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Smart Contracts and Cryptocurrency: In re Indian Contract Act, 1872


The subject of cryptocurrency has garnered considerable attention at present times. In India, the legal validity of the document, which is of critical significance to multiple stakeholders, remains the subject of dialogue. As one of the most specific cryptocurrency uses, smart contracts are prone to policy and legal discrepancies. The conundrum is essential since cryptocurrency is used as a form of consideration in smart contracts.

In India, contracts, which include smart contracts, are only valid if there is a 'lawful factor to consider.' As a byproduct, the enforceability of smart contracts in India is directly influenced by the legal perceived notion of cryptocurrency, which is currently ambiguous. Smart contracts have been used for a while now, evidently without hesitation.[1] Smart contracts have great potential, particularly in the financial marketplace, and their utility will only continue to expand.[2]In this context, the author considers whether smart contracts with cryptocurrency as consideration are enforceable. It is also recommended that the extent of reference under the Indian Contract Act 1872 (hereinafter referred to as “ICA”) be enlarged to implement future smart contracts in India. This will guarantee that stakeholders to a smart contract and can enforce their privileges irrespective of the cryptocurrency predicament.

A brief overview of smart contracts, cryptocurrencies and consideration

Smart contracts can be viewed as a collection of digitized guarantees wherein pre-determined rights, responsibilities, and protocols are then instantaneously implemented. These agreements are partially self-executing and depend solely on decentralized network technologies.[3] The automated scheme enables the transfer of digital assets within the blockchain when specific incidents occur, eradicating the need for third-party intermediaries. Smart contracts are available in many architectural formats, but they all incorporate digital exchanges via cryptocurrencies. In their current state, smart contracts cannot accept payments in fiat currencies (GBP, SGD, USD, etc.) and can only conduct transactions utilizing cryptocurrencies. Once it comes to contract consideration, we realize that it is merely the value conveyed in a swap to accomplish a stipulated promise. Since smart contracts first block amounts in the ledger, the total amount of cryptocurrency involved is factored into the equation.

Analyzing the validity from the Indian context

The ICA has primary authority over smart contracts, despite the lack of specific legislation. Its applicability can be seen in Section 10 of the act, which states unequivocally that all agreements are contracts and defines them. Smart contracts are also governed by provisions in the Indian Information Technology Act 2000 and the Indian Evidence Act 1872, although they are not primarily relevant in this context. Furthermore, Section 10 of the ICA asserts that those agreements are contracts made for a lawful consideration, among several other factors. This provision should be closely read with Section 23 of the ICA, which clearly defines the legality of the consideration (or lack thereof). Accordingly, where the consideration is:

  1. forbidden by law, or

  2. would defeat provisions of any law, or

  3. fraudulent, or

  4. involves or implies injury, or

  5. regarded as immoral or against public policy

So even though cryptocurrencies are not inherently fraudulent, harmful, immoral, or contrary to public policy, understanding their legality necessitates only an exploration of clauses (a) and (b). In both the sub-provisions, it suggests, for the requirement of some form of contradiction with the 'law.' The term 'law' as stated in Section 23 of the ICA was examined in the case of Udhoo Dass v. Prem Prakash and Ors.[4] It was clarified that "law" in clause (a) implied "jurisdictional law," that is, a law enacted by a competent legislature, and "law" in clause (b) intended "personal or customary law." Being prohibited or defeating a legal provision would be a concern if such a 'law' existed in the first place. At this point, a high-level committee may refer to the Cryptocurrency Ban and Regulation of Official Digital Currency Bill 2019 (hereinafter referred to as "2019 Bill"), which has been proposed. The existence of the Cryptocurrency and Regulation of Official Digital Currency Bill 2021 (hereinafter referred to as "2021 Bill") was also indicated by the government, but its components are not publically available. Both the 2019 Bill and the 2021 Bill are still to be proposed in either House of Parliament, and as the Supreme Court recognized in In Re: The Special Courts Bill,[5] a bill is not law until it is approved by parliament. As a result, there is currently no 'law' governing cryptocurrencies, making them inherently incapable of being prohibited or taking down a provision. Of course, if a provision equivalent to Section 3 of the 2019 Bill is incorporated into the 2021 Bill, utilizing cryptocurrency as payment may be considered illegal when the law is notified.

In light of these observations, cryptocurrency is not an unsanctioned consideration in and of itself, and smart contracts generated with it should be reasonable. However, this interpretation can only be satisfied in the current situation. There is a clear bias against the currently-in-use digital currencies (such as Bitcoin, Ethereum, and the others) – which can be linked to the proposed bills and the RBI's plan to create a digital currency unique to India.[6] As a byproduct of these reservations, cryptocurrencies will be deemed unlawful for future purposes and disrupt the enforceability of existing smart contracts under Section 56 of the ICA. While crypto payments can continue in the face of ongoing legal uncertainty, it would be prudent to proceed cautiously from a commercial standpoint.

The scope of 'consideration'

India has recently launched a campaign to enhance its standings in the ease of doing business. A few of its primary goals is to make pre and post-contracting procedures as efficient and effective as possible. With the popularity of smart contracts on the rise, uncertainties about their validity are detrimental to India's efforts. The author proposes that the scope of consideration be broadened to include smart contracts to recognize and enforce them. The solution is simple as laid down in Section 10 of the ICA and removing the qualification of 'lawful' from 'consideration.' From a comparative standpoint, it appears that it is a feasible measure.

The contract law in the United States is governed by state common law, judicial precedent, or principles codified in the 'Restatement of Contracts.' As an outcome, while consideration is still necessary, there are no specific requirements.[7]For instance, New York law entails either a benefit to the promisor or a disadvantage to the promisee. No requirements are needed under English contract law. Consideration is merely value given in exchange for a promise to be legally enforceable as a contract. As a result, a smart contract would be enforceable in both of these jurisdictions based on the requirement of consideration. Likewise, if the Indian regulations were changed to read "consideration" (rather than "lawful consideration"), courts would be likely to acknowledge cryptocurrency as consideration under common law principles. Furthermore, there would be adequate protection because the 'object' of a contract would continue to be scrutinized for legality under this proposal.


As previously noted, smart contracts are here to stay, and as an outcome, disagreements are bound to occur. The decision of the Singapore International Commercial Court in B2C2 Ltd. v. Quoine Pte Ltd. involved digital currencies in smart contracts and illustrated the need for further clarification.[8] ​​An absolutist position on cryptocurrency would only serve to disadvantage India – both stakeholders and government officials. If smart contracts are not acknowledged under the ICA, it is highly improbable that individuals or entities will refuse to enter into such agreements. The parties will eventually agree on a different jurisdiction for enforcement and dispute resolution, effectively surpassing India's current restrictive framework. Modifying the boundaries of consideration under the ICA has numerous benefits. For instance, the cryptocurrency used as payment for goods, services, or other items would be subject to taxation under Section 28, read with Section 2(13) of the Income Tax Act 1961, likely to result in revenue.[9] The Indian legal framework should be more tolerant of cryptocurrency, particularly when it comes to smart contracts. Smart contracts are technically enforceable in India as of now. However, a simple legislative change to the ICA will ensure future enforceability and serve the interests of businesses that have already incorporated smart contracts. Consequently, courts will have the opportunity to establish precedent on other aspects of smart contracts, thereby rapidly expanding jurisprudence.

[1] (Last accessed on 19.12.21) [2] (Last accessed on 19.12.21) [3] (Last accessed on 19.12.21) [4] AIR 1964 All 1 [5] AIR 1979 SC 478 [6] (Last accessed on 19.12.21) [7] (Last accessed on 19.12.21) [8] [2019] SGHC(I) 03 [9] (Last accessed on 19.12.21)

Submitted by,

Nakul Chengappa,

School of Law, Christ (Deemed to be University)


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