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The enforcement of government contracts could be improved by Blockchain

Blockchain technology could be a key instrument in enforcing government contracts in India, affecting project performance and accountability while reducing violations and disputes.


According to Milton Friedman, the Nobel laureate in economics in 1976, the three main functions of a government are law and order, defense and contract enforcement.

The enforcement of contracts is the mainspring of an economy in which all economic transactions are essentially contracts between two or more parties, including governments.

The current role of contract enforcement by governments is mainly exercised through the enactment of laws and the establishment of rules on the behavior of the contracting parties.

Not surprisingly, most of the enforcement is dissuasive - setting penalties for parties that violate agreed standards of performance and enforcing those provisions after the ruling.

Apart from regulation and case law, we have not realized yet that technology can be an important enforcement tool. It is time to dive into the age of smart contracts that can radically change the way contracts are enforced. It is somewhat regrettable that Bitcoin and other cryptocurrencies dominate the discussion about the disruptive technology of distributed ledgers, particularly blockchain.

Blockchain is not just a database technology - it's a very inefficient database when viewed as such - but a way to build trust between multiple parties that may or may not have the same interest. Moreover, this is achieved without the use of an intermediary.

As Friedman suggests, governments are the main mediators of the traditional way of contract enforcement and spend considerable resources on it. However, the confidence of economic operators (investors, entrepreneurs, and consumers) in the enforcement of an effective, efficient and unbiased intermediary is a crucial determinant of a well-functioning economy.

India's huge improvement in the World Bank's Ease of Doing Business Index is still hampered by the small improvement in contract enforcement. In this regard, India ranks 172nd out of 190 countries.

Because of limited decision-making ability, intelligent contracts could be the royal wave not only for India but for many other countries as well. Smart contracts are programmatic functions that are executed when certain conditions are met.

These self-enforceable protocols, written in code, are provided by asset or trade repositories in a decentralized GL, eliminating the risk of registry information corruption. These contracts rule out the likelihood of non-performance of the contract by one of the parties so that no legal mechanism to enforce the contract is required.

Take, for example, a real estate transaction between a buyer and a seller - an intelligent contract is encrypted and used in the blockchain to transfer ownership of the property from the seller to the buyer.


The contract verifies the distributed land register, verifies the vested title of the vendor, verifies that the buyer has sufficient capital to purchase the land, arranges a debit entry, confirms a credit note in the vendor's account, secures the property taxes and duties, and deduct state (provided the state authority is a participant node in the blockchain) - and then transfer the property to the buyer and enter that information in the register.

This procedure excludes the possibility of non-performance, as it carries out and does not contradict itself (the contracting parties can not refuse to fulfill the contract or the contract). As the performance is now required by the technology, the parties will not discover any breach of contract that leads to legal action.

A key question that arises here is why this can not be done through a central platform instead of a decentralized ledger. This is where the topic of trust comes into play.

In terms of land wealth, the state has the Record of Rights (RoR) - a list of land assets in India. However, the RoR is not definitive proof of land ownership (so-called "presumptive land title system"). It is interesting to note that a transfer of land titles in many states of India involves a management communication to check for opposition or counter-claim by the extended local community in the region.

This is a physical form of the "consensus protocol" where the transaction is reviewed by the community (or a declaration of invalidation is reported).

Since two-thirds of civil cases handled by Indian district courts (over 80% of all pending cases in district courts) are land and property-related cases, there is little confidence in government-maintained R & D.Building a decentralized register of land and property assets and empowering the community to engage in smart contracts could unleash the potential of the land / wealth market in India.

The power of Blockchain and Smart contracts will only be fully exploited if they can interact reliably with other external non-blockchain systems.

In the "real" world, where data is rarely generated and stored in a distributed ledger, intelligent contracts require governance models to harmonize cross-system communication. Many national systems (citizen service portals, ID systems, real-time payment systems, land registries, insurance, and social security systems) are important infrastructure platforms for a country.

While the coding capability of smart contracts has evolved from the simple execution of currency-like transactions to full programmability, not all possible contracting scenarios can be coded. The innovative potential of the Blockchain to increase efficiency and transparency can therefore only be realized if intelligent contract systems can reliably communicate with systems without blockchain and execute transactions automatically.

An example of possible cross-system communication is the integration of intelligent contracts with the Indian payment service UPI (Unified Payments Interface, a mobile real-time peer-to-peer account-to-account payment system).In this way, intelligent contracts could transfer insurance claims to weather-related crop damage to farmers, eliminating human discretion by integrating satellite data to validate crop damage, and transferring UPI's claim to the farmer's bank account.

Punit Shukla, Project Leader, Artificial Intelligence and Machine Learning, World Economic Forum, C4IR India