Enabling or Crippling? The Risks of State-by-State Blockchain Laws

Andrea Tinianow is the director of Global Delaware. Joshua Ashley Klayman chairs the Wall Street Blockchain Alliance’s Legal Working Group. 

In this opinion piece, Tianiow and Klayman consider whether so-called enabling legislation passed by a handful U.S. states is necessary for blockchain technology to flourish – and if so, some potential approaches.

When governments announce the adoption of blockchain legislation, even self-professed blockchain skeptics take notice. But are blockchain-enabling statutes really necessary in many cases, and could their passage lead to some unintended results?

To date, to our knowledge, four U.S. states have passed formal blockchain legislation. Such statutes authorize the use of blockchain technology for one or more functions, for instance: to conduct commerce (Arizona and Nevada); to introduce information into evidence (Vermont); and to maintain corporate records (Delaware). No doubt other states also are contemplating and, in some cases, actively working to draft and pass legislation authorizing the use of blockchain technology for some of the same – and perhaps, myriad other – functions.

Do we need permission?

It is exciting and, in many ways, laudable that Arizona, Delaware, Nevada and Vermont have taken leadership positions with respect to blockchain technology. By passing blockchain enabling statutes, those states arguably have signaled to the public and the market their confidence in the technology and, many believe, have given their imprimatur to the technology. These statutes appear to suggest, “Go ahead and use blockchain technology. We won’t penalize you for using it. You have our permission.”

But is it necessary? Do we need U.S. state governments to give their permission for the use of blockchain technology? Have there been other times at which we have called out a specific technology and required legislation to authorize its use? Why do we think we need to do it here? Will we have to go through this one more time to authorize the use of artificial intelligence?

And, if legislation is passed in one jurisdiction, what does that say about those jurisdictions that choose not to enact similar laws? Does that omission by a particular state somehow imply that such blockchain activity is invalid, illegal or not permitted there?

Many jurisdictions likely are struggling with these very questions, namely, whether specific legislation is required to authorize the use of blockchain technology and, if so, to what extent is such legislation required and with what degree of specificity?

In other words, how do we encourage blockchain innovation in all 50 states and across many sectors, including healthcare, education, banking, etc.? Do we identify every single function for which blockchain technology and smart contracts could be deployed, and then draft legislation accordingly?

Hopefully not. What a lengthy and cumbersome process that would be.

Risk of balkanization

Clearly, a scattershot approach among the 50 states (and cities, and counties) is not ideal when it comes to enacting blockchain legislation. Forethought and coordination among jurisdictions is important.

Otherwise, the result could be a hodgepodge of legislation covering different functions, with different standards, and different levels of specificity, potentially making nationwide blockchain solutions unduly complicated and perhaps commercially impracticable.

Without some degree of harmony across jurisdictions, even well-intentioned businesses that may have operations or customers located in or spanning more than one state may be faced with compliance challenges.

While it is true that there are many instances in which state laws differ from one another and that businesses may be accustomed to complying with such a tapestry of laws, a scattershot approach may result in a lack of clarity regarding whether the use of blockchain technology in a given state is permissible.

Even within a state, the passage of blockchain-enabling legislation with respect to certain functions and sectors also might suggest that those contemplating deploying blockchain technology for other functions and sectors not explicitly sanctioned may be prohibited.

Copying and pasting

In an effort to achieve coordination, some U.S. jurisdictions may consider copying their blockchain enabling legislation from another jurisdiction that already has passed it. This may be less than ideal for a number of reasons.

For instance, there may be legal differences and nuances across states that may not be evident from a plain reading of their respective statutes. Even identical statutory language in two different states may have different meanings, as that language may have been interpreted differently by different courts.

Merely grafting the same language, copycat style, onto another state’s statute is unlikely to be wise, absent considerable thought, analysis and planning.

Also, those states that have enacted blockchain enabling statutes may have encountered hurdles or complications that they had not foreseen at the time of passage. Based on their post-passage experiences, those states may recommend different approaches or language modifications, or might have approached the blockchain enabling legislation differently with the benefit of hindsight.

Insights should be sought from those states that have been leaders in passing blockchain technology before merely copying their blockchain enabling statutes or approaches.

A rule of thumb

With the goal of permitting blockchain enabling legislation to be truly enabling and not inadvertently crippling or confusing, we suggest that states consider enacting blockchain enabling laws only where the failure to enact such legislation would perpetuate existing – or create new – ambiguity about whether the technology’s use is permissible, or where the existing state laws preclude the deployment of the technology altogether.

Ambiguity about the permissibility of blockchain technology use may exist, for example, when an existing law contemplates that an enumerated function be performed by one or more human beings (as opposed to by technology).

This was the case in Delaware. Before enactment of the “Blockchain Amendments” to the Delaware General Corporation Law, the statute had contemplated that a corporate officer (a human being) would have charge of a corporation’s stock ledger. The amendments modified the corporate law to expressly allow performance of the administrative function of maintaining a corporation’s stock ledger by use of a network of databases (i.e., a blockchain), with certain qualifying requirements.

In our view, states that are exploring whether and how to enact blockchain legislation may benefit from considering which of their statutes contemplates or requires intervention by a human intermediary (like a corporate officer under the prior Delaware law), and then consider amending the law accordingly.

In circumstances and for functions where state laws do not preclude the deployment of blockchain technology or create legal ambiguity regarding the permissibility of, the adoption or use of blockchain technology, we suggest that the passage of specific blockchain enabling legislation not only may be unnecessary, but also may have unintended or confusing effects.

The views expressed are solely their own. The authors thank Lewis Cohen, Matt O’Toole and Aaron Wright for their contributions.

Ball and chain image via Shutterstock