What’s blocking the chain?

Blockchain can be a disruptive technology for the administration of smart contracts in the financial sector if some regulatory hurdles are cleared, writes Sanmit Seth

Earlier this year, the National Payment Corporation of India, with a view to automate payment clearing and settlement processes, launched a distributed ledger technology-based payments platform called Vajra. It’s interesting to note that the use of distributed ledger technology will benefit different segments of businesses.

Companies around the world have started experimenting in this direction to harness the capabilities associated with distributed ledger technology. This article sheds light on the use of blockchain technology in the way traditional contracts in India have been executed, and the adoption of smart contracts over traditional contracts. It also looks at the current statutory provisions applicable to smart contracts in India, and whether such provisions under their current form and structure provide legal sanctity to executed smart contracts.

What is blockchain?

The terms “blockchain” and “distributed ledger technology” are often used interchangeably. Blockchain stems from the idea of addressing the double-spending problem of digital money. Put simply, digital money is a sequence of bits, or computer-readable files, that can be copied and transferred between two parties without having any intermediaries maintaining the ledger of account holder’s balances. Without having intermediaries recording a transaction in a ledger, the transferor of the digital money can send the file and retain a copy of it, giving rise to the problem of double-spending.

The blockchain is an electronic public ledger that allows transacting parties to create an immutable record of transactions through a decentralized and distributed peer-to-peer network of several computers. The record of transaction on the distributed peer-to-peer network is packaged into a block built on a cryptographic hash function, which further links with other blocks of similar information to form a chain of blocks.

Such records of transactions can be accessed anytime in order to determine the exact sequence of events. The information recorded in the ledger can never be erased, and can only be updated with the consensus of the transacting parties in the system. The usage of blockchain eliminates intermediaries and provides a high level of security and integrity by acting as a database that contains the records of each transaction executed on the network.

The blockchain’s overarching potential can be extended to other traditional ledger-keeping methods including land titles, loans, identities, etc., and further to facilitate self-executing contracts between two or more parties, also called a “smart contract”.

Sanmit Seth is assistant vice president, legal, at Kissht, a digital platform operated by ONEMi Technology Solutions Private Limited to provide credit financing