By: Jon Avidor and Jaclyn Wishnia
The lack of U.S. federal regulations governing blockchain and the crypto industry has led some states to adopt their own interpretations of these technologies. A recent New York Times article compared the diverging regulatory theories stemming from various federal authorities to a parable about six blind men touching separate parts of an elephant, each defining the animal differently every time. Though the analogy was meant to send a message to federal agencies to compromise on standard definitions and finally resolve haphazard crypto industry regulations, the message should resonate with state governments as well. If states continue passing bills using their own terminology for blockchain, they will find themselves in the same predicament that the federal authorities are in now- saddled with fractured legislation and confusing jargon.
While many of the answers to the legal uncertainties surrounding these technologies rely on implementing uniform federal regulations, the initial problem stems from general misconceptions about how the technology operates, which directly correlates with how to properly define it for legal purposes. For instance, California’s legislature adopted a bill containing legal definitions for “blockchain technology” and “smart contract”. Specifically, the bill amends sec. 1633.2(c) of California’s civil code to define “blockchain technology” and concludes its definition by stating, “…data on the ledger is protected with cryptography, is immutable, is auditable, and provides an uncensored truth.”
This definition simply is not accurate. First, blockchains should be referred to as tamper-resistant, not immutable. Immutable means, “unable to be changed.” Blockchains are not impervious to change, it is just very challenging to do so. Second, blockchains are only auditable if they are public, or if an individual possesses a key to a permissioned network. Even if they are public, numerical identifications make it difficult to trace the person to whom the transactions belong. Finally, they do not unequivocally provide an uncensored truth, but they could. For example, fraudulent information can still be entered on a blockchain. So while that fraudulent data is truly displayed on the distributed ledger, it does not mean that the information itself is valid.
A better legal representation of blockchain can be found in a bill passed by Nevada, but it still does not negate the fact that these two states provide altered meanings within the texts of their acts. Nevada describes blockchain as, “an electronic record of transactions or other data…”, whereas California depicts it as, “distributed ledger technology that uses distributed, decentralized, shared, and reciprocal ledger.” While Nevada provides a more accurate definition than California, the issue remains that blockchain is inconsistently defined across state boarders. Not only does varying vocabulary pose an issue for understanding the technology, but as demonstrated by these two bills, it could potentially create “inconsistent regulation across subject-matter domains and jurisdictions.”
Word choice is also pertinent for assessing risk when formulating laws. For example Vermont’s bill, which under Vermont’s rules of evidence, permits blockchain records to be admissible in court. Data on a blockchain, however, may potentially be fraudulent. Fortunately, Vermont’s legislature was prudent to include a clause denoting how to challenge such information.
Though states already adopting blockchain legislation should be commended for forging ahead of their reluctant federal administrative counterparts, the best solution to prevent discrepant precedent and continue innovation in these fields must come from the top down, namely, national standard legal definitions and definitive determinations for how the technology operates under already existing laws.
We would like to thank our intern, Jaclyn Wishnia for her contribution to this article.