How have different States in the United States of America enabled Blockchain Technology and Smart Contracts

This post explores how different states in the United States have recognised blockchain and related technologies in their laws.

Introduction

We are well past the stage of countries pondering whether to integrate blockchain and related technologies into their laws. Many countries have; and most of those who have not are exploring the best ways to do so. The idea of this post is to facilitate this exploration. We will study a limited set of such enabling laws adopted by individual states in the US to identify the different approaches they have taken. Here are some of the questions we hope to answer for you:

1. Have new laws been passed altogether or have existing laws been amended?
2. What is enabled – blockchain, smart contracts, cryptocurrencies, tokens, blockchain based signatures? Which of these innovations have been recognised independently and which have been recognised by inference?
3. What is their stand on cryptocurrencies, utility tokens, security tokens, digital assets and depository institutions?
4. Is there a move to recognise agreements embodied in smart contracts as legally enforceable contracts?

Legal recognition of blockchain and related technologies is imperative on multiple counts – not only does it facilitate enforcement of blockchain based contracts in the courts of law, but it also unlocks innovation by signalling that the regulatory environment of the country looks at blockchain technology favourably – something that India has struggled with off late. Needless to say, this has a cascading effect on all emerging technologies, which can also draw some solace from the government’s innovation friendly outlook.

Now, let us look at legislative developments in the various states of the US.                                                                             

Findings

The studied states have all made fairly similar changes and many strands run common across the board:

1. Definitions of blockchain and smart contracts: They have all defined blockchain, and most have defined smart contracts, albeit with slight differences. For instance Arizona, Ohio and Tennessee adopted definitions to explicitly call out public or private, permissioned or permissionless blockchain.[45] For instance, under the Arizona Revised Statutes[46],

“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.” and;

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

Whereas, Nevada’s initially adopted definition of blockchain technology did not include these types of blockchains. Under the Nevada Revised Statutes (“NRS”)[47],

“Blockchain” is defined as an electronic record of transactions or other data which is: (a) uniformly ordered  (b) processed using a decentralized method by which one or more computers or machines verify the recorded transactions or other data; (c) redundantly maintained by one or more computers or machines to guarantee the consistency or nonrepudiation of the recorded transactions or other data; and (d) validated by the use of cryptography. The term includes, without limitation, a public blockchain.”

Only in a recent amendment, it was clarified that the definition of blockchain includes, without limitation, a public blockchain.[48] Further, a smart contract is defined as

…A contract stored as an electronic record pursuant to chapter 719 of NRS which is verified by the use of a blockchain.”

However, chapter 719 of NRS does not define ‘smart contract’ specifically but defines ‘blockchain technology’ and includes smart contracts by reference.

2. Smart contracts/smart contract terms, recognised at par with traditional contracts: They have expanded the scope of ‘contracts’ such that smart contract terms or blockchain-based contracts will be at par with traditional contracts in terms of enforceability. This means that going forward, agreements embodying smart contracts will not be denied legal effect only because a smart contract term is part of the contract. This also indicates that these states are working to accommodate blockchain technology/smart contracts within the existing contract law jurisprudence, rather than creating a new stream of jurisprudence on the same.

3. Whether smart contracts are recognised explicitly or through reference: While Arizona and Ohio have given explicit recognition to smart contracts, we see that Nevada has recognised blockchain records as ‘electronic records’ under its law. This leaves ambiguity on whether a smart contract would qualify as an electronic record and consequently be enforceable in court. These are policy decisions which must be taken on a national level and there is no one-size fits all solution.

4. Explicit recognition of blockchain based signatures needed: Blockchain based signatures have been legally recognised by many states. This is important to reduce friction. Consider India – the status of blockchain developed signatures is ambiguous under Indian law (specifically the Information Technology Act, 2000)[49]. This may compel many blockchain startups to go the convoluted route of integrating electronic or digital signature compatibility with their product which increases friction. An amendment to the Information Technology Act, 2000 recognising blockchain produced signatures may obviate the need for this extra step.

5. Digital assets, virtual currencies, tokens etc. not recognised everywhere: We see that Wyoming has created the most extensive framework, including specific laws for digital assets, security and utility tokens and virtual currencies, while others have stopped themselves at defining/recognising blockchain technology, and in places smart contracts. While this may have been inspired by its desire to become the preferred centre for blockchain innovation in the US and in the world, it is imperative that countries defining blockchain and related technologies also take a stand on block rewards (which we know as cryptocurrencies) and tokens. This is because most immediate commercial activity in the field deals with crypto-trading and exchanges. Regulatory unpredictability is likely to dampen investor confidence in projects related to cryptocurrencies.

Conclusion

In summary, any country seeking to enable the adoption of blockchain or blockchain based technologies must define and recognise blockchain technology itself, smart contracts, blockchain based signatures, and provide for their recognition by the courts of law, in the very least. Legislating on digital assets, digital securities and virtual currencies may follow as laws on the same mature globally, but national regulators should attempt to bring about some clarity on their stance with respect to them through intermediate directives. These are particularly important considerations for a developing country like India where blockchain and cryptocurrencies have attracted immense investor and innovator attention. These changes may be introduced through amendment to the Indian Information Technology Act, 2000.

Going further, every country will have to make multiple policy and architectural decisions as well. How do you define blockchain (or would you rather call it distributed ledger technology – what are the relative benefits of doing this?), do you specify the different kinds of blockchains (public, private, permissioned, permissionless) for predictability or do you leave these undefined for flexibility? Do you recognise blockchain records as a separate category or include them within the definition of ‘electronic records’? How do you define smart contracts and how do you give it legal recognition? If you legislate on smart contracts, should you also legislate on oracles? These and many similar questions will be country specific and ultimately policy decisions.

(This post was co-authored by Ratul Roshan, Associate, and Sanjana Saxena, 5^th year intern from Jindal Global Law School during her time with us, with inputs from Anirudh Rastogi, Founder and Managing Partner, Ikigai Law)

For more on the post, please reach out to us at contact@ikigailaw.com

[1] Original Senate File No. SF0125, Section 1, 34-29-101(a)(iii) states that a “Digital security” means a digital asset which constitutes a security, as defined in W.S. 17-4-102(a)(xxviii), but shall exclude digital consumer assets and virtual currency.” See https://legiscan.com/WY/text/SF0125/2019

[2] Original Senate File No. SF0125, Section 1, 34-29-101(a)(ii) states that “Digital consumer asset” means a digital asset that is used or bought primarily for consumptive, personal or household purposes and includes: (A) An open blockchain token constituting intangible personal property as otherwise provided by law; (B) Any other digital asset which does not fall within paragraphs (iii) and (iv) of this subsection.” See https://legiscan.com/WY/text/SF0125/2019

[3] Original Senate File No. SF0125, Section 1, 34-29-101(a)(iv) states that a “Virtual currency” means a digital asset that is: (A) Used as a medium of exchange, unit of account or store of value; and (B) Not recognized as legal tender by the United States government.” See https://legiscan.com/WY/text/SF0125/2019

[4] Original Senate File No. SF0125, Section 1, 34-29-101(a)(i) states that a “Digital asset” means a representation of economic, proprietary or access rights that is stored in a computer readable format, and includes digital consumer assets, digital securities and virtual currency.” See https://legiscan.com/WY/text/SF0125/2019

[5] Title 34.1 – Uniform Commercial Code. See https://wyoleg.gov/statutes/compress/title34.1.pdf

[6] HB0185, Corporate Stock-Certificate tokens. See https://www.wyoleg.gov/2019/Enroll/HB0185.pdf

[7] Original Senate File No. SF0125, Enrolled Act No. 39, Senate. See https://legiscan.com/WY/text/SF0125/2019

[8] Original Senate File No. SF0125, Section 1, 34-29-103(e)(i)(B) See https://legiscan.com/WY/text/SF0125/2019;

W.S. 40-21-102(a)(ii)  “Automated transaction” means a transaction conducted or performed, in whole or in part, by electronic means or electronic records, in which the acts or records of one (1) or both parties are not reviewed by an individual in the ordinary course in forming a contract, performing under an existing contract or fulfilling an obligation required by the transaction.” See https://law.justia.com/codes/wyoming/2011/title40/chapter21/section40-21-102/

[9] HB0185, Section 2 17-16-625 (h) (i) states that “Blockchain” means a digital ledger or database which is chronological, consensus based, decentralized and mathematically verified in nature. See https://www.wyoleg.gov/2019/Enroll/HB0185.pdf

[10] HB0185, Section 2 17-16-625 (h) (ii) states that a “Certificate token” means a representation of shares that is stored in an electronic format which contains the information specified under subsections (b) and (c) of this section, and this information is: (A) Entered into a blockchain or other secure, auditable database; (B) Linked to or associated with the certificate token; and (C) Able to be transmitted electronically to the issuing corporation, the person to whom the certificate token was issued and any transferee. See https://www.wyoleg.gov/2019/Enroll/HB0185.pdf

[11] Original Senate File No. SF0125, Section 1, 34-29-103(e)(i)(B) See https://legiscan.com/WY/text/SF0125/2019.

[12] Original Senate File No. SF0125, Section 1, 34-29-101(a)(iv) states that a “Virtual currency” means a digital asset that is: (A) Used as a medium of exchange, unit of account or store of value; and (B) Not recognized as legal tender by the United States government.” See https://legiscan.com/WY/text/SF0125/2019

[13] Original Senate File No. SF0125, Section 1, 34-29-101(a)(iii) states that a “Digital security” means a digital asset which constitutes a security, as defined in W.S. 17-4-102(a)(xxviii), but shall exclude digital consumer assets and virtual currency.” See https://legiscan.com/WY/text/SF0125/2019

[14] Sixty-Fifth Legislature Of The State of Wyoming, Original Senate File No. SF0125, Section 1, 34-29-101(a)(ii) “Digital consumer asset” means a digital asset that is used or bought primarily for consumptive, personal or household purposes and includes: (A) An open blockchain token constituting intangible personal property as otherwise provided by law; (B) Any other digital asset which does not fall within paragraphs (iii) and (iv) of this subsection.” See https://legiscan.com/WY/text/SF0125/2019

[15] HB0074, Chapter 12, Section 13-12-103 states that: (a)  Consistent with this chapter, special purpose depository institutions shall be organized as corporations under the Wyoming Business Corporation Act to exercise the powers set forth in subsection (b) of this section. (b)  Each special purpose depository institution may: (i)  Make contracts as a corporation under Wyoming law; (ii)  Sue and be sued; (iii)  Receive notes and buy and sell gold and silver coins and bullion as permitted by federal law; (iv)  Carry on a nonlending banking business for depositors, consistent with subsection (c) of this section; (v)  Provide payment services upon the request of a depositor; (vi)  Make an application to become a member bank of the federal reserve system; (vii)  Engage in any other activity that is usual or incidental to the business of banking, subject to the prior written approval of the commissioner. The commissioner shall not approve a request to engage in an incidental activity if he finds that the requested activity will adversely affect the solvency or the safety and soundness of the special purpose depository institution or conflict with any provision of this chapter; (viii) Exercise powers and rights otherwise authorized by law which are not inconsistent with this chapter. See https://wyoleg.gov/Legislation/2019/HB0074

[16] Original Senate File No. SF0125, 34‑29‑104: Digital asset custodial services; applicability to Uniform Commercial Code. See https://www.wyoleg.gov/Legislation/2019/sf0125

[17] Original Senate File No. SF0125, 34‑29‑102: Classification of digital assets as property; applicability to Uniform Commercial Code. See https://www.wyoleg.gov/Legislation/2019/sf0125

[18] Original Senate File No. SF0125, Section 1, 34-29-103(e)(i)(B) https://legiscan.com/WY/text/SF0125/2019;

[19] Sixty-Fifth Legislature Of The State of Wyoming, Original Senate File No. SF0125, 34-29-103, Perfection of security interests in digital assets; financing statements. https://legiscan.com/WY/text/SF0125/2019

[20] Ariz. Rev. Stat. Ann § 44-7061(E)(2). See https://www.azleg.gov/viewdocument/?docName=https://www.azleg.gov/ars/44/07061.htm

[21] Ariz. Rev. Stat. Ann § 44-7061. See https://www.azleg.gov/viewdocument/?docName=https://www.azleg.gov/ars/44/07061.htm

[22] Ariz. Rev. Stat. Ann § 44-7061(E)(1). See https://www.azleg.gov/viewdocument/?docName=https://www.azleg.gov/ars/44/07061.htm

[23] Ariz. Rev. Stat. Ann § 44-7061(E)(2). See https://www.azleg.gov/viewdocument/?docName=https://www.azleg.gov/ars/44/07061.htm

[24] State of Arizona, Senate Fifty-second Legislature, Second Regular Session 2016, SB1413. 14-13102(10) states that a “Digital Asset” means an electronic record in which an individual has a right or interest. Digital Asset does not include an underlying asset or liability unless the same is itself an electronic record.” See https://www.azleg.gov/legtext/52leg/2r/bills/sb1413p.htm

[25] Ariz. Rev. Stat. Ann § 44-7061(C). See https://www.azleg.gov/viewdocument/?docName=https://www.azleg.gov/ars/44/07061.htm

[26] Ohio Rev. Code Ann. § 1306.01. See http://codes.ohio.gov/orc/1306#:~:text=(A)%20Sections%201306.01%20to%201306.23,means%20or%20in%20electronic%20form.

[27] Ohio Rev. Code Ann. § 1306.01(G) states that an “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.” See http://codes.ohio.gov/orc/1306#:~:text=(A)%20Sections%201306.01%20to%201306.23,means%20or%20in%20electronic%20form.

[28] Ohio Rev. Code Ann. § 1306.01(H) states that an “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.”

See http://codes.ohio.gov/orc/1306#:~:text=(A)%20Sections%201306.01%20to%201306.23,means%20or%20in%20electronic%20form.

[29] Ohio Rev. Code Ann. § 1306.06: Electronic record or signature satisfies legal requirements. See http://codes.ohio.gov/orc/1306#:~:text=(A)%20Sections%201306.01%20to%201306.23,means%20or%20in%20electronic%20form.

[30] Vermont Rule of Evidence 902, 12 V.S.A. § 1913. See https://legislature.vermont.gov/statutes/section/12/081/01913

[31] Blockchain means a cryptographically secured, chronological, and decentralized consensus ledger or consensus database maintained via Internet, peer-to-peer network, or other interaction. Vermont Rule of Evidence 902, 12 V.S.A. § 1913 (a) (1). See https://legislature.vermont.gov/statutes/section/12/081/01913

[32] Blockchain technology means computer software or hardware or collections of computer software or hardware, or both, that utilize or enable a blockchain. Vermont Rule of Evidence 902, 12 V.S.A. § 1913 (a) (2). See https://legislature.vermont.gov/statutes/section/12/081/01913

[33] Vermont Rule of Evidence 902, 12 V.S.A. § 1913. See https://legislature.vermont.gov/statutes/section/12/081/01913

[34] Nev. Rev. Stat. Ann. § 719.090 states that an “Electronic record” means a record created, generated, sent, communicated, received or stored by electronic means. The term includes, without limitation, a blockchain.” See https://www.leg.state.nv.us/NRS/NRS-719.html#NRS719Sec090

[35] Nev. Rev. Stat. Ann. § 719.045. See https://www.leg.state.nv.us/NRS/NRS-719.html#NRS719Sec090

[36] Nev. Rev. Stat. Ann. § 719.145. See https://www.leg.state.nv.us/NRS/NRS-719.html#NRS719Sec090

[37] Tenn. Code. Ann. § 47-10-202(a), House Bill 1507, states that “A signature that is secured through blockchain technology is considered to be in an electronic form and to be an electronic signature.” See https://law.justia.com/codes/tennessee/2019/title-47/chapter-10/

[38]  TN Code § 47-10-201 (2019) states (1) “Distributed ledger technology” means any distributed ledger protocol and supporting infrastructure, including blockchain, that uses a distributed, decentralized, shared, and replicated ledger, whether it be public or private, permissioned or permissionless, and which may include the use of electronic currencies or electronic tokens as a medium of electronic exchange. See https://law.justia.com/codes/tennessee/2019/title-47/chapter-10/part-2/section-47-10-201/

[39] Tenn. Code. Ann. § 47-10-201(2), House Bill 1507, “Smart contract” means an event-driven program, that runs on a distributed, decentralized, shared, and replicated ledger and that can take custody over and instruct transfer of assets on that ledger.” See https://law.justia.com/codes/tennessee/2019/title-47/chapter-10/

[40] Tenn. Code. § 35-8-102 (2019) (10) “Digital asset” means an electronic record in which an individual has a right or interest. “Digital asset” does not include an underlying asset or liability unless the asset or liability is itself an electronic record.” See https://law.justia.com/codes/tennessee/2019/title-35/chapter-8/section-35-8-102/

[41] Tenn. Code. § 47-10-201 (2019) (1) states that “Distributed ledger technology” means any distributed ledger protocol and supporting infrastructure, including blockchain, that uses a distributed, decentralized, shared, and replicated ledger, whether it be public or private, permissioned or permissionless, and which may include the use of electronic currencies or electronic tokens as a medium of electronic exchange;” See https://law.justia.com/codes/tennessee/2019/title-47/chapter-10/

[42] Tenn. Code. § 47-10-201 (2019) (2) states that a “Smart contract” means an event-driven computer program, that executes on an electronic, distributed, decentralized, shared, and replicated ledger that is used to automate transactions, including, but not limited to, transactions that: (A) Take custody over and instruct transfer of assets on that ledger; (B) Create and distribute electronic assets; (C) Synchronize information; or (D) Manage identity and user access to software applications.” See https://law.justia.com/codes/tennessee/2019/title-47/chapter-10/

[43] TN Code § 47-10-202 (2019) (c). See https://law.justia.com/codes/tennessee/2019/title-47/chapter-10/part-2/section-47-10-202/

[44] 15 U.S. Code § 7002 states that an “Electronic record” means a contract or other record created, generated, sent, communicated, received, or stored by electronic means.” https://uscode.house.gov/view.xhtml?path=/prelim@title15/chapter96&edition=prelim

[45] Ariz. Rev. Stat. Ann § 44-7061. See https://www.azleg.gov/viewdocument/?docName=https://www.azleg.gov/ars/44/07061.htm; Ohio Rev. Code Ann. § 1306.06(A). See https://www.billtrack50.com/BillDetail/982826; Tenn. Code. Ann. § 47-10-201(1). See http://www.capitol.tn.gov/Bills/110/Bill/HB1507.pdf.

[46] Ariz. Rev. Stat. Ann § 44-7061 (2017). See https://www.azleg.gov/viewdocument/?docName=https://www.azleg.gov/ars/44/07061.htm

[47] Nev. Rev. Stat. Ann. § 719.090 (2017). Seehttps://www.leg.state.nv.us/NRS/NRS-719.html#NRS719Sec090

[48] 2019 Nev. S.B. 162 states that a “Public Blockchain” means an electronic record of transactions or other data which: (1) is uniformly ordered; (2) is processed using a decentralized method by which two or more unaffiliated computers or machines verify the recorded transactions or other data; (3) is redundantly maintained by two or more unaffiliated computers or machines to guarantee the consistency or nonrepudiation of the recorded transactions or other data; (4) is validated by the use of cryptography; and (5) does not restrict the ability of any computer or machine to: (a) view the network on which the record is maintained; (b) maintain or validate the state of the public blockchain.” See https://legiscan.com/NV/bill/SB162/2019

[49] The Information Technology Act, 2000 recognises two kinds of signatures – ‘digital signatures’ and ‘electronic signatures’ (the definitions are not pertinent at this juncture) and states that an electronic record can only be authenticated through an electronic signature (which includes a digital signature) which uses asymmetric cryptography (this technology uses a secure private-public key pair issued by a designated ‘certifying authority’, which means that a key pair not issued by a certifying authority will not be recognised under the Act) and hashing to envelop and transform the initial electronic record into another electronic record (Section 3). It further recognises only a limited number of electronic signatures which are specified in the Second Schedule of the Act (Section 3-A). These recognised electronic signatures need to be ‘reliable’ (Section 3-A(1)(a)) and reliability is assessed on the basis of whether signature creation data and authentication data are, at the time of signing, under the exclusive control of the signatory. This poses multiple problems for blockchain produced signatures. Blockchain protocols generate a unique hash (equivalent to a signature) for every block which stores a given number of transactions. From a plain reading of the Act, the requirements of asymmetric cryptography and reliability are not met by these blockchain generated signatures. Furthermore, blockchain generated signatures are not specified in the Second Schedule of the Act. Lastly, even if it were possible to integrate asymmetric cryptography into blockchain generate signatures, till the time the asymmetric key pair is not issued by a certifying authority under the Act, it is unlikely that these signatures will be recognised under Indian law. For more clarity on the distinction between electronic and digital signatures, see https://lunarpen.com/blog/electronic-signature-law-india/.