Smart Contracts & Blockchains in Supply Chains

 Smart Contracts & Blockchains in Supply Chains

The dire need for legislation

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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.   

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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.

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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.

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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.