Senate Bill 5638: What Does the New “Blockchain Bill” Mean for Washington State?
On January 25th 2019, a group of Washington State legislators introduced Senate Bill 5638 (SB 5638) entitled “AN ACT Relating to recognizing the validity of distributed ledger technology.” This bill proposes the establishment of legal definitions for “blockchain” and “distributed ledger technology” and provides clarification on the legal status of records created and stored using distributed ledger technologies. Submitted by Senators Brown, Rivers, Becker, and Short, SB 5638 would revise the “Washington Electronic Authentication Act” which is already part of state law. Specifically SB 5638 contains proposed amendments to RCW 19.34.010 (Purpose and construction) and 19.34.020 (Definitions), in addition to adding a further section to the previously passed act.
What does this do?
The proposed language expands the purpose of code RCW 19.34.010 “To encourage the development of distributed ledger technology,” and provides definitions for “Blockchain” and “Distributed ledger technology.” In their current form, RCW 19.34.010 and 19.34.020 codes define a number of technical terms relating to the use of digital messages and signatures for use in legal contexts and clarify that digital messages and signatures have the same legal force as “regular” messages and signatures.
By adding an additional section to the law, SB 5638 would also give records created and stored using distributed ledger technologies the same legal standing as other electronic records. Without explicitly using the term “smart contract,” the bill ensures that smart contracts and communications generated by distributed ledger technologies will not be interpreted in a different manner simply because they exist on a blockchain or some other form of distributed ledger technology. The text of the addition reads as follows:
“An electronic record or electronic signature may not be denied legal effect, validity, or enforceability solely because it is generated, communicated, received, or stored using distributed ledger technology.”
What does it mean?
Washington State has been characterized as having a “bad rep on blockchain and cryptocurrency,” once being called out as “unethical, wasteful, and reckless” by Shapeshift after the passage of Senate Bill 5031 in the fall of 2017. SB 5031 clarified licensing and enforcement provisions for businesses dealing with money transmission and currency exchange and has been interpreted by regulators to require exorbitantly expensive licensing as well as information storage that many feel defeats the purpose of distributed ledger technologies. Passage of that bill also led some blockchain businesses such as Shapeshift to leave the state.
While other states such as Wyoming have passed regulations aimed at attracting blockchain businesses, many have yet to provide any clarification for businesses operating in their borders. Thus far when the Washington state legislature has attempted to clarify existing law when applied to blockchain, they have failed to fully understand the potential impact their decisions can have on businesses here in the state wanting to contribute to the development of distributed ledger technologies. Meanwhile, confusion over the application of existing regulations in addition to anticipation of further regulations has put many entrepreneurs in a compromising position: to build in hopes of favorable regulations or move to a friendlier jurisdiction?
Clarification of the legal issues associated with the adoption of distributed ledger technologies plays a critical role in paving the way for a thriving ecosystem of startups and other foundational organizations. Companies working with blockchain and distributed ledger technologies often pay exorbitant legal fees due to the lack of familiarity with issues surrounding the development of these technologies in the legal system. This new Senate Bill 5638, helps to fix that problem and represents a minor step in the right direction. However, more needs to be done.
What can be done?
To enable blockchain innovation, Washington legislators should follow the lead of their counterparts in states such as Wyoming; they need to do more than simply clarify some regulations. Bills introduced in New York offer a blueprint for examining possible blockchain uses in government and Wyoming is leading the pack on defining blockchain and distributed ledger technologies, particularly in the finance sector. States such as Ohio and Arizona have followed suit.
Delaware is another great example to look at - the state envisioned using distributed ledger technology to let corporations automate key business processes and allow regulators to track assets in real time. They’re moving ahead with a test of the technology by creating a proof-of-concept blockchain based business filing system for the state. Washington could be doing its part to encourage the use of such smart contract innovations - while such blockchain innovators as RChain and Stably already operate within state boundaries, others have been skittish or even left the state due to previous legislation.
If passed, SB 5638 would put to rest any dispute over the legal status of messages and contracts created using distributed ledger technology. By giving legal weight to communications made using distributed ledger technology, Bill 5638 could be the an important step in clarifying the situation. While this would be viewed by many as a positive step, the bill does not clarify the state’s position on the use of cryptocurrency or distributed ledger technologies with regard to tax or securities law. Confusion regarding the application of tax and securities laws to different applications of distributed ledger technology represents a far greater concern for the businesses wanting to innovate in the space. Washington must tackle these problems head-on if it wants to remain relevant in the industry.
Nor is passage of SB 5638 assured. The bill is sponsored by Republicans only, and in the Democratic controlled Washington State Legislature, that may make it a tough sell. Democrats currently control 27 of 49 seats (one seat is currently vacant after Senator Kevin Ranker (D) resigned due to misconduct allegations, however it will be filled by a democrat) in the State Senate and in order to pass the bill, Republicans will have to reach out to their counterparts across the aisle.
If blockchain innovators want the state legislature to do more to protect and encourage blockchain, the industry needs to do more to educate and inform. Currently there is a lack of dialogue between stakeholders in the burgeoning industry and between regulators. While ideas such as the Washington Blockchain Coalition are on the right track, a good deal of tangible work needs to be done to engage and inform government on the potential effects of different regulations on the development of distributed ledger technologies.
Part of this discussion should be happening at the statehouse. In order to move forward, proponents of SB 5638 need to convince the Chair of the Washington Senate Environment, Energy, & Technology Committee Senator Reuven Carlyle to hold a public hearing on the bill. While the committee is bipartisan and designed to conduct analysis and gather research on proposed legislation, the committee is controlled by Democratic legislators and Senator Carlyle holds full power on whether or not to provide a public hearing on SB 5638.
Such a hearing would allow blockchain enthusiasts and entrepreneurs to testify about the need to support this emerging technology in Washington State. If Washington wants to take advantage of the opportunity provided by our burgeoning technology sector, prodigious engineering talent, and even more abundant cheap hydro power, further steps need to be taken to incentivize growth of the blockchain industry in Washington.
To request a public hearing on this bill, you can contact Senator Carlyle and his staff at Reuven.Carlyle@leg.wa.gov.
This post was co-authored by Seth Goldfarb . He is a Social Media and Content Marketing Specialist based in Seattle, Washington. Seth has been writing about blockchain since the spring of 2017 and has a passion for learning about its potential to promote financial inclusion.