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    May 24, 2019 Articles

    Blockchain in State Law: 10 Key Developments in 2019

    Many important developments in blockchain technology have already emerged this year.

    By Margaret Lyle

    Blockchain, or distributed ledger, is a new technology designed to keep records secure in a decentralized fashion that can be verified mathematically or cryptographically. Best known as the technology behind Bitcoin, blockchain has a recognized potential that goes beyond virtual currency. Some real-world examples under study or development for blockchain include managing food supply chains; “smart contracts,” where computer protocols themselves enforce the contract if specified conditions are met; and maintaining property titles, stock ledgers, and other records of ownership.

    Many states have implemented new laws and regulations that cover uses of blockchain in business or government, including

    • application of state money-transmitter laws to virtual currencies,
    • treatment of virtual currencies and other blockchain digital assets under state securities laws,
    • recognition of blockchain records as electronic records that have the same status as paper records, and
    • maintenance of corporate records on blockchain.

    Some states have gone even further. They have authorized new types of corporate entities for blockchain businesses. They have enacted laws that encourage the development of in‑state blockchain industry. And they have created new regulatory “sandboxes,” which allow innovative financial products or services to develop in a sheltered regulatory environment.

    These state-law efforts to regulate blockchain began as early as 2015, when New York created its BitLicense, a comprehensive and rigorous licensing framework for virtual-currency businesses. Delaware launched a government blockchain initiative in 2016; and the following year, it became the first state to amend its corporate law to authorize blockchain stock records. In 2018, Arizona opened the first state regulatory sandbox for FinTech companies. Also last year, Wyoming enacted five blockchain-friendly statutes designed to bring business to the state. These are only a few examples of a nationwide trend that seeks to balance the potential economic benefits of emerging blockchain technology with the protection of consumers and markets.

    The pace of state blockchain legislation has not slackened in 2019. Ten key developments have emerged in the states in just the first quarter of this year.

    Defining Blockchain

    The first step for blockchain legislation is often to define blockchain. However, the language used in the statutory definitions varies among the states from the highly technical to simpler layman’s terms. These definitions embody similar understandings, but consensus language has yet to emerge to define such key concepts as “blockchain,” “distributed ledger technology,” and “smart contract.”

    In late 2018, California created a government study group for blockchain, defining it broadly as “a mathematically secured, chronological, and decentralized ledger or database.” Cal. Gov’t Code § 11546.8 (West 2019); see also Cal. Corp. Code § 204(a)(12)(B) (West 2019) (similar definition but a “decentralized consensus ledger or database” (emphasis added)). The new California group will evaluate that statutory definition and report back to the legislature by July 2020 on the definition and on blockchain’s potential uses, risks, and benefits for state government and California-based businesses. Cal. Gov’t Code § 11546.9.

    Similarly, Utah chose a broad, less technical definition for blockchain in its 2019 legislation: “an electronic method of storing data that is: (a) maintained by consensus of multiple unaffiliated parties; (b) distributed across multiple locations; and(c) mathematically verified.” 2019 Utah Laws S.B. 213 (West No. 353).

    By contrast, in 2019, South Dakota adopted a more technical (but also broad) definition of blockchain technology as “technology that uses a distributed, shared, and replicated ledger, either public or private, with or without permission, or driven with or without tokenized crypto economics where the data on the ledger is protected with cryptography and is immutable and auditable.” 2019 S.D. Laws ch. 207 (H.B. 1196).

    Recognizing Blockchain as an Electronic Record

    In 2019, South Dakota joined the states—Arizona, Nevada, Ohio, and Tennessee—that have amended their statutes to make it clear that blockchain records qualify as electronic records and thus have the same force as paper records for many types of transactions. South Dakota did so by amending its contracts statute to include as an “electronic record” or “electronic signature” one “secured through blockchain technology.” 2019 S.D. Laws ch. 207.

    Vermont, which by statute already recognized authentication, admissibility, and evidentiary presumptions for digital records electronically registered in blockchain, Vt. Stat. Ann. tit. 12, §1913, promulgated a corresponding 2019 amendment to its evidence rule on self-authentication, Vt. R. Evid. 902.

    Authorizing New Blockchain Business Entities and Corporate Records

    Wyoming, which along with Arizona, California, Delaware, and Vermont already permitted certain blockchain corporate records, added a new statutory authorization in 2019 for blockchain certificate tokens in lieu of stock certificates. H.B. 0185 (Wyo. 2019). And in addition to its existing “series LLC” conducive to blockchain business, Wyo. Stat. Ann. § 17-29-211, Wyoming authorized another type of entity, a “special purpose depository institution,” to serve the banking needs of blockchain businesses. H.B. 0074 (Wyo. 2019).

    South Dakota also effectively recognized blockchain technology for certain corporate functions when it amended its corporations statute in 2019 to allow electronic transmission to include blockchain technology. 2019 S.D. Laws ch. 207 (H.B. 1196).

    Excluding Certain Blockchain Tokens from State Securities Regulations

    Colorado exempted digital tokens with a primarily consumptive purpose from state securities registration. Consumptive tokens, which provide prepaid access to goods or services, can be seen as akin to gift cards or coupons rather than as traditional investments. In Colorado, consumptive purpose means “to provide or receive goods, services, or content” or access to them. To qualify for the Colorado statutory safe harbor, certain rules, notices, and marketing limitations must be followed. S.B. 23 (Colo. 2019). In taking this approach to consumptive tokens, Colorado joined Arizona and Wyoming, which have similar statutes.

    Note that state securities laws, like Colorado’s exemption, do not affect the application of the federal securities laws to digital assets. In April 2019, the U.S. Securities and Exchange Commission provided its own guidance on the federal framework for an “investment contract” analysis of digital assets, considering, among other things, whether such assets were offered or sold for use or consumption by purchasers. It also issued a no‑action letter to a business that proposed to sell utility tokens as a way for customers to purchase its air charter services.

    Creating FinTech Sandboxes

    Arizona’s regulatory sandbox program, established last year and administered by the state’s attorney general, had accepted four participating companies as of March 2019. Companies apply for admission to the sandbox to test innovative products and services that are made available to only a limited number of consumers and are subject to specific dollar caps and transaction limits. The sandbox program also mandates specific consumer protections, mainly in the form of required disclosures. In the Arizona sandbox, oversight by the attorney general substitutes for much of the usual state regulation, creating a sheltered regulatory environment for start-ups and other innovators. Ariz. Rev. Stat. Ann. § 41-5601 et seq. (2019). In 2019, mainly technical legislative amendments added a requirement that sandbox applicants employ cybersecurity to avoid breaches and protect consumer data. 2019 Ariz. Legis. Serv. ch. 45 (H.B. 2177) (West).

    Wyoming authorized its own sandbox program in 2019 as part of a series of far-reaching new blockchain statutes enacted in that state. H.B. 0057 (Wyo. 2019). In a January 2019 report, Vermont’s financial regulator recommended sandbox legislation for that state as well.

    Encouraging Blockchain Business with a Suite of Statutes

    In 2019, Wyoming enacted a suite of eight new bills to create a blockchain-friendly business environment for the state. Notably, these new statutes were designed to work together—with each other and with Wyoming’s 2018 blockchain statutes—to encourage innovation in the state and to solve concerns shared by blockchain businesses, such as their limited access to banking services and their high energy needs.

    The eight new Wyoming statutes do the following:

    1. Classify three types of digital assets and their treatment: digital consumer asset, digital security, and virtual currency. S. File 0125 (Wyo. 2019).
    2. Classify certain utility blockchain tokens with a predominant purpose that is consumptive as intangible personal property not requiring a state securities law exemption. Wyo. Stat. Ann. § 34-29-101 (West 2019); H.B. 0062 (Wyo. 2019).
    3. Create a FinTech sandbox. 2019 Wyo. Legis. Serv. ch. 61 (West) (H.B. 57).
    4. Authorize “special purpose depository institutions” to serve the banking needs of the blockchain industry. H.B. 0074 (Wyo. 2019).
    5. Authorize blockchain certificate tokens in lieu of stock certificates. 2019 Wyo. Legis. Serv. ch. 93 (West) (H.B. 0185).
    6. Authorize a blockchain government filing system. H.B. 0070 (Wyo. 2019).
    7. Create a new chancery court to serve as a business court. S. File 0104 (Wyo. 2019).
    8. Authorize special electric utility agreements to meet the blockchain industry’s energy needs. H.B. 0113 (Wyo. 2019).

    Wyoming’s new legislation built upon a set of five laws that the state had enacted in 2018, which, among other things, exempted virtual currency from Wyoming’s money-transmitter laws, Wyo. Stat. Ann. § 40-22-104 (West 2019); exempted virtual currency from property taxation, Wyo. Stat. Ann. § 39-11-105 (West 2018); and allowed blockchain corporate records, Wyo. Stat. Ann. § 17-16-140 et seq. (West 2018).

    Providing Virtual-Currency Exemptions or Guidance

    Utah joined the states with a blockchain exemption from state money-transmission requirements when it amended its Money Transmitter Act to exclude blockchain tokens. 2019 Utah Laws S.B. 213 (West No. 353).

    Pennsylvania issued new guidance for virtual-currency businesses, providing that “only fiat currency, or currency issued by the United States government, is ‘money’ in Pennsylvania,” and therefore virtual currency is not money under the State Money Transmitter Act. Pennsylvania also stated that virtual-currency exchange platforms or kiosks are typically not money transmitters in Pennsylvania.

    The Texas Department of Banking revised its supervisory memorandum on virtual-currency licensing, adopting a nuanced approach that treats “stablecoins” that are sovereign-backed and have a redemption right differently from other types of cryptocurrency. The 2019 guidance emphasizes the importance of a licensing analysis tailored to the facts.

    Here, too, state virtual-currency exemptions (or guidance) do not affect federal law. Accordingly, virtual-currency users must still comply with federal money-transmission laws and regulations when they apply.

    Regulating Virtual Currency Through BitLicenses

    New York’s Department of Financial Services regulates virtual-currency businesses rigorously, requiring a BitLicense or trust charter with significant oversight from the state’s financial regulators. That comprehensive regulatory framework reflects New York’s emphasis on “responsible innovation” and fostering a competitive marketplace that benefits consumers and industry.

    After what some industry observers viewed as a slow start for New York’s BitLicense program in its first few years, by April 2019 New York had approved 19 BitLicense applications. Also in April 2019, however, New York denied a BitLicense, citing in a press release “deficiencies” in the applicant’s compliance program, in meeting capital requirements, and in “due diligence and control over . . . token and product launches.” The applicant has disputed New York’s findings in its own statement.

    Recommending Model Virtual-Currency Acts

    The Uniform Law Commission (ULC) has approved two model acts that cover virtual-currency businesses. The Uniform Regulation of Virtual-Currency Businesses Act employs a three-tiered licensing model, providing for exemption, simplified registration, or full licensing depending on the nature of the virtual-currency business. A companion act, the Supplemental Commercial Law for the Uniform Regulation of Virtual Currency Businesses Act, provides commercial law rules for transactions and relationships between virtual-currency businesses and consumers.

    The ULC model has been introduced in California, Hawaii, Nevada, Oklahoma, and Rhode Island, but no state has yet enacted it.

    In early 2019, the ULC and the Wyoming Legislature Blockchain Task Force vigorously debated the respective merits of the ULC and Wyoming approaches to virtual currency and other digital assets in a series of public letters and statements.

    Establishing Task Forces and Pilot Programs

    More than a dozen states now have blockchain initiatives and task forces examining blockchain economic development, government uses of blockchain technology, academic research and development in blockchain technology, or legislative blockchain recommendations. Many cities and local governments have initiatives as well.

    Notable in 2019, Wyoming directed its secretary of state to develop a government filing system using blockchain technology. H.B. 0070 (Act No. 50) (Wyo. 2019). Delaware, the first state to create a blockchain initiative, had an ongoing proof-of-concept program for blockchain Uniform Commercial Code filings and other government uses. Also in 2019, North Dakota authorized a state-agency pilot program for distributed ledger technology research and development. 2019 N.D. Laws H.B. 1048 (West No. 113). And Vermont issued a Request for Information (RFI) for vendors to provide information for a pilot program of blockchain registration for captive insurers in the state. Vermont also issued a comprehensive new report on blockchain for insurance and banking and a white paper analyzing blockchain’s suitability for land titles, which recognized a number of obstacles to the adoption of the technology for official state records.

    Margaret Lyle is of counsel at Jones Day in Dallas, Texas. The views in this article are the personal views of the author and do not necessarily reflect those of the firm with which she is associated. Portions of this article have been adapted from the author’s ABA webinar presentation, “SciTech Focus on Blockchain: A Patchwork of Federal and State Laws—Key Technology, Data, and Legal Developments You Need to Know Now” (Apr. 25, 2019).

    Copyright © 2019, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).