May 01, 2019

Another Bad Blockchain Bill

William Denny

We’re only going backwards in the quality of laws regarding blockchain technology and smart contracts. On April 16, 2019, the governor of Arkansas signed HB 1944 into law. Entitled “an Act Concerning Blockchain Technology,” HB 1944 amends the Arkansas version of UETA by defining “blockchain distributed ledger technology,” “blockchain technology” and “smart contract,” and by stating that a signature secured through blockchain technology shall be considered an electronic signature, a record secured through blockchain technology shall be considered an electronic record (so far so good), and a smart contract shall be considered a commercial contract. WHAT?

The problems with this new law are legion. Among other sins, and similar to the egregious blockchain law in Arizona, Ariz. Rev. Stat. Ann §44-7061 (2017), it tells us that “blockchain distributed ledger technology” is “securely protected with cryptography, immutable, auditable, and [best of all] provides an uncensored truth.” Anyone with a shred of technical experience with blockchain technology or who reads the paper should know that none of these purported attributes is necessarily true. Two of them (immutability and uncensored truth) are never true. For example, we have seen blockchain transactions reversed through “hard forks” after errors are found in the software code (see The DAO), and the accuracy of a transaction on a blockchain is only as reliable as the person (either a participant of the blockchain or an oracle, a third party source of outside knowledge) that supplied the data.

“Blockchain technology” is separately defined as an “immutable ledger” that records transactions and tracks assets “in a business network.” Putting aside the issue of immutability, if it does not track assets or it does not reside on a business network (whatever that is), it is not “blockchain technology.” Because no actual blockchain can fall within the definition of HB 1944, it is possible that we can simply ignore the enabling provisions indicating that a signature on a blockchain is an electronic signature and a record secured on a blockchain is an electronic record. In any case, signatures and records stored on a blockchain already fall within the definitions of electronic signatures and electronic records under UETA without the need for amendments such as HB 1944.

The definition of “smart contract” requires that it is either (1) “business logic that runs on a blockchain” (which is undefined) or (2) “[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.” I guess we can no longer use the vending machine example to explain smart contracts. Moreover, this definition requires that all three of the functions be true for a software program to be a smart contract. I think it is safe to say that nothing that we have, until now, thought of as a smart contract could fit this definition. While smart contracts frequently execute the terms of a contract, I am unaware of any instance in which a smart contract has been designed to negotiate the terms of a contract.

Forget everything we have said about smart contracts being neither smart nor contracts. HB 1944 tells us that “[a] smart contract shall be considered a commercial contract” and “[a] contract that contains a smart contract term and relates to a transaction shall not be denied legal effect, validity or enforceability.” Courts should have fun with that one! All a person has to do to guarantee the enforceability of a contract is to include a “smart contract term.” Moreover, the executable script that automatically performs a transaction upon the occurrence of a pre-defined event (such as the electronic version of putting a quarter into a vending machine), which we all have understood to be a smart contract, is now a commercial contract. Does that mean it is a legal contract, where there are parties to the transaction, offer and acceptance, consideration and potentially implied terms as well? An executable script is simply a computer program and does not necessarily have any of these indicia of a legal contract. The legislature probably intended to say (but did not say) that a commercial contract cannot be denied legal effect solely because it contains a smart contract term or is enforced through use of a smart contract.

Unlike a computer program, HB 1944 defies logic.

William Denny

Potter Anderson & Corroon LLP