Blockchain Law and Smart Contracts: Legal Implications for Indian Businesses

As blockchain technology and smart contracts rapidly reshape business processes worldwide, Indian companies are eager to adopt these innovations for greater efficiency and transparency. However, the evolving landscape of Blockchain Law in India brings unique legal challenges that businesses must carefully navigate. Understanding the regulatory framework, compliance requirements, and potential risks associated with smart contracts and blockchain-based transactions is crucial for Indian enterprises to harness this technology confidently and legally. This article explores the key legal implications of blockchain and smart contracts specific to India’s business and regulatory environment.

Understanding Blockchain Law: The Indian Legal Framework

The term Blockchain Law broadly encompasses laws regulating blockchain technology, including smart contracts and cryptocurrencies. India currently lacks a specific law dedicated solely to blockchain, causing legal ambiguity.

• Key Relevant Laws:

1. Indian Contract Act, 1872: Governs traditional contracts requiring offer, acceptance, lawful consideration, and mutual consent. Smart contracts often satisfy these elements but raise new questions due to their automated execution.
2. Information Technology Act, 2000: Validates electronic contracts and digital signatures, providing partial legal recognition to smart contracts.
3. Consumer Protection Act, 2019: Protects consumers against unfair contracts, including those executed via blockchain.
4. Income Tax Act, 1961: Taxes gains from virtual digital assets like cryptocurrencies at 30%, with mandatory TDS on transactions.
5. Prevention of Money Laundering Act, 2002 (PMLA): Applies to Virtual Digital Asset (VDA) service providers, mandating strict KYC and AML compliance.
6. Digital Personal Data Protection Act, 2023: Imposes data privacy obligations relevant to blockchain applications handling personal data.

1. The Rise of Smart Contracts: Legal Balancing Act in India

Smart contracts are self-executing agreements encoded on a blockchain that automatically enforce contractual terms. Indian businesses find them attractive for reducing paperwork, speeding up transactions, and cutting costs.

• Legal Status and Challenges

Though the Indian Contract Act governs contract formation, smart contracts’ immutable and automated nature creates legal complexities:

1. Can courts intervene if a smart contract executes unfairly or due to coding errors?
2. Are disputes resolvable under existing laws?

No definitive Indian court ruling on smart contracts exists yet. However, the Supreme Court’s decision in Shreya Singhal v. Union of India (2015) underlines that digital technologies must comply with constitutional and legal standards. This precedent implies that smart contracts will likely be judged by traditional contract law principles, especially concerning fraud, error, and fairness.

• Why Does This Legal Ambiguity Exist?

India’s legal framework is still adapting to rapid technological advancements. Businesses rush to implement smart contracts without fully understanding their legal risks, increasing exposure to disputes.

• Actionable Steps for Indian Businesses:

1. Draft Hybrid Contracts: Combine coded smart contracts with traditional legal agreements specifying Indian governing law and dispute resolution methods.
2. Conduct Thorough Audits: Engage legal and technical experts to review smart contract code to ensure compliance with Indian contract law and consumer protection standards.
3. Implement Robust Dispute Resolution Clauses: Use arbitration under the Arbitration and Conciliation Act, 1996 for efficient resolution of blockchain-related disputes.

These steps help Indian companies reduce legal risks and improve enforceability, fostering confidence in smart contract use.

2. Decentralised Autonomous Organisations (DAOs): Legal Uncertainties for Indian Businesses

DAOs are blockchain-based entities operating via coded rules and collective governance, often using crypto assets as voting tokens. DAOs challenge traditional corporate law by lacking formal legal status and clear accountability.

• Legal Challenges in India

Under the Companies Act, 2013, DAO-like entities do not have legal recognition. This lack of legal personality leads to uncertainty about liability for decisions causing harm or loss. Indian laws expect identifiable responsible parties, which DAOs often do not provide due to decentralisation and pseudonymity.

• Common Issues for Indian Businesses:

1. Legal personhood and asset ownership remain unclear.
2. Regulatory compliance for token issuance and fundraising is complex.
3. Liability allocation is ambiguous without traditional corporate structures.

• Recommended Steps:

1. Establish a Legal Wrapper: Form a registered entity like a Private Limited Company or trust to act as DAO’s legal representative, holding assets and liabilities.
2. Define Governance Structures: Document decision-making, voting rights, and roles clearly to ensure accountability.
3. Comply with Applicable Laws: Adhere to tax regulations under the Income Tax Act, 1961, and anti-money laundering rules under PMLA.

Following these practices enables Indian businesses to engage with DAO innovations while mitigating legal exposure.

3. Crypto Assets in India: Regulatory and Taxation Landscape

India treats cryptocurrencies and tokens as Virtual Digital Assets (VDAs), which are taxable but not recognised as legal tender.

• Recent Legal Developments

1. The Supreme Court’s landmark judgment in Internet and Mobile Association of India v. RBI (2020) struck down the RBI’s banking ban on crypto exchanges, legitimising regulated crypto activities.
2. The Finance Act, 2022 introduced a flat 30% tax on income from VDAs and a 1% TDS on transactions exceeding thresholds.
3. Since March 2023, all VDA service providers fall under PMLA regulations, requiring strict KYC and reporting suspicious transactions to the Financial Intelligence Unit – India (FIU-IND).

• Challenges Faced

The regulatory uncertainty around crypto assets, combined with their taxable but unregulated status, creates compliance risks for businesses.

• Practical Recommendations:

1. Maintain Detailed Records: Track all crypto transactions meticulously for tax compliance and audits.
2. Use FIU-IND Registered Platforms: Prefer Indian crypto exchanges compliant with AML/KYC norms.
3. Seek Specialised Tax Advice: Engage professionals experienced in VDAs to navigate complex tax requirements.

These measures empower Indian businesses to minimise financial and legal risks while operating in the crypto space.

4. Why Do These Legal Issues Commonly Occur in India?

India’s fast-paced digital transformation contrasts with a cautious, evolving regulatory environment. The law struggles to keep pace with technological innovation, creating uncertainty for blockchain-related activities. Additionally, the decentralised, anonymous nature of blockchain challenges India’s existing legal frameworks designed for identifiable, centralised entities.

Outlook: What Indian Businesses Should Prepare For

India’s blockchain law landscape is on the brink of transformation. Expect:

• Dedicated Blockchain Legislation: Laws specifically addressing smart contracts, DAOs, and crypto assets to provide clarity on enforceability and liability.
• Regulatory Sandboxes: RBI and SEBI expanding sandbox initiatives to safely pilot blockchain innovations.
• International Alignment: Harmonisation with global standards, especially concerning cross-border transactions and data privacy under the Digital Personal Data Protection Act, 2023.
• Use-Case Specific Regulation: Sectoral guidelines focusing on blockchain applications in finance, supply chain, real estate, and more.

Proactive Indian businesses that stay updated and partner with expert legal consultants like LawCrust Legal Consulting will be best positioned to leverage blockchain’s full potential while mitigating legal risks.

Conclusion

The intersection of Blockchain Law, Smart Contract Law, DAOs, and Crypto Assets presents a dynamic yet challenging landscape for Indian businesses. While regulatory clarity is still emerging, strategic legal planning—such as hybrid contracts, legal wrappers for DAOs, and rigorous compliance with tax and AML laws—can protect companies and boost confidence in adopting blockchain technologies.

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