The Importance of Creating Legal Frameworks for Blockchain by Dr Pavan Duggal, Advocate (SC-India), at Genesis DevCon
The creation of legal frameworks for emerging technologies is not an easy feat. It involves several layers of comprehensive study, socio-political inquiry, inter organisational collaborations and more to come up with ideal frameworks to add to the law. In the case of blockchain technology, the Government of India is surveying the subject albeit slowly, to ensure that the implementation of blockchain technology is regulated, safeguarding all its stakeholders and ensuring fair play in the market.
On that note, Dr Pavan Duggal virtually joined us at Genesis DevCon for a spirited conversation about the legality of blockchains in India. Before we begin with Dr Duggal’s account of blockchain legality, let’s get to know him a little.
Getting to know Dr Pavan Duggal
Dr Pavan Duggal — Cyber Law Advocate, Supreme Court of India, is a pioneering thought leader in the Cyberlaw space. He has earned an international reputation as an expert and authority on Cyber Law, Cyber Security Law, and E-commerce law. He is the Founder & Chairman of the International Commission on Cyber Security Law. World Domain Day also recognises Dr Pavan as one of the Top 10 CyberLawyers around the world.
With his expertise, he has profoundly provided context to legality for blockchain technology in India. Let’s take a look at what he shared with us.
Blockchains and the Indian Government
For stakeholders of blockchain in India, these are confusing times. There are conflicting signals with respect to the rules and regulations governing emerging technologies like blockchain given that there is a serious lack of substantial clarity.
In India, after the demonetisation of banknotes in 2016, there were several people who ended up investing in Bitcoin as it solved the problem of having unaccounted money. Subsequently, in the budget of 2018, Arun Jaitley — the then Finance Minister, in his speech on the budget stated that Bitcoin will not be a legal tender. However, the Government announced that blockchain technology — the technology that powers cryptocurrencies like Bitcoin — will receive a special spotlight as an emerging technology.
On that note, the government has shown great interest in adopting blockchain technology into its technological infrastructures. For example, the Government of Andhra Pradesh was working on transmigrating its land records on to a blockchain to make sure that the data is digitised, publicly accessible, and most of all — immutable. This is one of the many examples of initiatives by the Government involving electronic governance focusing on blockchain.
Deriving from Existing Laws to Regulate the Blockchain Landscape in India
Presently, there is no dedicated law on blockchains by the parliament of India. Given the lack of a specific law, we will have to look at other laws pertaining to blockchain technology and its applications to understand the legal implications.
The Information Technology Act, 2000, passed almost 20 years from now, and before blockchain came into the picture, is one that we can consider as directly applicable to blockchains. This is plainly because blockchains deal with data and information in the electronic/digital format that is resident on computer resources and communication devices. In certain cases, this information can be accessed by members of the public as well.
To add to that, blockchain technology adheres to a paradigm where there is the use of computer systems, networks, resources, communication devices with the availability of data in the electronic form. With respect to this feature, blockchain is legal by virtue of Section 4 for the Information Technology Act, 2000.
With that said, if there are any legal disputes upon blockchain, we can rely on the provisions of blockchain as an emerging technology. However, specific nuances pertaining to blockchains are not covered. In the realm of automated smart contracts, the legality of blockchain doesn’t provide a clear stance. We cannot say if it is legal in India or not.
The Indian Contract Act, 1872 — a legislation that is over 150 years old, has given legality to contracts that pertain to electronic offer, normal offer, normal acceptance, leading into a valid binding electronic contract, including a normal contract. The IT Act granted legality to the electronic component of the contracts. However the question still remains, electronic contracts are managed under the ambit of the IT Act, but what are the legalities with respect to smart contracts? Well, this is a grey area. In India, it will be very difficult for the proponent of a smart contract to argue that the contract is legal.
However, India can illustrate some clarity in this “grey area” by deriving contexts from existing legal frameworks in other countries. In countries like Switzerland, Malta, Estonia, and some states in the USA, there are legal frameworks for blockchains as well as smart contracts.
With that said, there is one important factor that will need to be addressed while formulating laws with respect to smart contracts. Legal contracts are created between two parties based on free will. From a legal standpoint (possibly, during disputes), it would be difficult to prove this point, and existing legal frameworks do not have provisions to counter this complication.
So, Where Do We Go from Here?
As a nation, we have a long way to go in creating legal frameworks. Blockchain has lesser media coverage and is slowly becoming a part of the mainstream digital ecosystem as a meme (Context: not your average Internet meme, but as a cultural phenomena in which everybody is reporting the trending bit of news in tech). India should come up with specific clarity, not just to clarify that blockchain is a legal technology, but it also needs to come up with legal frameworks for smart contracts.
This would begin with making provisions under the IT Act 2000. According to Section 81 of the IT Act, the provisions of the IT Act will override any conflicting provisions in other Acts. With this in mind, lawmakers can create provisions for smart contracts that will be independent of the Indian Contracts Act, 1872.
Laws for Securing Blockchain Activities from Illegal/Malicious Use
In a recent conference on cyber law, cyber crime and, cyber security, held in New Delhi, India, — the legality of blockchains and the distinctive legal challenges were discussed. One of the prominent points that came up was with respect to securing the use of blockchains to ensure that it is not used for malicious purposes.
Blockchains stand for transparency and accountability, and because of this people believe that blockchains are sacrosanct and 100 percent secure. However, blockchain is used for some cyber crime activity as well. Just because information is available in the public domain, it doesn’t necessarily mean that it will deter all stakeholders from refraining from illegal activities. Therefore, the potentiality of blockchain usage for cyber crime and cyber security breaches cannot be ruled out. However, traceability in blockchains can help resolve this problem.
On creating provisions in the IT Act 2000 for blockchain technology, the perks of the framework will also impact legalities for other emerging technologies like artificial intelligence (AI), the Internet of Things (IoT).
The Bitcoin Problem from a Legal Perspective
Bitcoin and other cryptocurrencies have had rough weather in India. From a legal perspective, it seems as though Bitcoin and other cryptocurrencies were asking for trouble. The volatility of prices and the speculativeness of crypto assets clearly paints a picture that these assets are going to be hard to deal with.
This aspect of cryptocurrencies has left several countries at an unease. Some countries feel that Bitcoin could be prejudicially impacting security, sovereignty, and integrity of their states.
Bitcoin also comes with a dark past if you remember Silk Road and its atrocities. Since Bitcoin was used as the de facto electronic currency of the dark-net, several countries fear for the security of their citizens and how this could impact their nation’s cyber sovereignty. This is mainly why Bitcoin is illegal in some countries.
The Reserve Bank of India (RBI) mandated banks to not offer banking services to any stakeholder using Bitcoin or other forms of cryptocurrency. This effectively strangulated the Bitcoin and crypto economy in India. Several Indians invested in Bitcoin, and in the time of demonetisation, holding Bitcoin was an effective means of dealing with unaccounted wealth. However, with the government coming down strongly on cryptocurrencies, India saw a transmigration of Bitcoin investors moving out of India, towards friendlier jurisdiction like Singapore, Malta, or Switzerland. At this point, what remains a loss to the Indian economy is a gain to other countries with better legal frameworks for Bitcoin and other cryptos.
Learning from the Past and Moving Towards Regulation
As a revolutionary technology that can impact several industry verticals, blockchain is here to stay. However, it is hard to substantially state the longevity of cryptocurrencies given their volatility and so on. This has left India lagging behind in the adoption race. But India can move progressively in this space if it looks towards other countries and how they are creating legal frameworks to regulate these emerging spaces.
The island country of Malta created regulatory frameworks for distributed ledger technologies (DLTs), initial coin offerings (ICOs), and cryptocurrencies. They came up with a distinctive approach of coming up with a delegated regulatory authority to oversee the further growth and enablement of blockchain. However, Malta is one of the few; in addition, we have Japan, Switzerland, Dubai, and several more. So, clearly, blockchains as tech, are having various new legal approaches that countries are adopting in the context of the same.
India cannot merely copy-paste these regulations, but it would need to customise or “Indian-ise” these legal frameworks. The Indian Government doesn’t see the creation of legal frameworks for emerging technologies like blockchain as an urgent priority. This is because we don’t have the right exposure to these technologies or the expertise they need to go forward
Blockchain can change the face of electronic governance across the world. To enable this technology, Governments need to take this more seriously and create regulations, and the effective collaboration of lawmakers and thought leaders in this space.
A Note to All Blockchain Entrepreneurs and Enthusiasts
It is commendable that India is seeing a growth in entrepreneurial activities in the blockchain landscape. To these people, Dr Duggal has the following pointers:
- Given the legal situation, you can rely on the rules, regulations, and provisions that broadly lie in the ambit of the IT Act.
- To those providing services, you have become an intermediary under Section 2 (1) (w), IT Act, 2000.
- You will be subject to certain compliances with the statutory provisions of the law.
- Complying with the law will also provide you with statutory exemptions and immunity from liability.
- Make sure that you have strong legal documentation.
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