The rise of Web 3.0 is reshaping the global digital landscape, and India is no exception. With its thriving tech ecosystem and rapidly growing blockchain adoption, India is poised to play a significant role in the Web 3.0 revolution. However, as with any emerging technology, Web 3.0 brings unique legal challenges — especially in areas like smart contracts, decentralised autonomous organisations (DAOs) and blockchain disputes.
For Indian businesses, developers, and users, understanding these challenges is critical. From the enforceability of smart contracts under Indian law to the regulatory uncertainty surrounding DAOs and cross-border blockchain disputes, the legal framework for Web 3.0 in India is still evolving. Let us explore these issues in the Indian context.
Smart Contracts: Are they legally binding in India?
Smart contracts are self-executing agreements where the terms are written directly into code. They operate on blockchain networks, ensuring transparency and immutability. In theory, once the conditions are met, the contract executes automatically. But what happens when there is a bug, an error, or a dispute?
In India, the legal enforceability of smart contracts is still a gray area.
The Contract Act, 18721, governs traditional contracts and requires elements like offer, acceptance, consideration, and mutual intent. While smart contracts can fulfil these requirements, their automated nature raises questions. For instance, if a smart contract executes in a way that one party finds unfair or unintended, can Indian courts intervene?
The Indian judiciary has yet to rule specifically on smart contracts. However, the general principle that technology must operate within the bounds of the law is well-established. For example, in Shreya Singhal v. Union of India2, the Supreme Court emphasised that even digital platforms must comply with constitutional and legal standards. This suggests that Indian courts may apply traditional contract law principles to smart contract disputes, especially in cases involving fraud, errors, or unfair outcomes.
Smart contracts guarded under Indian laws:
(i) Data privacy concerns: Smart contracts often rely on data stored on the blockchain, which may include personal or sensitive information. India’s Digital Personal Data Protection Act, 20233 imposes strict obligations on data fiduciaries, raising questions about how smart contracts can comply with these requirements.
(ii) Consumer protection: The Consumer Protection Act, 20194 provides remedies for unfair trade practices and defective services. If a smart contract fails to deliver as promised, consumers may seek redress under this law. However, the decentralised nature of blockchain could complicate such claims.
(iii) Evidence in court: Under the Evidence Act, 18725, electronic records are admissible as evidence. However, proving the authenticity and integrity of a smart contract’s code in court may require expert testimony and technical audits, adding complexity to disputes.
DAOs: Who is liable under Indian law?
DAOs are a cornerstone of Web 3.0. These are organisations governed by smart contracts and community voting, with no central authority. DAOs can manage anything from investment funds to online communities, but their decentralised nature raises significant legal questions in India.
One of the biggest challenges is determining liability. If a DAO makes a decision that leads to financial loss or legal harm, who is responsible? Unlike traditional companies registered under the Companies Act, 20136, DAOs do not have a Board of Directors or a clear hierarchy. This lack of structure makes it difficult to hold anyone accountable under Indian law.
For example, if a DAO operating in India is involved in a financial scam or a breach of contract, can its members be held liable? The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) have yet to issue clear guidelines on DAOs. However, SEBI’s cautious approach to cryptocurrencies and digital assets suggests that DAOs may face regulatory scrutiny in the future.
Moreover, DAOs intricacies can also be understood under these heads as well:
(i) Taxation of DAOs: DAOs often generate income through investments, trading, or other activities. Under Indian tax law, such income may be subject to income tax, goods and services tax (GST) or other levies. However, determining the tax liability of a decentralised entity with no clear legal structure remains a challenge.
(ii) Foreign exchange regulations: If a DAO involves cross-border transactions, it may fall under the purview of the Foreign Exchange Management Act (FEMA), 19997. Compliance with the FEMA Regulations, such as reporting requirements and restrictions on capital flows, could pose significant hurdles for DAOs operating in India.
(iii) Corporate governance: While DAOs operate without traditional management structures, they may still need to adopt governance frameworks to ensure transparency and accountability. Indian laws like the Companies Act, 2013 and the SEBI Regulations could serve as reference points for developing such frameworks.
Blockchain disputes: Jurisdiction and enforcement in India
Blockchain’s borderless nature complicates dispute resolution, especially in a country like India with its complex legal system. Transactions on a blockchain often involve parties from multiple jurisdictions, raising questions about which laws apply and how judgments can be enforced.
For instance, if a dispute arises between an Indian user and a foreign entity over a blockchain transaction, which court has jurisdiction? Indian courts have historically taken a broad view of jurisdiction in digital cases. In Google India (P) Ltd. v. Visaka Industries8, the Supreme Court held that Indian courts can exercise jurisdiction over foreign entities if their actions have an effect in India. This principle could extend to blockchain disputes involving Indian parties.
Enforcement is another challenge. Even if an Indian court issues a judgment, enforcing it on a decentralised blockchain network can be difficult. Arbitration and mediation are emerging as potential solutions. For example, the Indian Government’s push for online dispute resolution (ODR) mechanisms could provide a framework for resolving blockchain disputes efficiently.
Regulatory uncertainty: India’s evolving stance on Web 3.0
One of the biggest challenges for Web 3.0 in India is regulatory uncertainty. While the Indian Government has shown interest in blockchain technology, its approach to cryptocurrencies and digital assets has been cautious.
The RBI has historically been skeptical of cryptocurrencies, citing concerns about money laundering and financial stability. In 2018, the RBI banned banks from dealing with cryptocurrency exchanges, a move that was later overturned by the Supreme Court in Internet & Mobile Assn. of India v. RBI9. However, the Government has since introduced a 30% tax on cryptocurrency profits and a 1% tax deducted at source (TDS) on transactions, signaling a cautious but growing acceptance of digital assets.
For DAOs and smart contracts, the regulatory framework is even less clear. The Ministry of Electronics and Information Technology (MeitY) has been exploring the use of blockchain for governance, but specific regulations for Web 3.0 technologies are still lacking. This uncertainty creates risks for businesses and users, who must navigate a patchwork of existing laws and guidelines.
What’s next for India?
As Web 3.0 continues to grow in India, businesses and individuals must stay informed and proactive. Here are a few key takeaways:
(i) Understand the risks: Smart contracts and DAOs are powerful tools, but they come with risks. Ensure that your contracts are thoroughly audited and that you have a plan in place for dispute resolution.
(ii) Stay compliant: While regulations are still evolving, compliance with existing laws is essential. Work with legal experts to navigate the complexities of Indian law.
(iii) Embrace innovation: India’s tech ecosystem is well-positioned to lead in Web 3.0 innovation. Explore new technologies like decentralised dispute resolution platforms to address legal challenges.
The legal landscape of Web 3.0 in India is uncharted territory, but with careful navigation, it is possible to harness its potential while mitigating risks. As always, staying ahead of the curve is key.
Founder, Managing Partner of Vidhisastras.
3. Digital Personal Data Protection Act, 2023.
4. Consumer Protection Act, 2019.
