State governments are tiptoeing into blockchain.
The digital ledger technology behind bitcoin has fanned more states’ interests for its potential for managing large sets of data in a secure and decentralized manner. Eight states have enacted laws to, among other things, order studies of the technology for government use, legalize blockchain-based electronic signatures, and permit corporations to track stocks on the digital ledger, Bloomberg Law data show.
Blockchain-related legislation is also pending in 13 states, according to the data. States envision possibly tapping blockchain for managing tax records, business licenses, Medicaid rosters, and food stamps.
The mounting legislation signals the growing effort by state governments to recognize the technology’s benefits. States’ legislative activities also are a marketing tool. “One main objective is to encourage blockchain companies to set up shop in those states,” Jeffrey D. Neuburger, a partner and co-head of the technology, media and communications group at Proskauer Rose LLP, told Bloomberg Law.
But some states’ noticeably measured pace in dabbling in blockchain also shows the technology has limitations and may not be fully adoptable in current form without new rules.
Blockchain is a digital ledger system in which users can publicly store transactions in an unchangeable record. Data on blockchain are transparent and secure, proponents say, because they are encrypted and maintained by a network of people, as opposed to a central authority in traditional databases.
One New York lawmaker has introduced five blockchain-related bills in the last six months in the state General Assembly. Three of the bills would create separate task forces to study the potential impacts of: blockchain use for state record keeping; widespread use of digital currencies in the state’s financial markets; and the creation of a state-issued cryptocurrency.
The other two bills would legalize electronic signatures secured through blockchain and direct the state Board of Elections to examine the use of blockchain in elections. The bills have not yet seen committee action.
Blockchain is “virtually impenetrable,” Assemblyman Clyde Vanel (D), sponsor of the five bills, told Bloomberg Law. “In the state we have very valuable information and data, and we should look into protecting such data on this technology.”
A bill in Colorado would direct the state Governor’s Office of Information Technology to assess the costs and benefits, such as added security and transparency, of applying blockchain to state data systems. The bill would also direct the Colorado Department of State to consider using blockchain for business licensing records.
The Colorado bill is needed to protect the vast volumes of data stored and managed by the state, including sensitive information such as tax records and personal financial data, State Sen. Kent Lambert (R), sponsor of the bill, told Bloomberg Law.
The Colorado Senate Committee on Business, Labor and Technology approved the bill Feb. 7. It now heads to the Senate Committee on Appropriations.
A Vermont bill, introduced Jan. 3 by State Sen. Alison Clarkson (D), proposes rules for blockchain-based limited liability companies, which the bill defines as LLCs organized for the purpose of using blockchain for a material portion of their business activities.
The proposed rules were based on a government-commissioned report, released in December 2017, that analyzed potential blockchain applications and legislative solutions in the state. The ideas in the bill “represent significant business opportunities and protections for Vermonters,” Clarkson told Bloomberg Law.
Other states with pending legislation include Arizona, Hawaii, Florida, Nebraska, New Jersey, Tennessee, Virginia, Washington, West Virginia, and Wyoming.
Laws on the Books
Eight states—Arizona, Delaware, Illinois, Nevada, New Hampshire, New York, Vermont, and Washington—are ahead of the curve with blockchain initiatives and blockchain-related laws already on the books.
Delaware enacted a law in July 2017 that allows corporations to use blockchain to maintain corporate records, including stock transaction records. Delaware, known for business-friendly laws and the Court of Chancery, launched an initiative in 2016 aimed at enabling rules that would foster the technology.
Illinois also began studying blockchain in 2016, resulting in a report last month that recommended potential applications in government operations. The technology could be used to maintain a Medicaid recipient roster, determine food stamps eligibility, and create digital marketplaces for snow removal, recycling, and other services, the report, produced by a state-created task force, said.
The report also highlighted obstacles to the state government adoption of the technology. Scalability—or government agencies’ ability to ramp up the technology quickly to handle growing data volumes—is a concern, it said. Blockchains also must be able to exchange information with legacy and other data systems, the report said. The technology also typically consumes a lot of energy.
“Although blockchain technology may prove to be one of the most disruptive innovations of the 21st century, it currently is discussed as if it were more mature than it actually is,” the report said. “Many implementation hurdles at the technical, regulatory and governance level continue to hinder widespread adoption for both open and private blockchain networks.”
—With assistance from Tripp Baltz
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