Column

Blockchain Legislation – Too Soon?

The blockchain continues to be a popular topic for entrepreneurs, journalists and technology lawyers. Also, in the United States, for legislators. Several states have enacted legislation about the blockchain in some manner. This note reviews what they do and why. To the best of my knowledge, Canadian legislators have not ventured into the blockchain universe. Feel free to note if and how they have, or if you think they should, in Comments.

Several states have done legislation. The most usual provision is to amend the state’s version of the Uniform Electronic Transactions Act (similar to the Uniform Electronic Commerce Act in Canada, both inspired by the UNCITRAL Model Law on Electronic Commerce) to include blockchain transactions in some way.

For example, Ohio, one of the first into the field, says this in section 1 on definitions:

(E) “Electronic” means relating to technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities.

(G) “Electronic record” means a record created, generated, sent, communicated, received, or stored by electronic means. A record or contract that is secured through blockchain technology is considered to be in an electronic form and to be an electronic record. (Emphasis added)

(H) “Electronic signature” means an electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record. A signature that is secured through blockchain technology is considered to be in an electronic form and to be an electronic signature. (Emphasis added)

Blockchain itself is not defined in the statute. These are the only two uses of the term. Is there any conceivable possibility that any blockchain transaction anywhere would not be electronic as that term is defined? If not – and I submit that there is no such possibility – then this insertion seems completely superfluous. It is just showing off, grandstanding by some legislator who wants to appear in the know and supported by the rest of the legislature for the same reason.

Of course, if the answer were No, that there could be a non-electronic blockchain transaction, then why is it appropriate to define that quality away in the statute? What characteristics might inhere to a non-electronic blockchain transaction, and should the UETA apply to it in any event?

In short, if the insertion is not meaningless, it is probably inappropriate.

Other states with simple and similar UETA amendments include North Dakota, South Dakota, Nevada, and Tennessee. (Most amendments are too recent to be readily findable online – the source of this list is the website mentioned in the Source note to this column.) Arizona enacted a more complex bill that said, like the others, that an e-signature or e-record “secured by blockchain technology” were considered to be in electronic form and to be an e-signature or an e-record. It went on to define blockchain technology:

“Blockchain technology” means distributed ledger technology that uses a distributed, decentralized, shared and replicated ledger, which may be public or private, permissioned or permissionless, or driven by tokenized crypto economics or tokenless. The data on the ledger is protected with cryptography, is immutable and auditable and provides an uncensored truth.

The statute properly extends to a wide range of blockchains, though whether it will cover what is available in five years’ time, who knows? It is arguable, however, that not all of the characteristics attributed to the data on a blockchain are equally accurate. Sometimes data is (or are…) mutable, especially in a permissioned blockchain, which could be subject to a (possibly fraudulent) majority takeover, or a fork in the chain.

It is not clear to me what “provides an uncensored truth” might mean. A blockchain does not guarantee that every entry is accurate. There generally must be some kind of group-wide acceptance of each new block in the chain, but the group cannot know the “truth” of the information in the block. And even if the data were true, what does it mean to say that it is “uncensored”? Not screened by some central authority before being added to the chain? If that is meant, that is what should be said.[1]

The Arizona bill, and now statute, also validate, or at least support, smart contracts. Whether it adds anything to what the law would have been otherwise is here as well an open question.

Smart contracts may exist in commerce. A contract relating to a transaction may not be denied legal effect, validity or enforceability solely because that contract contains a smart contract term.

“smart contract” means an event-driven program, with state [sic], that runs on a distributed, decentralized, shared and replicated ledger and that can take custody over and instruct transfer of assets on that ledger.

That is a pretty narrow definition of smart contract, but it has at least the merit of making clear that a smart contract is not itself a contract but a computer program with prescribed results, the transfer of assets. It is arguable that a smart contract does not have to run on a blockchain, but since the legislation is all about blockchain, it now does in Arizona.

The other state recently to enter the fray in this area is Arkansas. Its legislation was adopted on April 16, 2019. It basically copies the Arizona statute (with a very blocky layout) and defines blockchain technology among other things as providing an uncensored truth. (Does it make a difference that the states using that term are in the Bible Belt?)

Arkansas goes well beyond the other states with respect to smart contracts, however. It allows such contracts to do more than Arizona:

“Smart contract” means:

(A) Business logic that runs on a blockchain; or

(B) A software program that stores rules on a shared and replicated ledger and uses the stored rules for:

(i) Negotiating the terms of a contract;

(ii) Automatically verifying the contract; and

(iii) Executing the terms of a contract.

One presumes that a shared and replicated ledger is not quite the same as a blockchain, or why use different language? But a shared and replicated ledger is not defined

The key provision about smart contracts is this:

A contract that contains a smart contract term and relates to a transaction shall not be denied legal effect, validity, or enforceability.

Note that it does not say (as did Arizona) “shall not be denied legal effect etc. because it is a smart contract, or in electronic form.” It shall not be denied legal effect for any reason. So solicitors, insert a smart contract term into any contract and it will prevail, at least in Arkansas. What happens when two parties have a smart contract term in their contracts, who knows? The battle of the superforms goes electronic, and sparks will fly.

Clearly the desire to show off one’s tech savviness has gone a bit far in some states. One has progressed from fairly innocent legislation (what one Attorney General of Ontario described – about a different piece of legislation – as “dumb but not dangerous”) to provisions that may or may not have meaning (“uncensored truth”) to provisions that are out-and-out ludicrous (a smart contract term makes any contract valid and enforceable.)

The whole exercise is a lesson – not followed – in the desirability of legislative restraint.[2]

On the other hand, one knowledgeable and perhaps not cynical observer said (of the Arkansas statute) that “since there is virtually no existing Blockchain that can fit the definition in the law and smart contracts aren’t smart contracts under the law unless they run on a Blockchain so defined”, maybe the harm will turn out to be pretty limited.[3]

SOURCE:

For a map showing which states have blockchain legislation, and which have pending legislation on it, see this map by Womble Bond Dickinson. The states with bills before their legislature produce a list of those bills when the cursor goes over them. States that have put a blockchain term into their version of the UETA are shown in yellow. The others may or may not have blockchain legislation; one has to click on their names to find out.

ADDENDUM

The aforesaid map also points out that all of these states, and a number of others, have enacted uniform legislation on fiduciaries’ access to digital assets. The commentary on the map notes that information on a blockchain would constitute a digital asset under this legislation (though there is no suggestion that the legislation has been amended to make this explicit.)

One wonders how that might work. The legislation, and similar uniform legislation in Canada, gives fiduciaries the right to require the holder of data to make it available to the fiduciary. In the case of a blockchain, there is by definition no holder. Who does a fiduciary address to exercise the legal right of access to information that might be very important to the interest of beneficiaries?

INTERNATIONAL ADDENDUM

UNCITRAL contemplated the use of the blockchain in its Model Law on Electronic Transferable Records in 2017. That model law aimed to describe – in technology-neutral terms as always with UNCITRAL – reliable methods to ensure that a transferable record was authentic. It mentions records stored in distributed ledgers, though only in the commentary, pointing out that the language of the model law itself would apply to such records and clarifying considerations to make them effective. (Search the full text for “ledger” to find six references.)

Here is the first, on the scope of application of the model law:

18. The Model Law provides generic rules that may apply to various types of
electronic transferable records based on the principle of technological neutrality
and a functional equivalence approach. The principle of technological neutrality
entails adopting a system-neutral approach, enabling the use of various models
whether based on registry, token, distributed ledger or other technology

This technology-neutral facilitative approach seems to avoid the risks of the legislation mentioned above.
___________________________

 

[1] Blockchains are “governed”, in a meaningful sense. For a description of governance issues faced by blockchains and a possible solution, see Carla Reyes, “(Un)Corporate Crypto-Governance“, Fordham Law Review, forthcoming.

[2] A more learned overview of the legislation is provided by A.J.Bosco, “Blockchain and the Uniform Electronic Transactions Act”, (2018/19) 74 The Business Lawyer 243-252.

[3] Prof. Carla Reyes, Michigan State University College of Law, in a group email on file with the author.

Comments

  1. I agree that those kinds of changes are for the most part unhelpful and uncalled for. It scares me every time legislatures consider laws relating to tech. They don’t understand the tech, or the issues, or the speed of change, and don’t seem inclined to listen or figure it out.

    We tend to get messes like CASL. The email parts in CASL are awful – and the parts relating to software make no practical sense at all.

Leave a Reply

(Your email address will not be published or distributed)