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Ohio and California Join Other States in Passing Blockchain-Friendly Legislation

This past summer, Ohio adopted legislation (SB220) that primarily provides for a legal safe harbor from certain data-breach related tort claims to covered entities that implement a specified cybersecurity program that “reasonably conforms” to a recognized cybersecurity framework for the protection of personal information and “restricted information” or comply with certain industry-specific federal privacy laws. This legislation is intended incentivize businesses to adopt heightened levels of cybersecurity through voluntary action.

Beyond cybersecurity, SB220 also includes language amending Ohio’s version of the Uniform Electronic Transactions Act (UETA) to incentivize blockchain investment and innovation in the state by allowing transactions recorded on the blockchain to be recognized under it. Ohio’s UETA generally stipulates that records or signatures may not be denied legal effect solely because they are in electronic form and that a contract may not be denied legal effect because an electronic record was used in its formation (a discussion of the extent to which any provision of Ohio’s UETA is preempted by the Federal E-Sign Act (15 U.S.C. § 7001) is beyond the scope of this post). In pertinent part, SB220 amends the definition of “electronic record” under the UETA to provide that “a record or contract that is secured through blockchain technology is considered to be in an electronic form and to be an electronic record.” It also amends the definition of “electronic signature” to clarify that a signature that is “secured through blockchain technology is considered to be in an electronic form and to be an electronic signature.” While one could argue that signatures secured using blockchain are already presumably valid under the UETA, such a law expressly takes up this issue and signals the state’s pro-blockchain stance.

Ohio is not the first state to expressly address blockchain in its electronic signature or related laws, as multiple states have debated such bills or have passed legislation in the past year. For example, in 2017, Arizona passed a law clarifying some of the enforceability issues associated with the use of blockchain and smart contracts under the Arizona Electronic Transaction Act. That same year, Delaware amended its corporation law to explicitly authorize the use of distributed ledger technology in the administration of Delaware corporate records, including stock ledgers. Earlier this year, Tennessee passed a law (HB1507) recognizing electronic signatures secured through blockchain technology (and also the enforceability of smart contract terms), and Wyoming passed several bills easing regulation of cryptocurrencies. Other states, including New York, are considering their own blockchain bills.

Indeed, on the heels of Ohio’s passage, California enacted two blockchain-related laws in late September 2018. The first bill (SB838) amends the California Corporations Code and permits privately-held corporations (i.e., ones that do not have outstanding securities on one of the major U.S. stock exchanges) to include a provision in their articles of incorporation authorizing the use of blockchain technology to record and track the issuance and transfer of stock certificates. SB838 places certain requirements on such records stored on a blockchain, including, among other things, that the encrypted information have the capacity to be converted into a clearly readable format within a reasonable period of time, and that the records be capable of producing the list of shareholders, recording information required to be included on stock certificates and recording required transfers of stock. The bill sunsets in 2022, presumably to allow for a reconsideration in light of technological advances. The second bill (AB2658), most notably, requires the state to appoint a blockchain working group to evaluate the uses, benefits and risks of the technology, and also defines “blockchain technology” to mean “a mathematically secured, chronological, and decentralized consensus ledger or database,” a definition which tracks the one used in a Vermont blockchain law.

The promise of blockchain and its wave of investment and R&D has spurred a number of states to create friendly environments for start-ups in this area, though it remains to be seen whether additional statutory steps would be required if blockchain solutions prove feasible in certain regulated industries (or if such laws will become obsolete should future versions of blockchain use altered standards or protocols).

authored this post.

© 2018 Proskauer Rose LLP.

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