Cybersecurity & Data Privacy In Web 3.0: Legal Risks & Solutions For Global Businesses

In a landscape where data is not controlled by a single entity/ central authority and transactions occur across distributed networks, traditional legal protections face new tests of quality, viability and sufficiency. For Indian business houses, it brings many questions: What are the security levels in these decentralized systems? What is the grievance redressal system if any issue arises? Are there any dedicated laws for the offences associated with this system? As India's legal and regulatory frameworks evolve to address these technological advancements, keeping an understanding of the allied drawbacks, risks and their associated safeguards becomes indispensable.

Cybersecurity and Data Privacy Challenges in Web 3.0

Web 3.0 offers transformative possibilities - from decentralised finance to tokenised assets - it also comes with embedded cybersecurity and privacy risks. Below discussed is an overview of the primary road blocks regarding the same:

1. Decentralisation and Accountability

Web 3.0's decentralised nature eliminates the scope of accountability by fading the role of built-in central authorities. In instances where transactions show a failure or smart contracts malfunction, determining the point of responsibility becomes a challenge in this system. Legal recourse is completely complicated in the borderless environment. For Indian businesses, this creates legal ambiguities, domestic laws may apply, but enforcing them across a decentralised, often anonymous, global network is a significantly difficult task.

2. Public Blockchains: Transparency vs. Privacy

Public blockchains allow anyone to view transactions, ensuring trust - but at a cost. Even if users are identified by wallet addresses, those can be traced back to real identities. Blockchain's permanence means data, once added, can't be deleted, clashing with privacy rights like India's “right to be forgotten”. Personal data on-chain is permanent, raising serious concerns under laws like the Digital Personal Data Protection Act, 2023 (DPDP Act).

3. Data Invariability and Legal Compliance

The DPDP Act grants individuals' rights over their data, including consent withdrawal and data erasure. However, blockchain's design resists such changes. If personal information is stored on-chain via smart contracts, platforms may struggle to comply with these rights. Then what is the solution for the same? This disconnect between the technological framework and legal requirement necessitates careful consideration in data management practices. A prudent approach is to keep sensitive data off-chain or well encrypted, ensuring legal compliance while benefitting with the blockchain technology.

4. Smart Contract Vulnerabilities

Smart contracts, while facilitating automated transactions, are susceptible to coding errors and security flaws wherein vulnerabilities in their code can lead to significant exploits. For instance, the 2021 Poly Network exploit resulted in a $610 million theft.

Under Indian law, the enforceability of smart contracts is still evolving. Courts may apply traditional contract principles if harm occurs, especially in cases of bugs, fraud, or unfair outcomes. Businesses must ensure robust audits and legal safeguards.

5. Cyberattacks and Fraud

Web 3.0 does not eliminate cyber risks; it reshapes them. Despite the advanced security features of blockchain technology, Web 3.0 platforms remain targets for cyberattacks, including phishing schemes, wallet compromises, and ransomware. If a company's blockchain infrastructure is compromised, it could face liability under data protection laws. Regulatory bodies like the Reserve Bank of India (RBI) or Securities and Exchange Board of India (SEBI) might intervene, especially in cases involving consumer loss or systemic risk.

6. Regulatory Uncertainty

The legal landscape for Web 3.0 technologies is still evolving. The legal journey of cryptocurrencies, from the Reserve Bank of India's 2018 ban to the Supreme Court's 2020 reversal, demonstrates the rapidly changing landscape. Decentralised Autonomous Organisations (DAOs), cross-border transactions, and foreign data laws (like the General Data Protection Regulation or GDPR) add further complexity. Though, in India, the regulatory environment is adapting to address the unique challenges posed by decentralised technologies, requiring businesses to stay informed and agile to ensure compliance.

The building of Web 3.0, rooted in blockchain, decentralisation, and transparency, creates new cybersecurity and data privacy challenges, distinct from those seen in the traditional systems. These include legal risks ranging from non-compliance with data protection laws, to liability for cyber breaches and regulatory uncertainty. However, these challenges are not insurmountable. Recognising them is the first step towards mitigation. Indian legislature is actively responding with new laws and regulatory measures aimed at addressing these issues within the Web 3.0 framework. The sections that follow outline how businesses can protect their interests while ensuring legal compliance.

India's Legal Framework: Cybersecurity and Data Privacy Laws

India is strengthening its legal framework for cybersecurity and data protection, driven by the rise of digital business models and high-profile data breaches. Any Indian company working in Web 3.0 must understand the key legal touchpoints, including both legacy laws adapted to modern technology and newly enacted legislation.

1. Information Technology Act, 2000 (IT Act) and Related Rules

The IT Act is the primary law addressing cybercrimes, electronic commerce, and data security practices in India. The key provisions of the ITA include:

• Section 66 & 43: Penalises hacking, unauthorised access, and data damage.
• Section 43A: Mandates businesses handling sensitive personal data to adopt "reasonable security practices".
• Section 72A: Criminalises unauthorised data disclosure under a contract.

The Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 clarify what qualifies as sensitive personal data (e.g., passwords, health, financial data) and recommend the international Standard IS/ISO/IEC 27001 on "Information Technology – Security Techniques - Information Security Management System – Requirements” compliance. The IT (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 require platforms like social media sites (and potentially crypto exchanges) to publish privacy policies and ensure user data protection.

2. Other Relevant Laws & Guidelines

• RBI & SEBI Guidelines: Financial and crypto-asset service providers are subject to additional rules.
• MeitY/CERT-In Directions: Cyber incident reporting is critical.
• Consumer Protection Act, 2019: It applies if the Web3 services act as consumer-facing platforms. In the case of Shreya Singhal v. Union of India^[1], it was clarified that digital platforms, even decentralised ones, must comply with constitutional safeguards and existing laws.

3. Digital Personal Data Protection Act, 2023 (DPDP Act)

India's first comprehensive data privacy law, passed in August 2023, was inspired by the Supreme Court's landmark Puttaswamy judgment^[2], which recognised privacy as a fundamental right. While the law is nascent and specifics of enforcement are still being developed, Indian businesses must pay close attention to it, even in Web 3.0. Key features of the DPDP Act include:

• Consent & Purpose Limitation: Data use must align with the purpose for which consent was given.
• Data Minimisation & Storage Limits: Only collect what's essential and avoid indefinite retention. Web3 businesses must avoid writing personal data permanently on-chain.
• User Rights: Users can request access, correction, or deletion of their data. The “Right to be Forgotten” is supported, with certain limitations.
• Security & Breach Notification: Mandatory reporting of breaches to the Data Protection Board of India. Fines can go up to ₹250 crore for serious violations.
• Cross-Border Transfers: Is allowed only to countries which are whitelisted. In this scenario, the Indian laws apply even if the server is abroad.

4. CERT-In (Indian Computer Emergency Response Team) Cybersecurity Directions - April 2022

The following compulsory directives apply to all digital service providers:

• 6-Hour Reporting Rule: Cyber incidents (including attacks on blockchain platforms) must be reported to CERT-In within 6 hours.
• 180-Day Log Retention: Logs must be stored and synced with official Indian time servers.
• Other Requirements: VPNs, cloud services, and crypto platforms must store customer data for 5 years.

Non-compliance can lead to imprisonment (up to 1 year) and fines under the IT Act. Web3 platforms must incorporate these into their cybersecurity protocols.

India now possesses a robust legal framework for cybersecurity and data protection. The IT Act (with its amendments and rules) addresses cyber offences and mandates baseline security practices. The new DPDP Act gives a modern touch to the privacy laws, demanding responsible data handling and granting users rights.

Regulatory bodies are active, whether it's CERT-In on incident reporting, or sectoral regulators overseeing fintech, crypto, etc. This means Indian businesses venturing into Web3 cannot assume it's a not regulated, lawless frontier. On the contrary, they must ensure compliance with these laws while addressing the technical challenges of Web3.

Practical Legal Solutions and Compliance Strategies for Web3 Businesses in India

The advent of Web 3.0 brings in significant legal and operational complexity. However, with informed planning and strategic legal oversight, Indian businesses can embrace decentralised technologies while remaining compliant with the prevailing regulatory framework. Here is a practical legal roadmap for Web3 enterprises operating in or with India.

1. Strengthen Cybersecurity through Audits and Controls

Web3 does not outrightly eliminate the requirement of traditional cybersecurity framework — it actually heightens it. Non-changing smart contracts are required to undergo rigorous audits prior to their deployment. Businesses should ensure to provide regular updates to blockchain clients, implement firewall protocols, multi-factor authentication (MFA), and monitor for intrusions. For firms handling digital assets, it is advisable to utilise multi-signature wallets or Hardware Security Modules (HSMs). Moreover, cyber insurance policies tailored to crypto-asset risks is expectedly prudent.

2. Incorporation of Privacy

Privacy must be embedded from the very outset of the framework. Web3 entities should collect only essential personal data and, wherever possible, avoid storing sensitive information on-chain, given the challenges of deletion and modification. Employing tools such as zero-knowledge proofs, cryptographic hashing, and end-to-end encryption ensures both user privacy and regulatory alignment. The Digital Personal Data Protection Act, 2023 (DPDP Act) mandates consent-based processing, the right to erasure, and purpose limitation—thus necessitating systems that respect user autonomy even in decentralised environments.

3. Drafting Non-ambiguous Legal Documents with risk disclosure

All user-facing documents — including terms of service, privacy policies, and disclaimers must comply with Indian regulations, particularly under the Information Technology Act, 2000 and the IT (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021. Consent obtained must be informed and explicit. Legal documents should clarify platform liabilities, especially in decentralised contexts, and disclose inherent risks, such as the beta status of blockchain protocols or the use of third-party oracles. Ambiguity shall not lurk around in any legal documentation to avoid any litigation around this issue.

4. Implement Incident Reporting Mechanisms and Recordkeeping Protocols

Under Indian regulations like CERT-In, cybersecurity incidents, including blockchain-based breaches, are required to be reported within six hours. Entities must have an incident response plan, depute a team, conduct simulations, and etain system logs for a minimum of 180 days. For services such as VPNs or cloud platforms, entities should maintain user data, including names, IP addresses, and timestamps for five years. It is advised that these protocols be inculcated in IT processes from the start to avoid any regulatory penalties in the process.

5. Stay Updated and Retain Legal Experts

India's legal framework for emerging technologies is evolving rapidly keeping up with the pace of technological advancements. In addition to the DPDP Act, the upcoming Digital India Act is expected to expand regulatory scrutiny across the areas including AI, blockchain, and data intermediaries. Web3 businesses should participate in industry groups such as the Blockchain and Crypto Assets Council (BACC) under IAMAI, monitor RBI, SEBI, and MeitY directives, and conduct regular legal and regulatory audits to avoid inadvertent violations and the consequent penal actions.

6. Define Jurisdiction and Dispute Resolution in User Agreements

Even in Web3, legal clarity is of utmost importance. User agreements should explicitly define the applicable laws and jurisdictional forum for clear grievance redressal. Web3 businesses may also explore smart contract-enabled arbitration frameworks or designated traditional offline mechanisms. Entities may also appoint a grievance officer for an organized track of complaints by responding promptly to the concerns expressed by the users.

7. Empower Your People and Protect Users

Human error remains one of the most significant vulnerabilities in any organisation. Teams must be trained to recognise phishing attempts, manage credentials securely, and adhere to smart contract deployment protocols. Key access should be compartmentalised and managed under formalised internal policies. User protection also demands robust front-end design—educating users about scam vectors, supporting the use of hardware wallets, and deploying built-in fraud detection mechanisms.

8. Benchmark Against Industry Standards and Learn from Precedents

Furthermore, all Virtual Digital Asset (VDA) service providers—such as crypto exchanges, NFT platforms, and wallet services — must register with the Financial Intelligence Unit-India (FIU-IND). This is essential to ensure compliance with anti-money laundering (AML) obligations under the Prevention of Money Laundering Act (PMLA), 2002. Non-compliance may result in enforcement actions, penalties, or platform bans.

India's regulatory infrastructure is not an obstacle, rather it is a statement of trust, innovation, and long-term credibility. For Web 3.0, businesses aiming to go global, aligning their set up with the Indian legal and ethical standard framework is not just prudent, it is also non-negotiable.

Authors: Ashish Deep Verma, Founder & Managing Partner, Vidhisastras, Advocates & Solicitors.Views are personal. 

1. [2015] 5 S.C.R. 963 ↑

2. Justice K. S. Puttaswamy (Retd.) and Anr. vs Union of India and Ors. AIR 2017 SC 4161. ↑