On a daily basis, companies are announcing new developments on the adoption of blockchain in core business operations. However, many of these use cases present unique legal issues. In order to provide some clarity on some of these issues, and perhaps to offer a blockchain-friendly environment for the operation of blockchain companies, state legislatures around the country are rushing to adopt blockchain-friendly laws. Among the latest states to join are Florida and Nebraska.
The Proposed Nebraska Laws
Nebraska has three proposed laws pending:
LB 695 contains concepts that are similar to those found in the Federal Electronic Signatures in Global and National Commerce Act, commonly known as the “E-Sign Act”. It would give validity and enforceability to smart contracts and would authorize use of distributed ledger technology in the Nebraska’s Electronic Notary Public Act and the Uniform Electronic Transactions Act. This would give legal effect to electronic notarial acts and make it easier for individuals and businesses to transact electronically.
LB 691 would create the Nebraska Virtual Currency Money Laundering Act and update certain Nebraska state criminal statutes to address crimes involving distributed ledgers and virtual currency. The statute includes the definition of distributed ledger technology (“DLT”) as “an electronic record of transactions or other data which is (a) uniformly ordered; (b) redundantly maintained or processed by one or more computers or machines to guarantee the consistency or nonrepudiation of the recorded transactions or other data; and (c) validated by the use of cryptography.” It seems likely that future implementations of distribute ledger may or may not satisfy all of these prongs.
The proposed law is intended to close any gap in existing laws and ensure that existing financial crime statutes cannot be argued to be inapplicable to virtual currencies. The proposed law allows for the issuance of a warrant authorizing the seizure of virtual currency.
LB 694 would prohibit cities, villages, and counties from taxing or regulating the use of distributed ledger technology. This aligns with legislation recently passed in Nevada last June, discussed here, which prohibits local governments from levying taxes or licensing requirements on the use of blockchain technology.
Proposed Florida Law
HB 1357 also contains elements similar to the “E-Sign Act”, as it generally stipulates that a contract cannot be denied legal effect solely because an electronic record was used in the formation of the contract. Additionally, similar to Nebraska’s LB 695 (see above), the proposed law stipulates that a contract cannot be denied legal effect solely because the contract contains a smart contract term.
As discussed here and here, Nebraska and Florida would not be first-movers in enacting laws pertaining to blockchain and virtual currencies. In theory, direct regulatory treatment on the state level provides clarity that may attract blockchain-related entities to set up shop within their borders.
The flurry of proposed and enacted laws relating to the enforceability of electronic records maintained through DLT raises the question of whether the E-Sign Act should be amended to reflect the use of DLT. The text of E-Sign has always been interpreted to be fairly broad and technology agnostic, and as a result, there would likely be a reluctance to amend it. However, the issue of E-Sign preemption of state laws has never been clearly delineated. Without clarity on this point, it is possible that someone could attempt to challenge aspects of state law relating to blockchain on a preemption theory.
Regulation of virtual and blockchain technology is rapidly occurring at the state, federal, and international level. Considering that blockchain technology is inherently borderless and decentralized, significant conflict among such regulations is likely inevitable. The issue of choice of law (along with other jurisdictionally-related issues) is likely to be the subject of dispute in the future. To the extent parties can agree in advance on this issue (for example, in the context of a permissioned implementation), parties will be well served by the elimination of uncertainty and future disagreements.