about customers within the consortium. This would help with the transmission of information directly to the banks without any leakages or delays.
  • Beta-testing of smart contracts on this block chain platform to minimize the effort involved in executing contracts of a generic nature, like non-disclosure agreements.


In India, the concept of smart contracts is at a very nascent stage. Adequate regulations both in regard to smart contracts and crypto currencies and bit coins are required for a smooth transition and integration of smart contracts with the industrial standards. The footsteps of advanced countries like the United States and Australia who have formed specific laws, regulations and deployed agencies for efficient execution of smart contracts should be followed.

With the given suggestions and recommendations, adoption of smart contracts would be easier in India and would also reduce risks. It would reduce the costs, increase efficiency, autonomy, accountability, transparency, would enhance security and would change the scenario in which contracts are executed thereby making the entire process paperless, easier and hassle-free bringing a revolution mainly in the Banking and Financial sector in India.

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