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 terms agreed upon.

Self-executing computer Program

It can be modified anytime with the consent of both parties.

It cannot be modified according to the parties' will.

These contracts entertain the possibility of being manipulated and tampered with.

 

These contracts cannot be tampered.

 

These contracts are based to execute contracts through human participation.

These contracts strive to restrict human participation to the minimal.

These contracts use simple codification of the terms agreed upon.

These contracts use complex 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 Technology

National Policy on Software 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 1997[3]

Press Information Bureau Government of India: Ministry of Commerce and Industry

Integrate to Innovate Programme for energy Startups[4]

Department of Banking Regulation Banking Policy Division

Enabling Framework for Regulatory Sandbox[5]

Press Information Bureau Government of India: Ministry of Commerce and Industry

Coffee Board Activates Blockchain Based Marketplace in India[6]

 

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 petition[7] 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 10[9] 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 Signatures[10]. 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 it[12]. 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 crimes[14] 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, 2018[15] 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.