The Blockchain Policy Puzzle

The technology that underlies bitcoin has a lot of potential. Governments will have to sort out the issues for its regulation and deployment.
October 3, 2017
By Nicholas Souza  |  Contributor
A tax analyst with the Texas Comptroller of Public Accounts
By Irakli Mirzashvili  |  Contributor
A tax analyst with the Texas Comptroller of Public Accounts

Just a year or two ago, few policymakers had any inkling of an emerging technology known as blockchain. But that is changing rapidly as awareness grows that the technology that underlies the digital currency bitcoin has the potential to modernize how the public and businesses interact with their governments and each other while revolutionizing record-keeping, and to do so far more securely than with the paper records or digital technologies currently in use.

Blockchain's potential applications go far beyond finance. It can be applied to a wide variety of functions including ones as disparate as property records, voting and cybersecurity. By broadly distributing record-keeping functions -- a concept known as "distributed ledgers" -- blockchain can maintain accurate, highly secure records of large numbers of transactions without the need for a centralized authority. Blockchain's inherent security is particularly important for governments, which maintain a treasure trove of confidential data that needs to be protected against an ever-expanding cohort of cyber criminals.

But governments' role goes far beyond simply securing and modernizing their own business operations. Given their central role in regulating financial transactions among individuals, businesses and local governments, in addition to those among their own agencies, it will fall to state governments in particular to sort out the issues surrounding blockchain.

That's beginning to happen. Several state legislatures have already taken up bills related to blockchain. The measures cover a wide range of blockchain uses, from increasing transparency to consumer protection. While not all have been enacted, even those that failed help illustrate potential uses for the technology and some of the issues it raises.

• One of the earliest out of the gate was Vermont. House Bill 868, which went into effect on July 1, 2016, created what's known as a "rebuttable statutory presumption of authenticity" for records using the technology. This legislation calls for any "fact or record" verified through the use of a blockchain to be considered authentic. This removes barriers to using blockchain-notarized documents, including those on the bitcoin blockchain, in a court of law.

• Delaware lawmakers recently passed Senate Bill 69, which went into effect Aug. 1. It provides statutory authority for Delaware corporations to use blockchain for corporate recordkeeping, including a company's stock ledger. The legislation is part of the state's effort to promote the use of blockchain via the Delaware Blockchain Initiative, a joint venture between the state and a blockchain provider.

• Nevada Senate Bill 398, signed into law in June, recognizes and authorizes "the use of blockchain" and smart contracts by the state's residents. The legislation mainly serves to ensure that Nevada's local governments will not interfere with the use of blockchains, either through regulation or taxation. The bill does not prevent the state from regulating or taxing blockchain transactions, but emphasizes that there will be consistent treatment of blockchain in the state.

• This March, Arizona House Bill 2417 became law. It defines both blockchains and smart contracts. The bill declares that all data tied to a blockchain is "considered to be in an electronic format and to be an electronic record" acceptable for use by the state.

• Illinois House Resolution 120 calls for the creation of the Illinois Legislative Blockchain and Distributed Ledger Task Force to study how and if Illinois' state, county and city governments can benefit from a transition to a blockchain-based system for record-keeping and service delivery. This task force is in addition to the Illinois Blockchain Initiative, an effort by six state and local agencies.

• Hawaii House Bill 1481 would establish a working group to consider several ways in which bitcoin and blockchain can help the state develop economically. "Digital currencies such as bitcoin have broad benefits for Hawaii," the bill reads. The bill is pending after passing several committees.

• In Maine, Senate Bill 950 proposed a 90-day field study to learn the effects of "Using Blockchain in Conjunction with Paper Ballots in Maine Elections." The study was to focus on paper-ballot security, increasing election transparency and reducing costs. The bill did not pass.

• North Dakota Senate Bill 2100 called for a study to consider "the feasibility and desirability of regulating virtual currency, such as bitcoin." While it passed unanimously in the Senate, it died in the House due to opposition based on the fact that virtual currency is not legal tender under federal law.

The range of issues that these measures take up serves to underline the complexity of choices for the regulation and deployment of blockchain technology that policymakers will face in the coming years. Governments at all levels are just beginning to sort these issues out. But it won't be long before they have to start making decisions. Perhaps they should wait for private industry to develop best practices. Or governments could start experimenting by integrating the technology into a limited sector of their operations.

Whatever the path they may choose, all governments should, at the very least, investigate the technology and its application to the provision of their core services. In an era when trust in government is nearing all-time lows and "transparency" has become a buzzword, blockchain may serve as a cornerstone for building trust and improving the relationship between the government and the governed.