Smart Contracts & Blockchains in Supply Chains
The
dire need for legislation
©
Blockchain technology has been powering the Bitcoin since
its inception. It is an ingeniously simple technology that has immense
potential for use in supply chains and projects. It is a public ledger to which
everyone has access. However, at the same time, no single individual or entity
can control it. The technology allows companies and individuals to collaborate
with an unprecedented degree of trust and transparency. Despite being
cryptographically secure, it is fundamentally open. Blockchain technology is a
revolution that has begun already and will change the world. Its impact on supply
chains and projects will be unprecedented. Governments around the world need to
be aware of its potential, and legislation is needed to give it legitimacy.
We’ve seen how, as early as 1994, Nick Szabo, a legal scholar and cryptographer, found that the decentralized
nature of cryptography could be used in smart contracts. These are basically
self-executing contracts and ensure the performance of virtual agreements
through blockchain technology. They provide a hassle-free execution of
agreements made between parties. The main property of blockchain technology is
its decentralized nature. This is because it takes away the requirement of
intermediaries. This, in turn, saves a lot of time and prevents any conflict
that may arise due to a third party. A smart contract is a self-performing
contract. The terms of the agreement that exist between a buyer and a seller
are written directly into lines of code. A distributed, decentralized blockchain
network contains the code, which consists of all the agreement terms. In
addition to the agreements, the code also consists of information that executes
the transactions and ensures that these transactions are tracked and are
irreversible.
A smart contract can therefore be
termed as mainly a type of computer protocol. It digitally performs the
function of facilitation, verification, as well as enforcement. In other words,
the performance of the contract is self-enforced and digitally recorded. Here
are the key factors of smart contracts:
- The
smart contract, once released, can’t be altered by anyone. No one can
change its terms, not even the creator or owner
- The
execution and completion of a smart contract does not require physical
preparation and/or submission of documents
- Users
can and may be anonymous, but the transaction details are recorded and
registered
- Transactions
of smart contracts can’t be reversed
Smart Contracts & How They Work
The terms and conditions of a
smart contract are engraved in the code itself. Typically, a smart contract
interprets, verifies, and automatically executes any transaction laid down in
the terms and conditions. Let us take a rental contract, for example. When it
is made into a smart contract, we will see its efficacy and effectiveness. The
tenant pays the rent to the house owner in cryptocurrency. As soon as the
payment is made, the code carries out the transactions in accordance with the
terms of the contract as entered into the code. The landlord receives an advisory
when the transaction is successful and will issue a receipt. The first-time
deposit and advance that are paid will lead to the release of the house key.
The system operates on the If-Then principle. Whoever is involved
in the blockchain will observe the transaction and become a witness to the
contract. The record of payment and key release are visible to all concerned.
One action will not be completed without the other. What could be a more
efficient and effective system than this?
Smart contracts specify the rules
and penalties related to an arrangement in the same manner and format as a
conventional contract. They also implement those obligations automatically. The
contracts are implemented using a platform, which consists of two elements:
currency and contracts. Smart contracts are essentially agreements in
electronic form rather than paper. So, the question is ~ what is their legal
status? Can they still be regulated by the existing legal framework? Do they
require a new legal system to govern them? We shall see.
Secured Transactions &
their Benefits: With smart contracts, transactions can be carried out, and
terms can be enforced seamlessly between the parties concerned. The concept of
a smart contract is that one person gains something of value in return for
the second party being paid. The absence of intermediaries makes it easy to
enforce. In the non-smart era, implementation wouldn’t be as seamless. Often
third parties, usually in foreign countries, are part of the contract. This
makes enforcement complicated. Blockchain platforms have made this possible.
The networks are transparent, as is the ability to determine and formulate who
has priority over the funds in question. Parties can therefore easily accept or
reject certain terms, thus promoting quicker and more efficient ways to implement
contracts.
Regulation
of Smart Contracts Around the World: Under contract laws applicable almost
universally, a conventional contract must contain the following elements to be
considered as valid:
- A legitimate offer
- A properly communicated acceptance
- Enforceability by law
- Consideration
- Consent
of all competent parties with regard to all aspects of the contract
The Uniform Electronic
Transactions Act (UETA) serves as a framework that states can use in
order to determine the legal status of electronic signatures. It is not a
federal law. As many as 47 states have passed and started enforcing it since
1999. UETA places regulations on electronic contracts, records and signatures.
It states that electronic contracts and signatures are valid. They constitute a
legitimate way of providing contractual consent. In the European Union (EU), the Rome
I Regulation is the legislation that determines the legality of all
EU civil and commercial contracts. The Rome I Regulation governed
the choice of law in the European Union till 2024. The European Union enacted
the landmark Markets in Crypto-Assets (MiCA) regulation, which took full
effect in 2024. MiCA establishes unified legal rules across the EU for digital
assets, stablecoins, token issuers, and crypto service providers, addressing
many of the regulatory grey areas.
Overview of Contract Law in India
Contracts in India are governed
by the Indian Contract Act of 1872. It lays down the basic elements under which
contracts are enforced and governed. Section 10 of the Act
states that “all agreements are contracts if they hold the free consent
of parties willing to contract, for a lawfully accepted consideration and with
an object.”
For an agreement to be
enforceable by law, it must consist of an offer, acceptance, and consideration.
By definition, it would be construed therefore that smart contracts are valid
under the Indian Contract Act, 1872. A smart contract consists of
the offer, the acceptance, and consideration in the form of cryptocurrency. Till
Cryptocurrencies are considered legal tender under Indian law.
Therefore, currently, these are not enforceable and hence don’t constitute a
contract. Section 5 & 10 of the Indian Information Technology Act 2000
state that electronic signatures are legally accepted. So, a contract is
legitimate and enforceable if it is prepared and signed electronically. Section
65B of the Indian Evidence Act 1872 states that
contracts digitally signed shall be admissible in the courts.
So, what about smart contracts in
India? Smart contracts basically provide a platform for contracting
parties who do not know each other. Not that parties who know each other are
excluded. Every contract involving exchange of goods/services and money is
prone to many risks. Smart contracts can help mitigate this problem. However,
the Indian Contract Act is the law that will regulate the contract. So, to be
enforceable under Indian law, due caution must be exercised. Although
electronic documentation and signatures are valid, the Indian Contract Act
needs to be amended to make all smart contracts legal. For example, the absence
of consideration should not render the contract null and void. So, though smart
contracts are legal in India, several provisions need to be added to it to make
it compatible with Indian laws. For a smart contract to be valid, it must
fall within the boundaries of Indian contract law.
Risks of Smart Contracts:
Today, Indian law allows electronic contracts and signatures. However, several
Ponzi schemes which succeeded in duping many people indicate that there is a lack
of desired safety in electronic documents. Will blockchain technology help in
safeguarding people’s interests? As things stand, there are no well-established
legal frameworks to regulate Crypto-transactions, not just in India but almost
everywhere else in the world. Section 35 of the Information Technology Act, 2000, regulates electronic signatures. It states
that “Any person may make an application to the Certifying Authority for the
issue of a Digital Signature Certificate in such form as may be prescribed by
the Central Government.” This raises a problem as far as smart contracts
and blockchain technology are concerned. When using blockchain technology, the
hash key is self-generated. It is the hash key that is used as an identifier to
authenticate the smart contract. Till 2022, under the Indian legal system
today, there is no legal authority that regulates blockchains or sanctions
electronic signatures in the form of hash-tags. Hence, there was a dire need for
legislation in this direction. In 2022, India introduced a formal tax regime
for Virtual Digital Assets (VDAs)—taxing crypto gains at 30% alongside a 1% Tax
Deducted at Source (TDS). In March 2023, crypto platforms were brought under
the Prevention of Money Laundering Act (PMLA) and required to register
with FIU-India. The Reserve Bank of India (RBI) launched pilot programmes
for the Digital Rupee (e-Rupee CBDC) in late 2022. Because e-Rupee is
legal tender, smart contract integration can now utilise sovereign digital
currency rather than volatile cryptocurrencies.
Till 2021 the status of
electronic messages was governed by Section 88A of the Indian Evidence Act
1872 which stated that “The Court may presume that an electronic message,
forwarded by the originator through an electronic mail server to the addressee
to whom the message purports to be addressed corresponds with the message as
fed into his computer for transmission; but the Court shall not make any
presumption as to the person by whom such message was sent.” Explanation. ––
For the purposes of this section, the expressions “addressee” and “originator”
shall have the same meanings respectively assigned to them in clauses (b) and
(za) of sub-section (1) of section 2 of the Information Technology Act, 2000
(21 of 2000).
So, under the act the court
presumed that an electronic record produced in court is genuine. However, it did
not make any presumptions about the sender of the contract. So, if a signature is obtained using blockchain technology, what will be its status? Under the then Act,
it was only admissible if the signature was obtained as per the provisions of
the Information Technology Act. Unfortunately, this not only vitiates the
system of encryption present in the blockchain technology for smart contracts,
it also disallows their use. That is why we need legislation, maybe a brand-new Evidence Act, to replace the existing one. Remember, this act was close to a
century and a half old when it was repealed. On July 1, 2024, the Indian
Evidence Act, 1872, was officially repealed and replaced by the Bharatiya
Sakshya Adhiniyam, 2023 (BSA). Under the new law, electronic and digital
records are given primary evidence status on par with physical documents,
streamlining how digital records, electronic signatures, and automated logs can
be produced in court.
Despite the absence of
legislation, some businesses have already started using blockchain technology
and smart contracts to conduct their business. Let’s first look at the
pre-blockchain scenario. Let’s, as an example, take a company manufacturing a
wide range of electrical equipment. The company’s business activities would affect
several sectors, not just channel partners and vendors, internal & external,
within India and abroad. One of the biggest problems for vendors, whether
supplying goods or rendering services, is that payment processes are always
cumbersome. Payments are forever delayed, and this badly affects their cash flows. In most cases, customers deliberately delay payments but, even if
they don’t, the very act of processing documents and payments plus the money
transfer mechanism leads to delays. This happens even in this day and age of
electronic documentation and payments. For almost every supplier, getting paid
for the material they supplied is a cumbersome process. It involves several
steps that include confirmation of delivery by the buyer, raising of a physical
bill of exchange by the supplier, and submission of invoice and transport
documents to the buyer’s bank. There is a speedy and secure solution to replace
the manual bill discounting process. The solution is blockchain. The use of
blockchain technology will eliminate the manual steps involved in bill
discounting processes and the entire transaction could be made paperless.
There is no question that the
implementation and growth of smart contracts is the next step of innovation. It
can lead directly to billions of overhead costs being minimized while making
the whole system more efficient. Regulatory issues, however, exist, especially
in India, where there are no regulations regarding the finer details of a smart
contract. If specific regulations are not made, a wide-ranging adoption of the
technology will require the government to make amendments to various laws that
are in force. Even some of the new laws have not addressed this issue.
Therefore, although there is a certain amount of progress in government
thinking and more businesses are adopting the smart contract concept, the law
is still functioning in a grey area. Legislation is direly needed to establish
an intricate framework within which to regulate the functioning of smart
contracts in India.
Companies in India Using Blockchain Technology in
Supply Chains
India’s blockchain technology is
being leveraged across various sectors, especially supply chain management. Bing
has listed some notable companies that are using blockchain technology to
monitor and support their supply chains. Here is the list [source: https://ensun.io/search/blockchain-supply-chain/india]:
·
ProConnect Supply Chain Solutions Limited
is a leading third-party supply chain service provider specializing in
end-to-end supply chain management and logistics services across India. The
company offers comprehensive 3PL services, including mission-critical service
parts logistics, warehousing, transportation, cold storage, imports and
exports, and reverse logistics. ProConnect serves a diverse range of industries
as a distributor and service provider, leveraging a robust network of over 172
warehouses totalling over 6 million square feet. The company emphasizes
value-added services and efficient operations designed to optimize supply chain
processes for clients, enhancing visibility and collaboration throughout the
integrated value chain.
·
Delhivery is India’s largest fully
integrated logistics provider, offering a comprehensive suite of logistics
services including express parcel transportation, freight services (PTL and
TL), cross-border shipping, supply chain management, e-commerce shipping, and
order fulfilment solutions. The company utilizes cutting-edge engineering and
technology capabilities to deliver omni-channel solutions, inventory
management, payment collection, and catalogue management. With a robust
infrastructure that includes 24 automated sort centres, 94 gateways, and 2880
direct delivery centres, Delhivery operates 24/7 throughout the year,
fulfilling over 2 billion orders across a nationwide network covering more than
18500 pin codes. Delhivery is a service provider in the logistics sector
·
Stellar Value Chain is a leading
manufacturer and service provider in India's consumer supply chain sector. The
company operates over 10 million sq. ft. of advanced Grade A Distribution
Centres, Fulfilment Centres, and Transportation facilities across 30 cities.
Stellar offers a comprehensive range of services, including Contract Logistics,
Express transportation, Less-than-Truckload (LTL) transportation, and Cold
Chain operations through its subsidiaries Innovative Logistics, Kelvin Cold
Chain, and Patel Roadways. With a fleet of more than 2,000 trucks, Stellar
efficiently services 15,000 pin codes nationwide, catering to over 1,000
customers. The company aims to expand its operations to 50 million sq. ft. and a
fleet of 50,000 vehicles, positioning itself as a disruptor in the market.
·
GreenBlock Technologies leverages
blockchain, IoT, and AI through its GBT-IDAP platform to enhance supply chain
traceability, transparency, and efficiency. Their solutions address key supply
chain challenges, including demand forecasting and logistics optimization,
making them well-suited for businesses looking to improve their supply chain
processes. The company is a service provider specializing in emerging
technologies to deliver sustainable solutions for businesses. Their primary
offering is the GBT-IDAP platform, which integrates Blockchain, IoT, and AI to
address supply chain challenges. Key services include traceability,
transparency, demand forecasting, production planning, demand fulfilment,
logistics optimization, regulatory compliance, and actionable insights through
AI and data analytics.
·
Stackbox is a service provider
specializing in supply chain solutions, including advanced warehouse management
and transport management systems. Their delivery application focuses on
optimizing last-mile delivery processes, ensuring seamless order processing and
compliance with regulatory requirements. Stackbox's technology enhances product
traceability and integrity while consistently meeting the demands of online
shoppers. The company aims to achieve high levels of customer satisfaction
through timely and efficient service delivery, making it a trusted partner
for industry leaders in the transportation sector.
·
Holisol Logistics Pvt. Ltd. is a service
provider specializing in tech-enabled end-to-end supply chain logistics
solutions. It offers a comprehensive suite of services, including multi-channel
fulfilment for B2B and B2C retail, integrated packaging and logistics, and
returnable packaging solutions applicable to the auto-components, agriculture,
and heavy engineering industries. The company has developed AI-enabled
full-stack technology solutions to digitize supply chains and provides
expertise in logistics management, supply chain consulting, and warehousing
solutions. Its offerings encompass a wide range of logistics IT solutions, fulfilment
centres, and project cargo packaging, aimed at optimizing supply chain
efficiency and effectiveness.
·
TraceX is a technology service provider
offering a blockchain-powered food traceability platform. The company focuses
on enhancing supply chain resilience and sustainability by connecting various
participants in the food and agriculture supply chain to securely exchange
verifiable and auditable data. Their services promote mutual trust,
accountability, and transparency, while also emphasizing sustainable
agriculture practices and soil health management to combat climate change and
ensure long-term productivity.
·
PharmaNET provides a cloud-based supply
chain and distribution management software solution that enhances operational
resilience and efficiency through automation and integration with existing ERP
systems. Their comprehensive modules cater to various sectors, including
pharmaceuticals and manufacturing, making it highly relevant for those
interested in blockchain supply chain applications.
These companies are among tt the forefront of
integrating blockchain technology into their supply chain operations, driving efficiency
and security in their businesses.
How Blockchains and Smart Contracts Help Businesses
We shall now see how blockchains
and smart contracts can transform business operations, along with key
legislative amendments that would help integrate them smoothly into legal and
commercial systems. Blockchains provide a decentralized, tamper-proof
distributed ledger, while smart contracts are self-executing code stored on the
blockchain that automatically triggers actions once predefined conditions are
met. This is how they do it:
- Eliminating
Intermediaries & Lowering Costs: By automating transactions (such
as escrow releases, payouts, or title transfers), smart contracts reduce
reliance on middlemen, legal brokers, and clearinghouses, drastically
cutting transaction fees and processing delays.
- Supply
Chain Transparency & Traceability: Blockchain creates an immutable
audit trail for goods at every stage. Businesses can track the provenance
of raw materials, verify authenticity, prevent counterfeiting, and
pinpoint logistics bottlenecks in real time.
- Automated
& Instant Execution: Processes like insurance claim settlements,
royalty payments, and trade finance settlements occur instantly upon
meeting verifiable conditions (e.g., flight delay data or IoT sensor
feeds), removing paperwork and human error.
- Enhanced
Security & Data Integrity: Because records are encrypted across a
distributed network, altering historical records is virtually impossible.
This minimizes fraud and unauthorized data tampering.
- Frictionless
Cross-Border Transactions: Smart contracts allow global partners to
conduct trade using unified protocols without relying on traditional
foreign exchange clearance cycles or complex international banking
channels.
Suggested Legal & Regulatory Amendments
There are some gaps in the existing laws which need to be filled.
To enable widespread adoption, existing legal frameworks (such as traditional
contract, technology, and evidence statutes) need targeted updates:
1.
Recognition of Cryptographic Signatures
- The
Gap: Acts like the Information Technology Act often require digital
signatures certified by centralized government authorities.
- Suggested
Amendment: Expand digital signature provisions to explicitly recognize
private key cryptographic signatures on distributed ledgers as
legally valid methods of authentication.
2.
Evidentiary Admissibility of Blockchain Logs
- The
Gap: Evidence laws often require traditional certifications or human
attestation to validate digital records in court.
- Suggested
Amendment: Amend evidence acts to create a statutory presumption of
authenticity for records, timestamps, and smart contract executions
stored on verified blockchain networks.
3.
Statutory Definitions for Automated/Smart
Contracts
- The
Gap: Traditional contract laws (e.g., the Indian Contract Act of 1872)
define offer, acceptance, and consent in terms of human communication,
leaving automated, machine-to-machine agreements in a grey area.
- Suggested
Amendment: Insert explicit provisions defining smart contracts as
enforceable legal agreements, recognizing that code deployment or
programmatic interaction constitutes valid offer and acceptance.
4.
Dispute Resolution & "Oracle"
Liability Rules
- The
Gap: Smart contracts rely on third-party data feeds
("oracles") to execute. If an oracle feeds corrupted or false
data, the contract executes irreversibly.
- Suggested
Amendment: Establish legal standards for oracle reliability,
consumer protection against coding bugs/exploits, and a framework for
off-chain arbitration or emergency judicial stay mechanisms.
5.
Recognition of On-Chain Settlement Assets
- The
Gap: Standard smart contracts often execute payments via tokens or
central bank digital currencies (CBDCs), which may face regulatory
ambiguity in traditional currency regulations.
- Suggested
Amendment: Clarify the legal status of regulated stablecoins and CBDCs
for contract consideration to ensure automated financial settlements are
fully compliant.
Etymonline+2
UpToWord