Consideration of blockchain legislation is a growing trend amongst state legislatures. Blockchain, which is essentially a more secure form of internet, has been expanding into new markets. This has increasingly caught the attention of legislators, who hope to capitalize on the potential economic gains by allowing for the implementation of the technology within the state. To date, twenty-four states and Puerto Rico have enacted a bill on blockchain technology. See Figure 1, which displays the year that states first enacted blockchain legislation based on data provided by the National Conference of State Legislatures (NCSL). Additionally, the rate of proposed legislation on blockchain has increased rapidly, with fifteen states introducing legislation in 2018, compared to six states in 2017.

Figure 1: The year that states first enacted blockchain legislation.

Congress is also actively considering blockchain legislation through bills such as the Blockchain Promotion Act of 2019, which is still working its way through Congressional committees. If enacted, the bill seeks to establish a working group to evaluate the application of blockchain in various federal agencies. Against the backdrop of Congressional delays, states have strong economic reasons to lead in this area. The following questions and responses may aid state lawmakers and policymakers working in this critical area of law and technology.

First, what is blockchain? Blockchain was first developed after the 2008 financial crisis. It provided a means for achieving secure financial transactions through the exchange of cryptocurrency. While cryptocurrency exchange is no longer the sole use for blockchain, it is the most ubiquitous application of the technology with more than 2700 unique digital currencies existing globally to date.

In the past decade, blockchain technology has expanded into new markets within the private sector. Common uses include financial transactions, record keeping, contract formation, and secure messaging. The adoption of blockchain technology has been slower in the public sector, but the potential applications are similarly diverse, including digital voting, real estate and title transfers, tax compliance and monitoring, and public health surveillance activities.

At the base level, the foundation of blockchain is a “decentralized database,” which is a network of computers that individually verify the authenticity of transactions, documents, and records. A document or record within the blockchain network is never edited, only added to. Each new change in the record (a “block”), once verified as an authentic transaction, gets connected to the prior record (the “chain”). Blocks are encrypted using a “hash”, which is an encryption algorithm that sufficiently scrambles and condenses the document for secure storage within the network.

“Digital signatures” create an additional layer of security and provide the means for authenticating each block. These signatures, or keys, are specific to each individual accessing the blockchain network and are required to unscramble the hash. A “private key” allows access for a select individual, whereas a “public key” is used by anyone to access the blockchain network. For example, someone could send a document which requires the receiver’s private key. This allows only the receiver to access it and makes it incredibly difficult to hack, even by someone within the same blockchain network.

For more technical definitions of blockchain terminology, see the Blockchain Technology Overview, published by the National Institute of Standards and Technology (NIST).

Blockchain technology is considered a disruptive technology, meaning that it creates a new market within an existing industry and does not rely on existing third party hosts, such as a bank or credit agency in financial transactions. Third party hosts are effectively replaced by the decentralized database, which self-authenticates the transactions with no need for additional oversight.

As a result, most experts predict that blockchain technology will upend traditional business models across multiple industries. Legislation can be used to monitor these changes and encourage responsible use of the technology.

Second, what does blockchain legislation cover? State legislation typically addresses blockchain technology in four different ways.

First, a bill can create a blockchain task force, working group, or subcommittee to better understand the technology and how it can be best utilized within the state. Several states, including California, Wyoming, Vermont, Illinois, New Jersey, and Connecticut, have legislatively created task forces to study blockchain technology.

Second, a bill can define blockchain or incorporate relevant terminology into existing statutory frameworks. This can be used to ensure that unwritten or electronically signed documents contained within the blockchain network, such as smart contracts, are legally recognized under state law. Examples of this type of legislation can be found in Arizona and Vermont.

Third, a bill can preempt or restrict local regulations of blockchain to encourage further development of the technology within the state. Examples of this type of legislation can be found in Arizona, Illinois (see Section 20), and Nevada (see Section 6).

Lastly, a bill can encourage the adoption of blockchain technology in certain industries or government agencies. This can be used to increase efficiency and security, and reduce costs for state government. Examples of this type of legislation can be found in Delaware, Illinois (see Section 10), and Nebraska (see Section 4).

Finally, what are ways to mitigate possible harms caused by legislating on blockchain? Due to the rapid rate of development, technology legislation typically becomes obsolete after a few years. As a result, it can be hard for legislatures to keep pace with the changing technology landscape. There are many ways that this obsolescence can be avoided.

First, blockchain legislation should include uniform language and address the technology in broad terms. Generalized language is crucial to maintaining the law’s relevancy since blockchain itself is rapidly developing and highly variable depending on its application.

Second, legislators can incorporate sunset provisions into their bill that either nullify the bill after a period of time or allows the legislature to renew or revise the bill to adjust to changes that occurred during the interim.

Third, legislators can incorporate accountability schemes into their bills to ensure that the legislation is applied correctly and reaching the intended result. This can include delegating additional authority to specific agencies or increasing oversight on private entities adopting the technology.

In conclusion, blockchain technology has a wide range of diverse applications within both private and public sectors. Legislation encouraging blockchain adoption can allow states to tap into this growth and pave the way for future technology developments.

Maria L. Hodge is a J.D. Candidate (2021) at the Sandra Day O’Connor College of Law, Arizona State University College of Law, with interests in federal and state legislative policy and technology law.

Suggested citation: Maria L. Hodge, A State Legislator’s Guide to Blockchain, JURIST – Student Commentary, September 30, 2019, https://www.jurist.org/commentary/Maria-Hodge-blockchain

This article was prepared for publication by Tim Zubizarreta, a JURIST Staff Editor. Please direct any questions or comments to him at commentary@jurist.org