• Manvee Kumar Saidha

Smart Contracts and Cryptocurrency – Is it Time to Revisit the Bounds of Consideration?

[Manvee is a student at School of Law, Christ University.]

Cryptocurrency has recently attracted a significant amount of discussion. In the Indian context, its legal validity – which is of determinative interest to numerous stakeholders – continues to garner an interesting discourse. As one of the chief use-cases of cryptocurrency, smart contracts are also prone to associated policy uncertainties and/or legal ambiguities. The quandary is in fact fundamental because cryptocurrency forms the element of consideration in smart contracts.

In India, the validity of contracts, including smart contracts, is contingent on ‘lawful consideration.’ The legal perception of cryptocurrency, which is currently dubious, thereby directly affects the enforceability of smart contracts in India. In seemingly no hesitation regarding the same, the usage of smart contracts has commenced. The potential of smart contracts is promising, especially in the banking sector, and their application is only going to increase.

In this context, the author deliberates whether smart contracts are enforceable with cryptocurrency as their consideration. It is further suggested that the ambit of consideration under the Indian Contract Act 1872 (ICA) should be broadened to ensure that prospective smart contracts are enforceable in India. This will ensure that irrespective of the cryptocurrency conundrum, parties to smart contracts are able to enforce their rights.

Smart contracts, cryptocurrencies, and consideration: A brief overview

Smart contracts may be seen as a set of digitized promises wherein the rights, duties and protocols are pre-determined and thereafter automatically administered. These are partially self-executing agreements which function on decentralized network technologies. The automated program allows for transfer of digital assets within the block-chain upon the happening of specified events, thereby reducing the need for third-parties. While there exist various architectural formats for smart contracts, they typically involve digital exchanges by way of cryptocurrencies. In their present state, smart contracts cannot make payments denominated in fiat currencies (GBP, SGD, USD, etc.), and facilitate transactions only by way of cryptocurrencies.

Coming to consideration in contracts, we know that it is simply the value exchanged for the fulfillment of a stipulated promise. Since smart contracts block amounts involved in the ledger as a preliminary step, the entirety of cryptocurrency involved is the consideration.

Scrutinising validity in the Indian context

While there is no specific legislation that deals with smart contracts, the ICA holds primary authority. Its applicability is apparent from Section 10 of the ICA, which clearly provides that “All agreements are contracts if…”. Additionally, provisions under the Indian Information Technology Act 2000 and Indian Evidence Act 1872 also govern smart contracts, though they are not of particular relevance in the present context.

Further, Section 10 of the ICA states that those agreements are contracts which inter alia have been made for a lawful consideration. This provision is to be read with Section 23 of the ICA which stipulates the conditions of lawfulness, or lack thereof, with respect to consideration. Accordingly, where the consideration is:

a) forbidden by law, or

b) would defeat provisions of any law, or

c) fraudulent, or

d) involves or implies injury, or

e) regarded as immoral or against public policy,

it is unlawful and the concerned agreement will not be a valid contract.

Since cryptocurrencies are not inherently fraudulent, injurious, immoral, or opposed to public policy, understanding their lawfulness demands analysis only under points (a) and (b).

Evidently, both the sub-provisions require some form of contradiction with the ‘law.’ In the case of Udhoo Dass v. Prem Prakash and Another, the term 'law' as used in Section 23 of the ICA was examined. It was reiterated that, in clause (a), ‘law’ implied juridical law i.e., the law enacted by a competent legislature; and ‘law,’ in clause (b), meant the law of personal or customary nature. Being forbidden or defeating a legal provision would thus come into question only where there exists such ‘law’ in the first place. At this juncture, reference may be made to the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill 2019 (2019 Bill), proposed by a high-level committee. While the government also revealed the existence of the Cryptocurrency and Regulation of Official Digital Currency Bill 2021 (2021 Bill), its contents are not available to the public. Both 2019 Bill and 2021 Bill are yet to be introduced in either House of Parliament, and as observed by the Supreme Court in In Re: The Special Courts Bill, a bill by itself is not law and becomes law only when passed by the parliament. Consequently, there is presently an absence of ‘law’ pertaining to cryptocurrencies, thereby making them innately incapable of being forbidden or defeating a provision. Of course, when said law is notified, usage of cryptocurrency as consideration may be considered unlawful if a provision akin to Section 3 of the 2019 Bill is embodied in the 2021 Bill.

In light of the above, cryptocurrency is not per se unlawful consideration and smart contracts formed using it should be valid. However, the satisfaction of this interpretation is limited to present circumstances. There is a rather obvious tilt towards rejecting the currently-in-use cryptocurrencies (such as Bitcoin, Ethereum, etc.) – which can be linked to the proposed bills and RBI’s plan of designing a digital currency unique to India. The culmination of these reservations will not only deem cryptocurrencies as unlawful consideration for future purposes but will also disrupt the enforceability of existing smart contracts as per Section 56 of the ICA. Thus, while crypto transactions can continue amidst, and in benefit of, the current legal uncertainty, it would be commercially prudent to engage with caution.

Broadening the horizons of ‘consideration’

India has recently made concerted efforts towards achieving a higher Ease of Doing Business ranking. One of its key components is to ensure pre and post contracting procedures are unchallenging and efficient. With smart contracts on the rise, any apprehension regarding their validity is unfavorable to India’s efforts. The author suggests that the ambit of consideration should be expanded to recognize and enforce smart contracts. The solution is simple – removing the qualification of ‘lawful’ from ‘consideration’ in Section 10 of the ICA. Analysis from a comparative standpoint indicates that it would be a doable measure.

In USA, the contract law is governed by State common law, judicial precedent, or principles that have been codified as the ‘Restatement of Contracts’. As a result, while consideration remains a pre-requisite, there exist no specific qualifications. New York law, for instance, simply requires either a benefit to the promisor or detriment to the promisee. English contract law also does not prescribe any qualifications. Consideration is simply something of value which is given for a promise to make the promise enforceable as a contract. Thus, in both these jurisdictions a smart contract would be enforceable basis the requirement of consideration. Similarly, if the Indian legislation was amended to solely read ‘consideration’ (as opposed to lawful consideration), then common law principles would allow courts to accept cryptocurrency as consideration. Moreover, since the ‘object’ of a contract would continue to remain under scrutiny of lawfulness as per this proposal, there would be sufficient safeguard.


As highlighted before, smart contracts are here to stay, and consequently, disputes are bound to arise. The decision of the Singapore International Commercial Court in B2C2 Ltd. v. Quoine Pte Ltd. pertained to the use of digital currencies in smart contracts and goes on to exemplify the extant need to clarify related details. Herein, it was observed that “…cryptocurrencies are not legal tender in the sense of being a regulated currency … but do have the fundamental characteristic of intangible property as being an identifiable thing of value...” Such acknowledgment was welcomed by stakeholders, and the classification of crypto assets as property thereafter has simultaneously benefited users and regulators. Keeping aside the appraisal of the decision, the takeaway is that issues surrounding smart contracts will arise, and a predetermined regulation is advisable as opposed to post-dispute action.

An uncompromising outlook vis-à-vis cryptocurrency only stands to disadvantage India – stakeholders and authorities alike. If smart contracts do not receive recognition under the ICA, it is not that Indian individuals/entities will refrain from engaging in such agreements. The parties will merely stipulate another jurisdiction for enforcement and dispute resolution, thereby defeating the (immoderate) intention behind India’s current rigid approach. There are in fact various advantages to altering the confines of consideration under the ICA. For instance, cryptocurrency as consideration for sale of goods, supply of services, etc. would be liable to taxation under Section 28 read with Section 2(13) of the Income Tax Act 1961, thereby generating revenue.

Indian law and policy should thus accept and deal with cryptocurrency in a more accommodative manner – particularly, in respect of smart contracts. Technically, smart contracts are presently enforceable in India. However, an undemanding legislative tweak in the ICA will additionally secure prospective enforceability and safeguard the interests of businesses which have already engaged in smart contracts. This in turn will also provide courts with the opportunity to develop precedent on other aspects of smart contracts, thereby expanding jurisprudence in a timely manner.

After all, parties are free to determine their rights and liabilities in a contract following which a court gives effect to their (lawful) intentions – a smart contract involving cryptocurrency, which is inherently harmless, should not be an exception to this.


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