Blockchain and Web 3.0: Legal challenges and India’s evolving framework
Blockchain and other Web 3.0 innovations promise decentralisation and automation. However, disputes, such as those involving a malfunctioning smart contract or lost cryptocurrency, inevitably lead parties to seek legal resolution. Indian law, rooted in traditional principles, is now being tested by these emerging digital challenges.
Key questions include: How does one enforce a self-executing contract? Who bears liability if a decentralised autonomous organisation (DAO) engages in fraudulent activity? Can a court reverse a transaction immutably recorded on a blockchain? These are not hypothetical scenarios but pressing legal issues faced by businesses and individuals in India today. This article examines how India’s legal system is adapting, or struggling to adapt, to disputes in this evolving digital landscape.
Smart contracts: Enforceability under Indian law
Smart contracts are self-executing agreements programmed on a blockchain, automatically enforcing terms upon the fulfilment of predefined conditions, for instance, releasing payment upon the delivery of goods. The critical question is whether Indian law recognises these digital arrangements as legally binding.
Under the Contract Act, 18721, a valid contract requires essential elements such as offer, acceptance, lawful consideration, and intent to create legal relations. Prima facie, smart contracts satisfy these criteria, as terms are encoded in programmable logic and value is exchanged. Section 102 of the Contract Act, 1872 stipulates that agreements made with free consent, lawful consideration, and a lawful object are enforceable. This suggests that Indian law does not inherently invalidate a contract merely because it is executed through code.
However, complications arise when considering India’s digital transaction laws, which were not designed with blockchain technology in mind. The Information Technology Act, 20003 (IT Act), and the Evidence Act, 18724, govern electronic contracts and signatures but presuppose reliance on a government-certified authority. For instance:
(1) The IT Act recognises electronic contracts but mandates authentication via a licensed digital signature.
(2) Section 65-B5 of the Evidence Act, 1872, permits electronic records as evidence only under specific conditions.
(3) Section 85-B6 of the Evidence Act, 1872, presumes the integrity of digitally signed records solely if issued by a recognised certifying authority.
Since blockchain-based smart contracts typically operate without centralised certification, enforcing them in court may raise objections regarding compliance with these statutory provisions.
Judicial uncertainty and practical challenges
To date, Indian courts have not issued a definitive ruling on the enforceability of smart contracts, leaving the matter in a legal grey area. However, past judgments indicate that courts will prioritise legal principles over technological autonomy. For example, in Shreya Singhal v. Union of India7, the Supreme Court emphasised that digital platforms must comply with constitutional and statutory standards. Similarly, if a smart contract produces an illegal or unconscionable outcome, courts may intervene using traditional contract law doctrines such as fraud, mistake, or coercion.
Another challenge pertains to evidence. Proving a smart contract dispute may necessitate expert testimony to explain blockchain transactions and verify data integrity. While the Evidence Act, 1872, permits electronic evidence, parties may encounter difficulties in obtaining a Section 65-B compliance certificate for decentralised ledger records, posing challenges for lawyers and Judges unfamiliar with blockchain technology.
Key takeaways
While smart contracts are likely enforceable under Indian laws, they remain subject to traditional contract principles. Parties utilising them should:
(1) Ensure some form of recognised authentication or mutual agreement on digital validity.
(2) Prepare for evidentiary complexities, including expert witnesses and technical documentation.
(3) Avoid assuming complete autonomy, as courts may override self-executing code if it conflicts with legal standards.
Until India introduces blockchain-specific legislation or clear judicial precedents, smart contracts should be treated as innovative yet subject to conventional legal scrutiny.
Blockchain-based assets and dispute resolution challenges
Web 3.0 has led to the proliferation of novel digital assets such as cryptocurrencies (e.g., Bitcoin, Ether) and non-fungible tokens (NFTs). Legal disputes involving these assets pose unique problems, especially in the Indian context. Consider, for instance, a situation in which an Indian entity pays for services in cryptocurrency, or a user purchases an NFT that is later found to be misrepresented.
Jurisdictional uncertainty
Blockchain transactions are inherently global and pseudonymous. Participants may reside in different jurisdictions, be governed by different laws, and be identified only by cryptographic addresses rather than real names. This raises critical questions: Which court has jurisdiction, and which laws apply?
Indian courts have historically adopted an expansive view of jurisdiction in internet-related cases. In Google India (P) Ltd. v. Visaka Industries8, the Supreme Court of India ruled that Indian courts could exercise jurisdiction over foreign entities if their actions had tangible effects in India. Applying this logic, if a foreign cryptocurrency exchange or NFT seller causes harm to an Indian consumer, an Indian court may assert jurisdiction. However, compelling a foreign party to participate in Indian proceedings, or enforcing an Indian judgment abroad, remains a significant challenge.
Pseudonymity and identification challenges
The pseudonymous nature of blockchain transactions presents another obstacle. If cryptocurrency is stolen from a digital wallet, the victim may trace the funds to a specific address but struggle to identify the perpetrator. While law enforcement agencies and exchanges [with know your customer (KYC) protocols] can sometimes trace illicit activity, private litigants face difficulties in unmasking wrongdoers.
This issue is not unique to India but poses a global challenge, often preventing disputes from reaching court due to the anonymity of offenders. Even when the opposing party is known, they may be located outside India, necessitating reliance on international treaties (such as the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards) and adding layers of complexity, cost, and delay.
Enforcement hurdles
Enforcement presents perhaps the most formidable challenge. Suppose an Indian court or arbitrator orders a defendant to return Bitcoin as restitution. How can this ruling be enforced if the defendant refuses? Unlike traditional assets, cryptocurrencies exist as data secured by private keys, with no Central Authority to compel compliance. Courts cannot unilaterally access and transfer blockchain assets, leaving winning parties to pursue off-chain assets (e.g., bank accounts or property) to satisfy judgments. Voluntary compliance remains the most practical solution, as forcibly seizing cryptocurrency is nearly impossible without cooperation.
Uncertainty in applicable law
Determining which law governs blockchain disputes can be ambiguous. Explicit agreements (e.g., smart contract terms specifying Indian law) provide clarity, but many decentralised platforms lack such provisions. Indian courts may apply domestic law if the dispute primarily involves Indian parties or effects, but foreign platforms could argue for different jurisdictions. Until more precedents emerge, these conflicts remain unresolved.
Potential solutions: Injunctions, arbitration, and online dispute resolution
Despite these challenges, Indian courts are not without remedies. Courts can issue injunctions to freeze assets, a tactic used abroad to restrict transactions linked to specific wallet addresses. India could adopt similar measures under its equitable jurisdiction.
Alternative dispute resolution (ADR) mechanisms, such as arbitration and mediation, offer faster and more flexible solutions. India’s push for online dispute resolution (ODR), leveraging technology for digital mediation and arbitration, could be particularly suited to blockchain conflicts. Specialised technology arbitrators and streamlined virtual hearings may enhance efficiency, easing the burden on traditional courts.
Key takeaways for stakeholders
Disputes involving blockchain assets face hurdles in jurisdiction, anonymity, evidence, and enforcement. While the principle that “code is law” does not negate legal recourse, parties must prepare for a complex process. As courts grapple with novel questions, such as serving legal notices to cryptographic addresses, each ruling will shape future precedents.
For those engaged in Web 3.0, proactive measures are essential:
(1) Include arbitration clauses in contracts.
(2) Maintain detailed transaction records.
(3) Consider insurance for cryptocurrency-related risks.
Indian courts and regulators: Adapting to the blockchain era
How have Indian courts and regulatory bodies responded to Web 3.0 disputes and blockchain-related issues? The response has been a blend of judicial action and regulatory caution, marked by pivotal developments.
The RBI banking ban and Supreme Court intervention
The first major legal clash over cryptocurrencies in India occurred between 2018 and 2020. In April 2018, the Reserve Bank of India (RBI) imposed a banking ban, prohibiting regulated financial institutions from servicing cryptocurrency exchanges. This move crippled the industry, forcing many exchanges to shut down or relocate overseas.
The cryptocurrency sector challenged the ban in court, and in March 2020, the Supreme Court of India delivered a landmark verdict in Internet and Mobile Assn. of India v. RBI9. A three-Judge Bench overturned the RBI’s Circular, ruling that the ban was disproportionate, as the Central Bank had failed to demonstrate tangible harm to the banking system. This decision revitalised India’s cryptocurrency ecosystem and signalled that courts would not endorse restrictive measures without justification.
However, the Supreme Court did not recognise cryptocurrencies as legal tender. It merely lifted the banking restrictions, leaving the matter to regulators and lawmakers. The RBI remained sceptical, continuing to advocate for a ban.
Taxation and regulatory developments
Meanwhile, the Indian Government adopted a different approach: Taxation. In 2022, India introduced one of the world’s strictest cryptocurrency tax regimes, a flat 30% tax on digital asset income (with no loss offsets) and a 1% tax deducted at source (TDS) on transactions above a minimal threshold. This policy discouraged speculative trading while stopping short of an outright ban, reflecting a stance of cautious regulation.
In 2023, the judiciary weighed in again with a notable ruling in Nirod Kumar Das v. State of Odisha10, delivered by the Orissa High Court. The case involved a cryptocurrency Ponzi scheme (the Solar Techno Alliance Token scam), where the accused were charged under anti-fraud laws. The Court granted bail, observing that cryptocurrencies do not qualify as “money” or “deposits” under existing statutes. While fraud charges remained, the ruling clarified that merely dealing in cryptocurrency is not illegal, a significant acknowledgment of the legal grey area surrounding digital assets.
Regulatory steps forward
On the regulatory front, agencies have taken incremental steps. The Securities and Exchange Board of India (SEBI) has proposed a multi-regulator framework, suggesting that different types of tokens could fall under distinct oversight bodies. A 2023 government panel echoed this approach, recommending coordinated regulation rather than an outright ban or unilateral RBI control.
The Government’s official stance remains ambivalent. While the Finance Minister has ruled out recognising cryptocurrencies as legal tender, authorities have extended existing laws, such as the Prevention of Money-Laundering Act, 200211 (PMLA), to cover virtual assets. From March 2023, cryptocurrency exchanges must comply with anti-money laundering (AML) and KYC requirements, subjecting them to greater scrutiny. The Consumer Protection Act, 201912, has also been invoked in cases of exchange misconduct, offering users legal recourse.
Indian courts have cautiously legitimised cryptocurrency activities, while regulators have begun integrating the sector into existing frameworks. Yet, comprehensive Web 3.0 legislation remains absent. For now, businesses and users must navigate a patchwork of tax, AML, and consumer protection rules, awaiting clearer laws tailored to blockchain innovation.
On-chain dispute resolution: Future of justice or distant dream?
On-chain dispute resolution refers to the concept of settling conflicts via blockchain systems, often bypassing traditional courts, an emerging Web 3.0 development. Parties can embed arbitration clauses in smart contracts, allowing decentralised platforms (such as Kleros or Aragon Court) to resolve disputes, with outcomes automatically enforced (e.g., transferring funds). This approach offers speed, global reach, and self-execution, making it ideal for digital disputes.
In India, the concept is gaining attention but remains theoretical. The former Chief Justice Dr D.Y. Chandrachud has acknowledged blockchain arbitration’s potential, signalling judicial openness to integrating technology with legal frameworks. The United Kingdom Jurisdiction Taskforce released its Digital Dispute Resolution Rules on 22-4-202113 [UK Jurisdiction Taskforce (UKJT) Rules], which permit on-chain arbitration enforcement and have also sparked discussions.
Under the Arbitration and Conciliation Act, 199614, parties may adopt blockchain arbitration, but enforcement requires court approval under Section 3615. Key concerns include due process (fairness, impartiality) and whether courts will recognise decentralised verdicts. While no Indian case law exists yet, legal experts suggest blockchain arbitration may be valid if procedural fairness is ensured.
Pros and cons of on-chain dispute resolution
Advantages
(1) Scalability for small claims (e.g., NFT scams).
(2) Technical expertise from specialised jurors.
(3) Automated enforcement.
Disadvantages
(1) Off-chain enforceability gaps.
(2) Transparency risks (public blockchain exposure).
(3) Lack of explicit legal recognition for automated decisions.
Currently, India focuses more on ODR, using digital tools such as video hearings, rather than blockchain-based systems. For now, parties experimenting with on-chain arbitration should pair it with traditional arbitration clauses to ensure enforceability.
Conclusion
Web 3.0’s decentralised nature presents significant challenges to traditional legal systems, yet India is making gradual progress in adapting to these changes. Indian courts have begun recognising digital assets, while regulators are actively implementing cryptocurrency taxation frameworks. Despite these advancements, key uncertainties persist regarding the judicial interpretation of code-based disputes and the potential enactment of specialised cryptocurrency legislation in India.
While blockchain dispute resolution is promising, it remains experimental. Businesses should balance innovation with caution by incorporating dispute resolution clauses in smart contracts, complying with regulations, and staying informed on legal developments. India’s balanced approach, neither banning nor fully embracing cryptocurrency, suggests a future where law and blockchain coexist, but the path requires patience and proactive adaptation.
The future of justice may be code-aided, but for now, traditional legal safeguards remain indispensable.
Founder & Managing Partner, Vidhisastras, Advocates & Solicitors.
3. Information Technology Act, 2000.
5. Evidence Act, 1872, S. 65-B.
6. Evidence Act, 1872, S. 85-B.
11. Prevention of Money-Laundering Act, 2002.
12. Consumer Protection Act, 2019.
13. Digital Dispute Resolution Rules, 2021 (UK).
