Arizona Passes Groundbreaking Blockchain and Smart Contract Law – State Blockchain Laws on the Rise

by Proskauer - New Media & Technology
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The blockchain or “distributed ledger network” was originally conceived as the peer-to-peer technology platform that allows for the transfer of Bitcoin without the need for a trusted intermediary.  However, the blockchain protocol is being implemented across many industries and in many applications beyond digital currencies. Of course, there are questions about the enforceability of blockchain-based transactions and related, self-executing “smart contracts.”

Late last month, Arizona Governor Doug Ducey signed HB 2417 into law. This law clarifies some of the enforceability issues associated with the use of blockchain and smart contracts under Arizona law, in particular with respect to transactions relating to the sale of goods, leases, and documents of title governed respectively under UCC Articles 2, 2A and 7.

HB 2417 amends the Arizona Electronic Transactions Act (“AETA”).  AETA stipulates that records or signatures in electronic form cannot be denied legal effect and enforceability based on the fact they are in electronic form.  (For now, we are not going to discuss whether any provision of AETA is preempted by the Federal E-Sign Act (15 U.S.C. § 7001), which generally provides that a signature, contract, or other transaction record may not be deemed invalid or unenforceable solely because it is in electronic form.)  HB 2417, in pertinent part, clarifies that electronic records, electronic signatures and smart contract terms secured through blockchain technology and governed under UCC Articles 2, 2A and 7 will be considered to be in an electronic form and to be an electronic signature under AETA.  The statute also provides that a contract relating to a transaction may not be denied legal effect, validity or enforceability solely because that contract contains a “smart contract term.”

Seeking to avoid any legal uncertainty surrounding blockchain transactions and smart contracts relating to certain digital assets, HB 2417 includes a number of interesting points:

  • The statute includes a very specific definition of “blockchain technology” as a “distributed, decentralized, shared and replicated ledger, which may be public or private, permissioned or permissionless, or driven by tokenized crypto economics or tokenless” and provides  that the “data on the ledger is protected with cryptography, is immutable and auditable and provides an uncensored truth.”
  • HB 2417 includes a definition of “smart contracts” as an “event driven program, with state, that runs on a distributed, decentralized, shared and replicated ledger that can take custody over and instruct transfer of assets on that ledger.”
  • The law provides that a person that, in or affecting interstate or foreign commerce, uses blockchain technology to secure information that the person owns or has the right to use retains the same rights of ownership or use with respect to that information as before the person secured the information using blockchain technology.

Interestingly, while Arizona enacted HB 2417 to encourage blockchain development, another law was signed this week by the Arizona governor (HB 2216) that restricts the use of blockchain as a tool for “electronic firearm tracking technology.”

Arizona is not the first state to expressly address blockchain in statutory law. For example, a law enacted in Vermont in 2016, H.868, provides that a blockchain-based digital record will be considered a business record under the Vermont Rules of Evidence. In fact, we anticipate increased state legislative activity over the coming year on blockchain. A pending bill in Nevada addresses the same issues as Arizona’s HB 2417, but in a more detailed and different way. (We will blog on the Nevada law if and when it is enacted.)  Other states with pending blockchain bills include Hawaii (establishes a blockchain working group), Vermont (further study of blockchain) and Maine (blockchain for state elections).  Delaware launched a Blockchain Initiative in 2016 to support sophisticated commercial transactions and store state archival records, and is considering amendments to Delaware General Corporation Law that would permit corporations to use blockchain for stock ledgers and other business records.  Similarly, Illinois created the Illinois Blockchain Initiative, a consortium of state and county agencies to explore innovative opportunities for blockchain technology.

What will the rise in state-level regulation mean? As law is typically a lagging indicator to technology and technology-based business models, will these statutes quickly become obsolete? Or, to the extent relevant, will companies be faced with a patchwork of inconsistent and sometimes conflicting regulatory requirements to grapple with? Or will the state initiatives be deemed to be preempted by federal statutory law in the area? To the extent preemption is ambiguous, will the states’ activities give the impetus to Congress to pass enabling law to preempt state conflicts and inconsistencies, similar to the way E-SIGN was enacted in 2000 to address inconsistent and conflicting digital signature laws? Will a newly formed Congressional Blockchain Caucus step in to attempt to enact clarifying legislation?

There are many questions. We will continue to follow the technological and legal developments regarding blockchain as businesses and government strive to accommodate this new way of doing business.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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