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Smart Contracts — An Indian Perspective

Posted on February 2, 2017 | by Signzian

Smart Contracts, within the burgeoning realm of blockchain technology, are beginning to gain traction in India’s technological and legal landscapes. These self-executing contracts, with terms of agreement directly written into code, promise a future of transparent, tamper-proof, and efficient transactions. While the global community has been quick to adopt and integrate these into various sectors, India stands at a pivotal juncture, balancing its rich legal traditions with the innovations of the digital age. As the nation grapples with the challenges and opportunities presented by smart contracts, it’s essential to understand their implications, regulatory frameworks, and potential transformative power in reshaping the Indian contractual ecosystem.

Demonetization in India has placed Blockchain-based Smart Contracts in a visible space. Blockchain technology has enabled the smooth transition from traditional to smart contracts by making them simpler and less expensive. Smart contracts are a vital step forward in automating the terms of an agreement between two parties.

For smart contracts to completely penetrate the Indian business circuit, the following aspects need to be focused upon:

The myth of smart contracts not being analogous to traditional contracts, needs to be addressed.
The legal clarification on status of Digital Currency is vital. Adequate regulation in the sphere of digital currency and smart contracts, will help in integration of digital contracts into present industrial standards. But, this transition needs the regulatory and logistical help of the RBI and Government structures.

Table of Contents

What are Smart Contracts?

Smart contracts are computer protocols that embed the terms and conditions of a contract. The human readable terms of a contract are fed into an executable computer code that can run on a network. Many contractual clauses are made partially or fully self-executing, self-enforcing, or both.

Understanding Smart Contracts and Blockchain Technology

Smart contracts are self-performing and operate in combination with blockchain. This enables them to move information of value on the blockchain between parties.
Blockchain forms the backbone of all digital contracts and currency like the Bitcoin. It creates a transaction database that is shared by all nodes participating in a system based on the Bitcoin protocol.

Smart Contracts vs. Traditional Contracts

Contracts can be understood as agreements which are legally enforceable. The rights and obligations created by this agreement are recognized by law.

The idea of smart contracts is compatible with our understanding of traditional contract principles. Since, smart contracts also have legal backing, they fulfil the requirements of traditional contract law.

An important distinction between traditional and smart contracts is the medium on which the contract is formed. Commerce depends on individuals being able to form stable, predictable agreements with one another. Communication and physical ratification are the primary ways of creating a legal relationship. This infuses confidence of enforceability into the parties. The legal legitimacy and confidence of enforceability make traditional contracts a preferred way of forming contractual relations.

In smart contracts, the terms and conditions of contractual agreement are entered into the software code. But, this does not take away from the original character of the agreement. As long as the agreement creates a set of rights and duties or obligation, it is a valid contract.

Smart contract comprises of a new set of tools to articulate terms. The process of formation and articulation of contract is now embedded in a self-enforcing automated contract. Hence blockchain technology-based-smart contracts are a way to complement or replace, existing legal contracts.

For a wide range of potential applications, blockchain-based-smart contracts offer many benefits:

Speed — Smart contracts use software code. These codes automate tasks that are typically accomplished manually. Hence, they can increase the speed of a wide variety of business processes.
Accuracy — The probability of manual error is reduced due to automated transactions.
Lower cost — Smart Contracts need less human intervention, fewer intermediaries and thus reduce costs.
Auto-enforcement — Smart contracts are unique in their enforceability since these clauses are embedded in the applicable software itself.

Despite these benefits, there is hesitancy to participate in transactions involving smart contracts. This is because the status of digital currency is still ambiguous in India. Unlike traditional contracts, the legal position on enforcement, jurisdiction etc. is unsettled.

Yet, it can be seen that smart contract based transactions are much more popular in international parlance. Recognition for such transactions in major international commercial law statute have a profound impact.

Current Legal Scenario in India

Opponents of smart contracts in India argue that cryptocurrencies do not have the legal status as a currency in India. Hence, there is ambiguity about whether they constitute a ‘valid consideration’ as per traditional contractual principles.

Cryptocurrency is undefined under the FEMA, RBI Act or Coinage Act.
It is uncertain as to how Cryptocurrencies will be taxed and whether such tax will be a central or state subject.
Recently, a multi-stakeholder panel comprising of members from the RBI and the IDRBT looked into the implications of blockchain technology.[1]
Since all transactions take place over the internet, the dispute resolution or clause reposing jurisdiction to courts or excluding jurisdiction of courts needs to be clearly spelt out. “Smart contract itself should envisage a dispute resolution mechanism involving external arbitrators and/or courts, where the contract is frozen pending proceedings, and the award of the court is incorporated into the terms of the smart contract. With regards to evidence, a dual-integration mechanism comprising hybrid ‘code + paper’ contracts can be presented in court.”[2]

Commercial agreements comprise of clauses that protect parties from various liabilities. They are not always suitable for representation and execution through code. Hence it can be concluded that smart legal contracts will need a blend of code and natural language.

Smart contracts in the commercial realm are at a nascent stage. Hence, regulation in this regard will render adequate clarity to the functioning of smart contracts. This would ensure a smooth transition from traditional contracts to smart contracts in the near future.

About Signzy

Signzy is a market-leading platform redefining the speed, accuracy, and experience of how financial institutions are onboarding customers and businesses – using the digital medium. The company’s award-winning no-code GO platform delivers seamless, end-to-end, and multi-channel onboarding journeys while offering customizable workflows. In addition, it gives these players access to an aggregated marketplace of 240+ bespoke APIs that can be easily added to any workflow with simple widgets.

Signzy is enabling ten million+ end customer and business onboarding every month at a success rate of 99% while reducing the speed to market from 6 months to 3-4 weeks. It works with over 240+ FIs globally, including the 4 largest banks in India, a Top 3 acquiring Bank in the US, and has a robust global partnership with Mastercard and Microsoft. The company’s product team is based out of Bengaluru and has a strong presence in Mumbai, New York, and Dubai.

Visit www.signzy.com for more information about us.

You can reach out to our team at reachout@signzy.com

Written By:

Signzy

Written by an insightful Signzian intent on learning and sharing knowledge.

Fintech & Banks – a synergistic approach!

Posted on February 2, 2017 | by Signzian

Fintech & Banks, once perceived as rivals in the financial ecosystem, are now increasingly embracing a synergistic approach to reshape the future of finance. While fintech startups bring agility, innovation, and digital prowess to the table, traditional banks offer a wealth of experience, deep-rooted customer trust, and robust regulatory frameworks. By collaborating, they harness the best of both worlds: leveraging cutting-edge technology to enhance customer experiences while building on the strong foundations that banks have established over centuries. This evolving partnership not only promises greater financial inclusivity and efficiency but also indicates a future where technological innovation and banking legacy coalesce for the betterment of consumers worldwide.

The global economic crises brought the world economy to its knees a decade ago. Still, the world’s largest banks operated and continue to operate, almost as if they were too big to fall. This feeling was echoed by Governments the world over. Their steadfast foundation among consumers has now been challenged by a different type of institution. This is the financial technology start-ups. (fin-techs.)

A compelling argument elucidates the whirlwind-like effect that fin-tech start-ups have on banking. The shift of priorities towards a consumer-convenience model gives incentive to banks to collaborate with fin-tech companies. These fin-techs make banking processes quicker and easier. They continuously innovate in the field to ensure greatest satisfaction of the consumer.

Table of Contents

Fintech – a Growing Force Internationally

The growth of fin-techs has been exponential, making them a true force to be reckoned with. Venture capitalists, private equity firms, corporates etc have poured an unprecedented amount of money into global financial technology start-ups. More than $50 billion has been invested in almost 2,500 companies since 2010. These innovators redefine the way we store, save, borrow, invest, move, spend and protect money. Leading financial analysts and experts like KPMG have estimated that the investment in fin-techs will increase by a whopping 36% in 2016.

There are various instances of success when it comes to fin-techs across the globe. Fin techs realize that consumer desire is paramount. They have persevered to provide quality digital service to thousands of consumers across the globe. M-Pesa is a case in point. M- Pesa is mobile money platform created by Vodafone and functional in Kenya. It capitalized on the realization that phones can be used to not only make calls, but also execute financial transactions. The premise of the M-Pesa is that most people in emerging and frontier markets don’t have bank accounts. They can use the platform via their mobile phones to make payments and ease money transfers. Estimates suggest that nearly 43 percent of the gross domestic product of Kenya takes place on the M-Pesa platform. The upward trajectory of investment in fin-techs is due to the satisfaction they provide to consumers worldwide. This has ensured that they become a strong global force.

Fintech in India

The Modi regime in India has been particularly supportive of the start-up culture in India. There has been consistent lobbying for foreign direct investment into the entrepreneurship sector. There have been initiatives such as ‘Start-up India, Stand up India’. India is among the first five largest start-up communities in the world. with the number of start-ups crossing 4,200 (at a growth of 40%) by the end of 2015. A Microsoft Ventures report states that the number of start-ups is expected to zoom from 3,100 in 2015 to an expected 11,500 start-ups by 2020.

The recent demonetization has encouraged ideas of a cashless and an e-wallet friendly economy. It has further prioritized the necessity of secure enablers and other platforms, such as Signzy Technologies Pvt. Ltd. They ensure a simple, secure and legal way of making payments. They also help to execute other necessary due diligence through their products like RealKYCTM, ARITM (Algorithmic Risk Intelligence) and Digital Contracts. This provide safety and security of parties to an online/diligence related transaction.

Flipkart CEO Binny Bansal and Snapdeal (and Freecharge) CEO Kunal Bahl acknowledged demonetisation as a game-changer. They labelled it as a move which will usher in the era of digital growth in India’s economy. The economy currently needs a stable and reliable platform to ease payments and related transactions now. This is where fin-techs step in. They bridge the gap between security and dependability. These are two key considerations that consumers in this new-look economy will have.

Services which Fin-Techs Can Offer

Mobile Payments

Payment security is a key concern in today’s risk-loaded environment. Innovation is essential to ensure risk mitigation and consumer responsiveness in the sector.[6] Fin-techs enable convenient and quick payments for various services, goods and other transactions through mobile wallets. Tokenisation and biometric data have developed to a great extent. This ensures authorization of payments through ‘mobile wallets’. There is no need to go through elaborate documentation and technicalities anymore.

P2P Payments

Fin-techs also enable the transfer of value of currency between to persons, thus enabling person to person (P2P) payments. The same transactions can be made between institutions and persons also.

The picture above is a representation of a report by BI Intelligence. It shows the growing popularity of P2P payments using mobiles. It also explains how they may serve as a bridge to widen use of smartphones to complete in-person “wallet-less transactions”.

Collaborative Actions between Fin-techs and Banks in India

Banks have realized that the way forward is to embrace digitized processes. It is essential to collaborate with fin-tech start-ups to maximize consumer satisfaction. Various Indian banks have taken active steps to partner with start-ups to make banking processes easier.

HDFC Bank

HDFC has partnered with a Bangalore-based start-up called “Tone Tag”. It provides phone-based proximity payment services to its customers. it had also tied up with Chillr — an app-based payments platform which transfers funds from account to account without having to fill in any account numbers or bank codes. The bank is also known to host start-up competitions in the form of digital innovation summits.

Axis Bank

Axis bank partnered with Vayana Network. Together. Together, they launched “Invoice to Payment,” an end-to-end digital invoicing and payment solution. The solution aims to simplify B2B payments in India. Currently B2B payment is estimated at over $95 billion annually. It offers digital invoicing, electronic workflow approval and instant payment processing for businesses in India.

ICICI Bank

ICICI Bank is partners with Paytm. Paytm is India’s largest mobile payment firm to launch virtual prepaid cards. This idea has now evolved into the Paytm wallet. It can be used for purposes such as purchasing supplies, usage of public transport etc.

YES Bank

YES Bank has partnered with some exciting fin-tech start-ups like Ultracash Technologies. They have launched payments processing through sound waves and TimesofMoney. They also plan on launching their own online remittance solution called YES Remit. YES Remit will allow non-resident Indians (NRIs) to send money to any YES BANK account or other bank accounts in India.

Bill Gates once said that banking would remain essential to the world, but banks wouldn’t. Fin-tech companies are looking to take over the market. Hence, NBFCs and financial institutions need to remember is that collaboration is key. It is high time that these institutions look inwards and identify key weaknesses that these fin-techs can fill proficiently. Fin-techs and undeniably exciting. They also own the brightest and most innovative minds in the country and have enough funding. Yet taking lessons in market expertise, brand image, expensive licensing, brand name and image etc. from banks is the only way for them to progress. A combination of digitally aware customers and a symbiotic synergy between fin-techs and financial institutions is indicative of the birth of a new system of global finance.

About Signzy

Visit www.signzy.com for more information about us.

You can reach out to our team at reachout@signzy.com

Written By:

Signzy

Written by an insightful Signzian intent on learning and sharing knowledge.

Peer to Peer Lending: An Overview

Posted on January 26, 2017 | by Signzian

Peer to Peer (P2P) lending is revolutionizing the financial landscape by offering an alternative platform for borrowing and lending money. By directly connecting borrowers with individual lenders, it bypasses traditional financial intermediaries like banks, leading to quicker, more transparent, and often more favorable loan terms. This model not only democratizes access to credit for many underserved segments but also presents an attractive investment opportunity for individuals seeking better returns than traditional savings vehicles. As the popularity and trust in P2P lending grow, it’s poised to reshape how consumers and investors perceive and engage with the credit market.

After Securities Exchange Board of India (SEBI) released its Discussion Paper on Crowdfunding, the Reserve Bank of India (RBI) also has decided to regulate the online lending and borrowing market. While it is easy to digest the thought and attempt made by SEBI through its discussion paper considering the involvement of “securities” and “public” in the whole process of crowdfunding, the same is not the case with RBI’s consultation paper (“the paper”). One fundamental point of difference between these two regulatory bodies is that SEBI comes into the picture whenever there is involvement of “securities” and “public” but RBI does not get involved in every activity when there is “money” and “transaction” involved because there are several other enactments which deal with other aspects of transactions which take place in money. One such activity is money lending which is a State subject and it is to be governed by the individual states, leaving RBI with no role to play.

Keeping that in mind, this article will further analyze how, at several instances, RBI is trying to regulate P2P lending platforms by exceeding its jurisdiction.

Nature of P2P Lending

Firstly, one needs to understand that P2P lending is not just something to do only with start-ups but is in fact a much bigger idea than that. Here the borrower can either be an individual or a legal person requiring a loan and hence this new area has the capability to satisfy temporary monetary needs of individuals as well.

Proposed Regulations

(i) Permitted Activity: The P2P Lending Platform will only act as a facilitator for borrower and lender. Various requirements need to be met by the platform, such as:

Display of the amount of lending and borrowing on balance sheet.
No ‘financial activity’ can be carried out on its own, and compliance to The Reserve Bank of India Act, 1934 is necessary.
Assurances of any returns cannot be given/made.
Information about suitability of a lender and creditworthiness, reliability of a borrower can be given on the platform.
Advertisement will be regulated.
The platform cannot take part in the financial transaction between lender and borrower and move through banking channels between the two.
No cross-border transaction will be allowed.

(ii) Prudential Requirements: The prudential requirements will include a minimum capital of Rs 2 crore. Also, leverage ratio may be prescribed. There can also be a cap on the total investment by a Lender.

(iii) Governance Requirements: The management and operational personnel of the platform would need to be stationed within the country and a financial background of promoters and board needs to be thoroughly conducted.

(iv) Business Continuity Plan (BCP): There must be an arrangement like a ‘living will’ or alternative arrangement in the form of an agreement for continuation of its operations. The Platform must also contain risk management systems and a Business Continuity Plan. There should be a back-up for the data since the Platform acts as a custodian of cheques, agreements and other details.

(v) Customer Interface: Confidentiality of the customer data and data security would be the responsibility of the Platform. It will also need to provide to borrowers and lenders transparency, data confidentiality, minimum disclosures and proper grievance redress mechanism.

(vi) Reporting Requirements: Basic reporting requirements may be prescribed.

Dissecting the paper and analysing RBI Responsibility

1. Para 1.6 of the paper inter-alia states that:

“The platform provides the service of collecting loan repayments and doing preliminary assessment on the borrower’s creditworthiness.”

The question arises in a situation where both these functions i.e. of collecting loan repayments and doing preliminary assessment on the borrower’s creditworthiness are outsourced by the P2P platform as both of these activities though important are not core to the platform and not something that cannot be outsourced.

2. Para 1.6 of the paper further inter-alia states that:

“The fees go towards the cost of these services as well as the general business costs. The platforms do the credit scoring and make a profit from arrangement fees and not from the spread between lending and deposit rates as is the case with normal financial intermediation.”

Here RBI itself has made a fundamental classification of business activities undertaken by a financial intermediary and that of a P2P platform.

3. Para 5.4 of the paper which deals with the scope of RBI’s regulations also inter-alia state that:

“The notification can therefore specify that no entity other than a company can undertake this activity. This will render such services provided under any other organizational structure illegal. Alternatively, the other forms of structure may be regulated by the State Governments.”

RBI recognizes here that money lending activity is an activity which is not completely an unregulated space but can be regulated by the State Governments.

4. Para 4.3 of the paper which puts forth the arguments in support of regulating the activity is as follows:

Considering the significance of the online industry and the impact which it can have on the traditional banking channels/NBFC sector.

“Impact on something that RBI regulates” cannot qualify as a reason for RBI to regulate something which it is not supposes to regulate. If this rationale were to be followed, RBI should also have power to regulate the securities market considering the situation that would have been in existence for the Banks & NBFCs had there not been any securities market and Stock Exchanges.

If properly regulated, the P2P lending platforms can do this more effectively.

Making something more effective can only be done if the RBI is statutorily permitted to do so, and it is clear that is not the case.

5. For better understanding let us divide para 4.3. (iv) of the paper, because here RBI has tried to establish its jurisdiction.

a. Section 45S of RBI Act prohibits an individual or a firm or an unincorporated association of individuals from accepting deposits, if his or its business wholly or partly includes any of the activities specified in clause © of section 45-I (i.e. activities of a financial institution);

Attention must be paid to the fact that the providing platform for lenders and borrowers does not fall under the functions carried on by financial institutions.

b. if his or its principal business is that of receiving of deposits under any scheme or arrangement or in any other manner, or lending in any manner

It is important to note that there is no receiving of deposits done by the platform providers.

c. As per the Act, ‘‘deposit’’ includes and shall be deemed always to have included any receipt of money by way of deposit or loan or in any other form, but does not include any amount received from an individual or a firm or an association of individuals not being a body corporate, registered under any enactment relating to money lending which is for the time being in force in any State.

The RBI Act once again has recognized that the money lending activity is to be regulated at the state level.

d. Since the borrowers and lenders brought together by a P2P platform could fall within these prohibitions, absence of regulation may lead to perpetrating an illegality.

At the end RBI has also accepted that borrowers and lenders are the persons which come under the purview of the RBI and not the platform itself. However, going by this logic, RBI should have power to regulate the money lenders also under the Money Lenders enactments of states.

In this whole clause the justification given by RBI has only shown how remote this industry is from its ambit and has failed to substantiate a solid claim for regulation.

Regulatory Space- State Governments

RBI’s own paper expresses doubts over the legality of these regulations over P2P lending platforms in Para 5.4 of the Paper, as money lending through money lenders is a state subject any regulations over P2P may need a legislative backing. Currently, it seems that the two regulators SEBI and RBI are trying to draw boundaries between themselves over crowdfunding and P2P lending.

Conclusion:

The consultation paper in its present form if developed into any regulations may provide for an easier entry for the large NBFCs to set up a P2P platform which might create an entry barrier for the new players willing to enter into this space and eventually few of these NBFCs might grab up substantial part of the future market of P2P lending by availing the early bird benefit and undertaking aggressive marketing, which eventually leads to brand recognition.

Originally published at legalminimalist.org on January 26, 2017.