Web3 is changing how digital platforms, financial services and online communities operate. At the centre of this ecosystem are smart contracts and Decentralised Autonomous Organisations (DAOs). Smart contracts automate transactions through blockchain-based code, while DAOs use blockchain technology to enable collective decision-making through tokens, governance mechanisms and predefined rules.
However, decentralisation does not automatically eliminate legal responsibility. As Web3 applications increasingly interact with financial services, digital assets and AI systems, businesses and developers must consider questions of enforceability, accountability, compliance and liability.
What Are Smart Contracts?
A smart contract is a programme deployed on a blockchain that automatically executes specified actions when predetermined conditions are satisfied. For example, a smart contract could automatically transfer digital assets when a particular condition is met.
Their key advantage is automation. Once deployed, the contract can execute without requiring a traditional intermediary. However, code is not necessarily equivalent to a legally enforceable contract. Whether a smart contract creates enforceable contractual rights and obligations depends on the applicable law, the parties involved and the circumstances surrounding the transaction.
Businesses using smart contracts should therefore consider how legal terms, dispute-resolution mechanisms, governing law and liability provisions interact with the underlying code.
Smart Contracts and Regulation in India
India does not currently have a single comprehensive statute specifically governing smart contracts. Instead, their legal treatment may depend on the nature of the activity and the laws applicable to it.
Where smart contracts facilitate transactions involving Virtual Digital Assets (VDAs), additional regulatory considerations can arise. The Financial Intelligence Unit–India’s updated AML/CFT guidelines specifically recognise that the use of an automated process such as a smart contract does not remove the responsibility of parties performing regulated functions under the Prevention of Money Laundering Act framework.
This is particularly relevant for Web3 platforms that use smart contracts to automate activities that would otherwise involve regulated functions.
What Are DAOs?
A Decentralised Autonomous Organisation (DAO) is a blockchain-based organisational structure in which members can participate in governance through voting mechanisms, usually involving governance tokens.
Instead of relying entirely on a traditional board or central management team, a DAO may use smart contracts to implement governance decisions automatically.
Despite their decentralised structure, DAOs can raise important legal questions. Who owns the assets? Who is responsible for contractual obligations? Can token holders be held liable? Which jurisdiction applies to the DAO? How are disputes resolved?
The absence of a traditional corporate structure can make these questions particularly complex.
DAOs and Regulatory Accountability
Decentralisation should not be assumed to mean the absence of regulatory obligations. If a DAO or its participants conduct activities involving financial products, VDAs, fundraising, exchanges or other regulated services, applicable legal requirements may still apply.
India’s AML/CFT framework for VDA service providers is particularly relevant. FIU-India’s guidance states that persons performing specified VDA-related activities may qualify as reporting entities, and the use of automated smart-contract processes does not by itself eliminate those responsibilities.
Accordingly, Web3 projects should assess their regulatory position based on what the platform actually does, rather than relying solely on its decentralised structure.
AI and Autonomous Web3 Systems
The combination of AI and smart contracts introduces another layer of complexity. AI systems may generate recommendations, identify transactions, detect fraud or interact with blockchain protocols.
India’s AI Governance Guidelines adopt a principle-based approach centred on trust, accountability, transparency, safety and human-centric development. The framework recommends that AI developers and deployers comply with applicable laws and establish appropriate governance and risk-management mechanisms.
For Web3 projects using AI, this means that automated decision-making should be accompanied by appropriate monitoring, documentation, cybersecurity controls and accountability mechanisms.
Key Compliance Considerations
Web3 businesses developing smart contracts or DAOs should consider:
- clearly defining the legal structure of the project;
- documenting the rights and responsibilities of participants;
- conducting legal and technical audits of smart contracts;
- assessing whether VDA or AML/CFT obligations apply;
- establishing appropriate governance and voting mechanisms;
- identifying responsible persons for regulatory compliance;
- incorporating dispute-resolution mechanisms;
- maintaining appropriate cybersecurity controls; and
- assessing data-protection and AI-governance requirements where personal data or AI systems are involved.
Conclusion
Smart contracts and DAOs offer new models for automation, governance and digital collaboration, but decentralisation does not automatically remove legal responsibility.
For Web3 businesses, the objective should be to combine technological decentralisation with appropriate legal and governance structures. As blockchain and AI become increasingly interconnected, projects that build compliance, accountability and risk management into their architecture will be better positioned to innovate while maintaining trust and regulatory resilience.
