Blockchain In Indian Legal System

On 1st February 2022, Finance Minister of India while presenting Budget 2022 proposed to levy tax at the rate of 30% on income from transfer of ‘Virtual Digital Asset’ which is getting popular day by day and growing at a very fast pace. 

Virtual Digital Asset is also a subject of curiosity for many as they want to know what is it, how it works and which technology is being used to protect the interest of its users. Well, it all started with an Article “Bitcoin: A peer-to-peer electronic cash system” published on internet in 2008 by Satoshi Nakamoto, a pseudonym, who conceptualized ‘Bitcoin’ a virtual digital asset or currency which could be sent anywhere for free without the control of governments. This idea did not gain much attention initially but was able to ignite the thrust of some to start working in this direction. Finally the idea evolved and Bitcoin was formally launched in 2009. Since then a number of virtual digital assets or currencies have been developed worldwide and are being traded on dedicated exchanges without interference or control of Governments.

The key element for successful Trade & Commerce has always been “Trust.” Government and Central Bank of any country provide that Trust. Laws of land ensure fulfillment of responsibility by parties to the trade or commerce and punish those who break the trust. It means Trade & Commerce necessarily be under the control of Government to build Trust. But in case of virtual digital assets or currencies, question remains, why these currencies, which are not backed by government or subject to any regulation, are getting so much of positive response from the general public? How these currencies gained Trust? And how it is made possible? To answer these questions we need to understand how it works. 

Virtual Digital Asset, typically called Cryptocurrency, uses Cryptography to assign a unique digital signature to each of its user to prevent identity fraud and makes every user accountable for its transactions recorded in digital ledger. Cryptocurrency works on “Blockchain” technology which distributes the digital ledger across the user’s network to avoid fraud. This technology further makes it strong enough to be Trusted by public at large. Let us understand what Blockchain is and how it works.

Blockchain or Distributed Ledger Technology (DLT): Blockchain is a network of participants connected together through computers. Every computer is called “Node”. 

Every node stores the identical database. This replaces the old system of recording centralized database under the control of one person with a new system where every computer has it’s copy of database and has full control over it. Whenever new Data or ‘Block’ is required to be added or changed, it has to be authenticated and authorized by the majority of nodes. So, Blockchain cannot be tampered with or hacked as information is recorded in a distributed fashion. The database is decentralized and controlled by all the participants. If hacker has to change a block or data, he has to change it on majority of nodes of the Blockchain which is impossible to do. 

For example if ‘A’ initiates a transaction on his Node, all the nodes connected directly to ‘A’ will verify the transaction and further distribute the transaction to other connected Nodes and that’s how transaction spreads across the Blockchain network. Thereafter, consensus mechanism takes places and if authorized a new block is added to the distributed ledger. The Blockchain which has comparatively greater number of Nodes is considered more secured. Cryptocurrency like Bitcoin and Ethereum are Blockchains which are growing continuously as new blocks are being added which adds to the security of the ledger. Hacking attack on Bitcoin Gold (version of Bitcoin) in 2018 is a perfect example of hacking on smaller Blockchain.

Public Blockchain: It is open to general public to participate in Public Blockchain. Cryptocurrency Blockchains are the best example of Public Blockchain. Decision to add or change any transaction rests with participants. The people who own the computers in the network are rewarded to verify transactions. This process is known as ‘proof of work’.

Private Blockchain: General public is not allowed to participate in Private Blockchain. Decisions are taken by limited persons. These Blockchains are very small compared to public blockchains. Bank’s internal ledger shared between all the branches is the best example of private Blockchain.  Digital Locker which stores documents concerning citizen is yet another example. 

Indian Scenario: Till now, India’s stand on cryptocurrency has not been very supportive. It earlier introduced a bill ‘Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019’ which sought complete ban of the crypto activities and Reserve Bank of India’s (RBI) also issued a circular dated 6th April 2018 prohibiting banks to support crypto transactions. After the Supreme Court of India quashed RBI circular by its order dated 4th March 2020 passed in WPC 528 of 2018, Internet and Mobile Association of India Versus Reserve Bank of India, the bill of 2019 was withdrawn and now a new bill “The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021” is to be introduced in Lok Sabha. 

But India is fully supporting the use of Blockchain Technology. Recently on 18th January 2020, ‘Centre of Excellence’ has been established for advancement of Blockchain technology in India. Websites like https://blockchain.gov.in and https://www.nic.in/blockchain have also been developed. A white paper on “Blockchain for Government” was also released. Academic Block Chain Documents (ABCD) is yet another government application which stores the academic certificates of CBSE. Other applications of Blockchain in India are Aadhaar, UPI, e-Sign and Digilocker, supply chain of blood bank and public distribution, settling of bills, subsidy disbursement, insurance claims settlement, and keeping records & ownership of properties and vehicle. 

Blockchain in Legal Sector: Blockchain in legal sector can increase efficiency and reduce costs. It brings transparency, accessibility and data integrity in legal sector. Lawyers can use this technology to store digitally signed legal agreements which are called Smart Contract. Since the smart contracts on distributed ledger are accessible to all the parties, it leaves no room for surprises or misinterpretation. Automation drastically reduces drafting time of legal documents and the benefit of cost is passed on to clients. This technology can protect any legal process without interfering with the judicial authority. Date integrity is the most important aspect of legal sector and Blockchain can play crucial role in protecting data from hacking. Legal documents contain valuable and confidential information. Lawyers normally send these sensitive legal documents to their clients through email which are open to hackers. Now lawyers can store legal documents on distributed ledger which can be seen by clients only which increases data integrity. 

Blockchain-based arbitration system - An integrated arbitration system can help the parties select right arbitrators from the list of arbitrators on Blockchain. Record of each arbitrator can be found on public Blockchain and suitable arbitrator can be shortlisted on the basis of his past record of dealing with similar cases, experience and earlier awards which got finality. This may be universally available and can deliver high-quality dispute resolutions even online. 

Apart from above there are specific uses of Blockchain in the following areas: 

Intellectual property – Authors can upload their piece of work on a public ledger which gives indisputable proof of ownership. Property rights – Ownership of property can easily be ascertained on Blockchain without depending on property brokers. Not only this, properties can be sold immutably in a very transparent way. Automated Regulatory Compliance – Regulatory Authorities can make the mandatory compliance available on the Blockchain. Parties can easily report compliance and see the progress. This will also save the time of compliance and avoid unnecessary delay caused by corrupt officials. Smart Payments - Smart contracts can provide a secured record for machine-to-machine communication that too without interference of a central authority. 

Threats to overcome: Over the years, the world has also encountered some threats with this technology. There are different opinions by different countries on crypto assets. Some have advocated for complete ban while other has only issued investor’s advisories to be cautious and there are countries that have supported crypto activity. Since the computer network may spread across countries, it is difficult to decide laws and regulations of which jurisdiction should apply. Privacy of data is yet another challenge before Blockchain. It is also debated that if false data is stored at input point that may lead to acceptance by other nodes believing the false data to be true. In public blockchain it is difficult to fix accountability. Global taxation requires restructuring.

It can be concluded as Blockchain is a need of the hour and can become backbone of future economy. So, one must embrace it as early as possible to get maximum gains.