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