Existing law, the Uniform Electronic Transactions Act, specifies that a record or signature may not be denied legal effect or enforceability solely because it is in electronic form and that a contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation. Among other things, the act provides that if a law requires a record to be in writing, or if a law requires a signature, an electronic record or signature satisfies the law.

Existing law specifies that there is, in the Government Operations Agency, the Department of General Services, which shall develop and enforce policy and procedures and institute or cause the institution of those investigations and proceedings as it deems proper to assure effective operation of all functions performed by the department and to conserve the rights and interests of the state.

This bill, until January 1, 2022, would require the Secretary of the Government Operations Agency to appoint a blockchain working group on or before July 1, 2019. The bill would define blockchain. The bill, on or before July 1, 2020, would require the working group to report to the Legislature on the potential uses, risks, and benefits of the use of blockchain technology by state government and California-based businesses, as specified.

Existing law, the Uniform Electronic Transactions Act, specifies that a record or signature may not be denied legal effect or enforceability solely because it is in electronic form and that a contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation. Among other things, the act provides that if a law requires a record to be in writing, or if a law requires a signature, an electronic record or signature satisfies the law.

Existing law specifies that there is, in the Government Operations Agency, the Department of General Services, which shall develop and enforce policy and procedures and institute or cause the institution of those investigations and proceedings as it deems proper to assure effective operation of all functions performed by the department and to conserve the rights and interests of the state.

This bill, until January 1, 2022, would require the Secretary of the Government Operations Agency to appoint a blockchain working group on or before July 1, 2019. The bill would define blockchain. The bill, on or before July 1, 2020, would require the working group to report to the Legislature on the potential uses, risks, and benefits of the use of blockchain technology by state government and California-based businesses, as specified.

Existing law, the Uniform Electronic Transactions Act, specifies that a record or signature may not be denied legal effect or enforceability solely because it is in electronic form and that a contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation. Among other things, the act provides that if a law requires a record to be in writing, or if a law requires a signature, an electronic record or signature satisfies the law.

Existing law specifies that there is, in the Government Operations Agency, the Department of General Services, which shall develop and enforce policy and procedures and institute or cause the institution of those investigations and proceedings as it deems proper to assure effective operation of all functions performed by the department and to conserve the rights and interests of the state.

This bill, until January 1, 2022, would require the Secretary of the Government Operations Agency to appoint a blockchain working group on or before July 1, 2019. The bill would define blockchain and require the working group to report to the Legislature on the potential uses, risks, and benefits of the use of blockchain technology by state government and California-based businesses, on or before July 1, 2020, as specified.

Existing law, the Uniform Electronic Transactions Act, specifies that a record or signature may not be denied legal effect or enforceability solely because it is in electronic form and that a contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation. Among other things, the act provides that if a law requires a record to be in writing, or if a law requires a signature, an electronic record or signature satisfies the law.

Existing law specifies that there is, in the Government Operations Agency, the Department of General Services, which shall develop and enforce policy and procedures and institute or cause the institution of those investigations and proceedings as it deems proper to assure effective operation of all functions performed by the department and to conserve the rights and interests of the state.

This bill, until January 1, 2022, would require the Secretary of the Government Operations Agency to appoint a blockchain working group on or before July 1, 2019. The bill would define blockchain and require the working group to report to the Legislature on the potential uses, risks, and benefits of the use of blockchain technology by state government and California-based businesses, on or before July 1, 2020, as specified.

Existing law, the Uniform Electronic Transactions Act, specifies that a record or signature may not be denied legal effect or enforceability solely because it is in electronic form and that a contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation. Among other things, the act provides that if a law requires a record to be in writing, or if a law requires a signature, an electronic record or signature satisfies the law.

Existing law, the Uniform Electronic Transactions Act, specifies that a record or signature may not be denied legal effect or enforceability solely because it is in electronic form and that a contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation. Among other things, the act provides that if a law requires a record to be in writing, or if a law requires a signature, an electronic record or signature satisfies the law.

This bill would revise provisions of the act that define electronic record and electronic signature to include a record or a signature that is secured through blockchain technology, as defined. The bill would expand the definition of contract to include a smart contract, as defined. The bill would also specify that a person who, in or affecting interstate or foreign commerce, uses blockchain technology to secure information that the person owns or has the right to use retains the same rights of ownership or use in this state with respect to that information as before the person secured the information using blockchain technology. The bill would make other related conforming changes.

Existing law, the Uniform Electronic Transactions Act, specifies that a record or signature may not be denied legal effect or enforceability solely because it is in electronic form and that a contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation. Among other things, the act provides that if a law requires a record to be in writing, or if a law requires a signature, an electronic record or signature satisfies the law.

This bill would revise provisions of the act that define electronic record and electronic signature to include a record or a signature that is secured through blockchain technology, as defined. The bill would expand the definition of contract to include a smart contract, as defined. The bill would also specify that a person who, in or affecting interstate or foreign commerce, uses blockchain technology to secure information that the person owns or has the right to use retains the same rights of ownership or use in this state with respect to that information as before the person secured the information using blockchain technology. The bill would make other related conforming changes.

CONCURRENCE IN SENATE AMENDMENTS

CSA1 Bill Id:AB 2658

Author:(Calderon)

As Amended Ver:August 17, 2018

Majority vote

Original Committee Reference: P. & C.P.

SUMMARY: Until January 1, 2022, establishes a blockchain working group, appointed by the Secretary of the Government Operations (GovOps) Agency, which is to include the State Chief Information Officer among others, as specified, to evaluate the uses of blockchain by California's businesses and state government. This also includes an evaluation of the benefits, risks (including privacy risks), best practices, and legal implications associated with such use of blockchain. Defines "blockchain" for these purposes to mean a mathematically secured, chronological, and decentralized ledger or database, but also requires the working group's report to include recommendations for modifications to this definition of blockchain and recommendations for amendments to other code sections that may be impacted by the deployment of blockchain.

The Senate amendments:

1. Revise the definition of "blockchain."
2. Require the Secretary of GovOps to also designate the chairperson of the blockchain working group.
3. Add Senator Hertzberg as a principal co-author.

FISCAL EFFECT: According to the Senate Appropriations Committee:

1. Significant costs to GovOps in the low hundreds of thousands of dollars to convene a working group, reimburse working group members for incurred expenses, and prepare the required report. (GF)
2. Potential cost pressure for implementing any recommendations created from the report.

EXISTING LAW:

1. Establishes in the state government, the GovOps Agency, among other agencies. (Government Code Section 12800(a).)
2. Establishes the California Department of Technology (CDT) within the GovOps Agency. (Gov. Code Sec. 11545(a)(1).) Provides that unless the context clearly requires otherwise, whenever the term "State Chief Information Officer" or "Secretary of California Technology" appears in any statute, regulation, or contract, or any other code, it shall be construed to refer to the Director of CDT. (Government Code Section 11545(a)(2).)
3. Provides that the Director of the CDT shall be the State Chief Information Officer. (Gov. Code Sec. 11545(a)(3).)
4. Enumerates the duties of the Director of CDT, which include, among other things:
   1. Advising the Governor on the strategic management and direction of the state's information technology resources;
   2. Establishing and enforcing state information technology strategic plans, policies, standards, and enterprise architecture, including the periodic review and maintenance of the information technology sections of the State Administrative Manual and procurement procedures related to information technology projects, except for sections on information technology fiscal policy;
   3. Minimizing overlap, redundancy, and cost in state information technology operations by promoting the efficient and effective use of information technology;
   4. Providing technology direction to agency and department chief information officers to ensure the integration of statewide technology initiatives, compliance with information technology policies and standards, and the promotion of the alignment and effective management of information technology services;
   5. Working to improve organizational maturity and capacity in the effective management of information technology; and
   6. Establishing performance management and improvement processes to ensure state information technology systems and services are efficient and effective. (Gov. Code Sec. 11545(b).)

COMMENTS:

1. Purpose of this bill: With blockchain technology being widely perceived to hold exciting promise and new uses due to its security features in the private industry, this bill seeks to establish a working group to evaluate the uses, risks, and benefits of blockchain technology and develop recommendations, including recommendations surrounding a definition of blockchain definition for statutory purposes, that would help inform future legislation.
2. Author's statement: As stated by the author, "California has long been a global leader in fostering innovation and new technology. In order to continue in this role California must create an environment in which entrepreneurs and innovators are encouraged to develop new products, applications, and business models with blockchain technology. Blockchain technology has near limitless applications and has the opportunity to upend society and our economy like the internet did in the 90s and 00s. It is in California's best interest to encourage innovation with and investment in blockchain technology. Doing so will benefit consumers, result in economic growth, and maintain California's role as a leader in technology and innovation."
3. Blockchain, generally: As society has evolved, so too has trade and society's reliance on institutions to facilitate trade between individuals who may not know one another or even be located near one another. When consumers use "eBay," "Amazon," etc., they are effectively using digital marketplaces and platforms that help facilitate an exchange of value.

Blockchain is a new network that allows individuals to conduct transactions, "peer-to-peer," with fewer (or no) intermediaries (i.e., middle men, such as banks, clearing houses, payment networks). In place of those traditional intermediaries or institutions, blockchain relies on a software code run by different computers that are guaranteeing these transactions as they happen. It uses cryptography techniques to encode its transactions as they are added to the digital ledger, and the ledger of transactions is owned by a larger number of parties and verified against one another, instead of by one company (the intermediary). Notably, the ledger of transactions can be added to, but never erased from. In other words, the data that has been added to the ledger, can never be changed. It does all this though a mechanism for creating census between scattered or distributed parties that do not need to otherwise trust each other, but need to trust the mechanism by which their consensus is arrived at. It is, in so many words, a decentralized, transparent, immutable, append-only, cryptography-transmitted, digital, distributed public ledger.

In simple terms, a blockchain is a distributed ledger–that is, 'a list of transactions that is shared among a number of computers, rather than being stored on a central server.' Blockchain technology was originally developed in conjunction with the virtual currency Bitcoin. In the Bitcoin context, blockchain "replaces [the] trusted third party" that would otherwise be needed to ensure that a transferor's title to virtual Bitcoin is valid–that is, to ensure that the Bitcoin has not been illegally replicated or stolen. In Bitcoin transactions, blockchain functions as "[a] database that contains the payment history of every bitcoin in circulation" and "provides proof of who owns what at any given juncture. The strength and security of the blockchain database is guaranteed by an elaborate 'consensus mechanism" by which various computers in the system must agree to update the blockchain after any legitimate Bitcoin transfer. Through blockchain's "mixture of mathematical subtlety and computational brute force," computers on a peer-to-peer network alert one another to shoddy transactions and respond to legitimate transactions by updating the blockchain permanently. Because legitimate transactions are irreversibly recorded, illegitimate transactions can be spotted and rooted out. (Svikhart, Blockchain's Biggest Hurdle (Nov. 2017) <https://www.stanfordlawreview.org/online/blockchains-big-hurdle/> [as of Mar. 21, 2018] (internal citations omitted) (hereinafter "Svikhart").)

1. Blockchain uses: While bitcoin is commonly associated with blockchain, bitcoin is in fact just one of blockchain's many applications. Blockchain technology "can maintain accurate chains of title to securities and other legal instruments in a reliable electronic form" and has been identified as having incredible value in its potential to record and secure an immense volume of trades and financial transactions on a perpetual basis. (Svikhart.) Blockchain's most disruptive aspect is its ability to eliminate the need for third-party intermediaries in some transactions – in other words, removing the costly "middle men" who have policed such financial transactions or trades in the past, or been needed as guarantors, authenticators, or trusted third parties to aid in a transaction between two other willing parties. (See id.; see also Vermont Study, p. 4.)

As highlighted by a recent Forbes article, aside from its use in bitcoin, "[b]lockchain can ensure that the terms of programmable autonomous contracts, known as smart contracts, are met. It can be used for online voting to address voter fraud. It can be used to secure identity and many other situations where transparency and security is lacking." (Moy, Forbes, Forget Bitcoin, It's All About the Blockchain (Feb. 22, 2018).)

What makes blockchain so attractive, at this point, is its security. "Blockchains, like Bitcoin and Ethereum, have not yet been hacked. They are considered to be very secure. It is very challenging, almost impossible, to change any transaction information once it is validated and becomes part of a block." (Id.) This security appears to be built into blockchain's very structure, "where each block is linked to another block [. . .] in a time-stamped chronological order. [Thus, to] access data of the first ever created block, you have to traverse from the last created block, then the block before that, so on and so forth till you reach the first block. Each block contains elements like the version # [hash], reference of the address of the previous block, timestamp, transactional data, block size etc." (Vaidya, Medium, Decoding the Enigma of Blockchain (November 28, 2016).) As a result, corruption or hacking of blockchain transactions are made incredibly unlikely, if not impossible given that the hacker would have to manipulate each block starting from the latest block added to the network in order to corrupt or hack any single transaction of a certain block.

As described by a blockchain report by the State of Vermont: "Because of the distributed, consensus driven nature of the blockchain it is nearly impossible for an attack to compromise the entire system. The number of nodes [i.e., computers](and attendant computing power) required to confirm an error or malicious attack would be impractical in a large blockchain like Bitcoin. Trying to forge a previously verified block would be akin to changing the shape of a brick in an ever growing stack – each subsequent brick would also need to be modified to fit with the previous one. The blockchain is resistant to compromise due to the nature of the linked blocks. However [ …] there are ways the use of this technology is vulnerable to compromise, but they are not fundamental vulnerabilities with the blockchain itself." (State of Vermont, Blockchain Technology: Opportunities and Risks (Jan. 2016) p. 10.)

As stated in a 2017 Harvard Business Review article, however, "[b]lockchain, the distributed ledger technology underlying bitcoin, may prove to be far more valuable than the currency it supports. But it's only as valuable as it is secure. As we begin to put distributed ledger technology into practice, it's important to make sure that the initial conditions we're setting up aren't setting us up for security issues later on." (Berke, Harvard Business Review, How Safe are Blockchains? It Depends (Mar. 7, 2017).) Again, given the possibility for human errors, adoption of blockchain should arguably still be undertaken with some caution and potentially greater study. This bill seeks to facilitate that study.

1. Senate amendments to definition of blockchain: The Senate amendments to the definition of blockchain redefine the term to now mean "a mathematically secured, chronological, and decentralized consensus ledger or database."

This definition, unlike the prior definition used in the bill, tracks a recent Vermont statute defined the term for purposes of its Rules of Evidence after Vermont completed its study on the topic of blockchain. (12 V.S.A. Sec. 1913(a).) This same definition is also used in another bill relating to blockchain, SB 838, authored by Senator Hertzberg, now a principal co-author of this bill. That bill also includes a January 1, 2022 sunset, like this bill, with the intent that this bill's study and developed definition of blockchain will inform both this bill, and SB 838's statutory definitions, if enacted.

Analysis Prepared by: Ronak Daylami / P. & C.P. / (916) 319-2200 FN: 0004504

 THIRD READING  

Bill No: AB 2658

Author: , et al.

:

Vote:

SENATE GOVERNMENTAL ORG. COMMITTEE: 13-0, 6/26/18

AYES: Dodd, Wilk, Bradford, Cannella, Gaines, Galgiani, Glazer, Hill, Hueso, Lara, Portantino, Vidak, Wiener

SENATE APPROPRIATIONS COMMITTEE: 7-0, 8/16/18

AYES: Portantino, Bates, Beall, Bradford, Hill, Nielsen, Wiener

ASSEMBLY FLOOR: 76-0, 5/30/18 - See last page for vote

SUBJECT:

SOURCE: Author

DIGEST: This bill requires the Secretary of the Government Operations Agency (GOA) to appoint a blockchain working group, on or before July 1, 2019, to evaluate the use of the technology, as specified.

ANALYSIS:

Existing law:

1. Specifies, under the Uniform Electronic Transaction Act (Act), that a record or signature may not be denied legal effect or enforceability solely because it is in electronic form and that a contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.
2. Provides, under the Act, that if a law requires a record to be in writing, or if a law requires a signature, an electronic record or signature satisfies the law.
3. Establishes the Department of General Services (DGS), within GOA, which shall develop and enforce policy and procedures and institute or cause the institution of those investigations and proceedings as it deems proper to assure effective operation of all functions performed by DGS and to conserve the rights and interests of the state.

This bill:

1. Requires the Secretary of GOA to appoint a blockchain working group and designate the chairperson of that group on or before July 1, 2019, to evaluate the following:
   1. The uses of blockchain in state government and California-based businesses.
   2. The risks, including privacy risks, associated with the use of blockchain by state government and California-based businesses.
   3. The benefits associated with the use of blockchain by state government and California-based businesses.
   4. The legal implications associated with the use of blockchain by state government and California-based businesses.
   5. The best practices for enabling blockchain technology to benefit the State of California, California-based businesses, and California residents.
2. Defines “blockchain” to mean a mathematically secured, chronological, and decentralized ledger or database.
3. Requires the working group to consist of participants from all of the following:
   1. Three appointees from the technology industry.
   2. Three appointees from nontechnology-related industries.
   3. Three appointees with a background in law chosen in consultation with the Judicial Council.
   4. Two appointees representing privacy organizations.
   5. The State Chief Information Office, or his or her designee.
   6. The Director of Finance, or his or her designee.
   7. The chief information officers of three other state agencies, departments, or commission.
   8. One member of the Senate, appointed by the Senate Committee on Rules, and one member of the Assembly appointed by the Speaker of the Assembly.
4. Requires the blockchain working group to take input from a broad range of stakeholders with a diverse range of interests affected by state policies governing emerging technologies, privacy, business, the courts, the legal community, and state government.
5. Requires, on or before July 1, 2020, the blockchain working group to report to the Legislature, as specified, on the potential uses, risks, and benefits of the use of blockchain technology by state government and California-based businesses.
6. Requires the report to include recommendations for modifications to the definition of blockchain and recommendation for amendments to other code sections that may be impacted by the deployment of blockchain.
7. Specifies that the members of the working group shall serve without compensation, but shall be reimbursed for all necessary expenses incurred in the performance of their duties.
8. Includes a sunset date of January 1, 2022.

Background

Purpose of the bill. According to the author’s office, “the applications of blockchain technology are nearly limitless. As a complex, emerging technology it is important to fully understand the legal implications and potential consequences of state and local regulation of blockchain. There are many unknowns surrounding the risks of government use of blockchain as well as the risks to industry from unnecessarily burdensome regulation. Prior to designing a regulatory framework, it is vital to identify potential technical, regulatory, and governance hurdles.”

Additionally, the author states that, “AB 2658 will establish a blockchain working group to study the uses of, risks, and benefits associated with, and the legal implications of the use of blockchain by state government and California-based businesses.”

Blockchain. Blockchain is a term widely used to represent a new suite of technologies. Because of its infancy and the many ways it can be implemented,

there is substantial confusion around its definition. In very simple terms, blockchain technology is designed to let an individual safely transfer digital property (money) without the need for any middlemen (financial institutions). MIT professor Christian Catalini, an expert in blockchain technologies, provides a more detailed description:

At a high level, blockchain technology allows a network of computers to agree at regular intervals on the true state of a distributed ledger. Such ledgers can contain different types of shared data, such as transaction records, attributes of transactions, credential, or other pieces of information. The ledger is often secured through a clever mix of cryptography and game theory, and does not require trusted nodes like traditional networks. On a blockchain, transactions are recorded chronologically, forming an immutable chain, and can be more or less private or anonymous depending on how the technology is implemented. The ledger is distributed across many participants in the network — it doesn’t exist in one place. Instead, copies exist and are simultaneously updated with every fully participating node in the ecosystem. A block could represent transactions and data of many types — currency, digital rights, intellectual property, identity, or property titles, to name a few.

The main value of a blockchain is that it enables a database to be directly shared without a central administrator. In other words, blockchain technology removes the need for third parties to check transactions. Because blockchain and Bitcoin were invented together, they are often talked about together. However, Bitcoin is only the first use of the technology. Proponents of blockchain state that it can be used to remove middlemen from hundreds of industries and completely revolutionize the world.

One of the biggest critiques of blockchain is that it is simply too complicated. Critics argue that not only is the technology behind blockchain complex but once added to the complexity of a heavily regulated businesses environment; blockchain may not even get off the ground.

The author states that “prior to enacting a legal framework to regulate blockchain, it is important for the Legislature to fully understand the technology and potential effect regulation would have on the adoption and use of the technology.”

Related/Prior Legislation

SB 838 (Hertzberg, 2018) authorizes corporations to include a provision in their articles of corporation, allowing the use of blockchain technology to record and track the issuance and transfer of stock certificates. (Pending on the Assembly Floor)

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Senate Appropriations Committee, significant costs to GOA in the low hundreds of thousands of dollars to convene a working group, reimburse working group members for incurred expenses, and prepare the report. In addition, potential cost pressure for implementing any recommendations created from the report.

SUPPORT: (Verified 8/17/18)

Association of National Advertisers

California Cable and Telecommunications Association

California Chamber of Commerce

California Credit Union League

CompTIA

Med-Legal, LLC

Microsoft

TechNet

OPPOSITION: (Verified 8/17/18)

None received

ARGUMENTS IN SUPPORT: According to Med-Legal, LLC, “blockchain is one of the most auspicious new digital technologies emerging as a secure network for individuals and businesses to more efficiently execute transactions. Secure by design, blockchain technology ensures that only those who ‘own’ particular parts of the blockchain are able to edit it. Because of this protection, blockchain could be ideal for maintenance and use of digital records. This type of open ledger technology can be traced, audited and is tamper free and could be relevant to transactions involving a chain of custody. It would also assuage any concerns from affected parties regarding the data being comprised.”

ASSEMBLY FLOOR: 76-0, 5/30/18

AYES: Acosta, Aguiar-Curry, Arambula, Baker, Berman, Bigelow, Bloom, Bonta, Brough, Burke, Caballero, Calderon, Carrillo, Cervantes, Chau, Chávez, Chen, Chiu, Choi, Chu, Cooley, Cooper, Cunningham, Dahle, Daly, Eggman, Flora, Frazier, Friedman, Gallagher, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gonzalez Fletcher, Gray, Grayson, Harper, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager-Dove, Kiley, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Muratsuchi, Nazarian, Obernolte, O'Donnell, Patterson, Quirk, Quirk-Silva, Reyes, Rodriguez, Rubio, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Voepel, Waldron, Weber, Wood, Rendon

NO VOTE RECORDED: Travis Allen, Fong

Prepared by:

8/19/18 13:34:19

**** END ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2017 - 2018 Regular Session

AB 2658 (Calderon) - Secretary of the Government Operations Agency: working group: blockchain technology

Bill Summary:

AB 2658 would require the Secretary of the Government Operations Agency (GovOps) to appoint a blockchain working group, on or before July 1, 2019, to evaluate the use of the technology, as specified.

*********** ANALYSIS ADDENDUM – SUSPENSE FILE ***********

The following information is revised to reflect amendments

adopted by the committee on August 16, 2018

Fiscal Impact:

• Significant costs to GovOps in the low hundreds of thousands of dollars to convene a working group, reimburse working group members for incurred expenses, and prepare the required report. (GF)
• Potential cost pressure for implementing any recommendations created from the report.

Author Amendments:

Correct the definition of "blockchain technology."

-- END --

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2017 - 2018 Regular Session

AB 2658 (Calderon) - Secretary of the Government Operations Agency: working group: blockchain technology

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

AB 2658 would require the Secretary of the Government Operations Agency (GovOps) to appoint a blockchain working group, on or before July 1, 2019, to evaluate the use of the technology, as specified.

Fiscal Impact:

• Significant costs to GovOps in the low hundreds of thousands of dollars to convene a working group, reimburse working group members for incurred expenses, and prepare the required report. (GF)
• Potential cost pressure for implementing any recommendations created from the report.

Background:

Blockchain is a term widely used to represent a new suite of technologies. Because of its infancy and the many ways it can be implemented, there is substantial confusion around its definition. In very simple terms, blockchain technology is designed to let an individual safely transfer digital property (money) without the need for any middlemen (financial institutions). It is essentially an electronic ledger used to record transactions that, unlike a paper ledger, are maintained across a network of computers or nodes. The main value of a blockchain is that it enables a database to be directly shared without a central administrator. In other words, blockchain technology removes the need for third parties to check transactions. Because blockchain and Bitcoin were invented together, they are often talked about together; however, Bitcoin is only the first use of the technology. Proponents of blockchain state that it can be used to remove middlemen from hundreds of industries.

Proposed Law:

This bill would require the Secretary of GovOps to appoint a blockchain working group and designate the chairperson of that group on or before July 1, 2019, to evaluate the technology. Specifically, the working group would be required to:

• Consist of three appointees from the technology industry, three appointees from nontechnology-related industries, three appointees with a background in law chosen in consultation with the Judicial Council, two appointees representing privacy organizations, two appointees representing consumer organizations, the State Chief Information Officer, or his or her designee, the Director of Finance, or his or her designee, the chief information officers of three other state agencies, departments, or commissions, one member of the Senate (appointed by the Senate Committee on Rules), and one member of the Assembly (appointed by the Speaker of the Assembly). Members of the working group shall serve without compensation, but shall be reimbursed for all necessary expenses actually incurred in the performance of their duties;
• Take input from a broad range of stakeholders with a diverse range of interests affected by state policies governing emerging technologies, privacy, business, the courts, the legal community, and state government;
• Report to the Legislature on the potential uses, risks, and benefits of the use of blockchain technology by state government and California-based businesses by July 1, 2020. The report shall include recommendations for modifications to the definition of blockchain and recommendations for amendments to other code sections that may be impacted by the deployment of blockchain;

This bill would sunset on January 1, 2022.

Related Legislation:

SB 838 (Hertzberg, 2018) would authorize corporations to include a provision in their article of corporation allowing the use of blockchain technology to record and track the issuance and transfer stock certificates. It is pending on the Assembly Floor.

Staff Comments:

Staff notes that since absorbing the Department of Tax and Fee Administration, GovOps currently does not have the resources and personnel to convene a workgroup, at least until next year’s budget if they were to receive the necessary additional positions. Given the January 1, 2020, deadline, GovOps would only have roughly six months to acquire additional personnel, convene the working group, and produce the report.

-- END --

SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION

Senator Bill Dodd

Chair

2017 - 2018 Regular

Bill No: 2658 Hearing Date: 6/26/2018

SUBJECT: Secretary of the Government Operations Agency: working group: blockchain technology

DIGEST: This bill requires the Secretary of the Government Operations Agency (GOA) to appoint a blockchain working group, on or before July 1, 2019, to evaluate the use of the technology, as specified.

ANALYSIS:

Existing law:

1. Specifies, under the Uniform Electronic Transaction Act (Act), that a record or signature may not be denied legal effect or enforceability solely because it is in electronic form and that a contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.
2. Provides, under the Act, that if a law requires a record to be in writing, or if a law requires a signature, an electronic record or signature satisfies the law.
3. Establishes the Department of General Services (DGS), within the Government Operations Agency, which shall develop and enforce policy and procedures and institute or cause the institution of those investigations and proceedings as it deems proper to assure effective operation of all functions performed by DGS and to conserve the rights and interests of the state.

This bill:

1. Requires the Secretary of the GOA to appoint a blockchain working group and designate the chairperson of that group on or before July 1, 2019, to evaluate the following:
   1. The uses of blockchain in state government and California-based businesses.
   2. The risks, including privacy risks, associated with the use of blockchain by state government and California-based businesses.
   3. The benefits associated with the use of blockchain by state government and California-based businesses.
   4. The legal implications associated with the use of blockchain by state government and California-based businesses.
   5. The best practices for enabling blockchain technology to benefit the State of California, California-based businesses, and California residents.
2. Defines “blockchain” to mean a mathematically secured, chronological, and decentralized ledger or database of transactions or other data.
3. Requires the working group to consist of participants from all of the following:
   1. Three appointees from the technology industry.
   2. Three appointees from nontechnology-related industries.
   3. Three appointees with a background in law chosen in consultation with the Judicial Council.
   4. Two appointees representing privacy organizations.
   5. The State Chief Information Office, or his or her designee.
   6. The Director of Finance, or his or her designee.
   7. The chief information officers of three other state agencies, departments, or commission.
   8. One member of the Senate, appointed by the Senate Committee on Rules, and one member of the Assembly appointed by the Speaker of the Assembly.
4. Requires the blockchain working group to take input from a broad range of stakeholders with a diverse range of interests affected by state policies governing emerging technologies, privacy, business, the courts, the legal community, and state government.
5. Requires, on or before July 1, 2020, the blockchain working group to report to the Legislature, as specified, on the potential uses, risks, and benefits of the use of blockchain technology by state government and California-based businesses.
6. Requires the report to include recommendations for modifications to the definition of blockchain and recommendation for amendments to other code sections that may be impacted by the deployment of blockchain.
7. Specifies that the members of the working group shall serve without compensation, but shall be reimbursed for all necessary expenses incurred in the performance of their duties.
8. Includes a sunset date of January 1, 2022.

Background

Purpose of the bill. According to the author’s office, “the applications of blockchain technology are nearly limitless. As a complex, emerging technology it is important to fully understand the legal implications and potential consequences of state and local regulation of blockchain. There are many unknowns surrounding the risks of government use of blockchain as well as the risks to industry from unnecessarily burdensome regulation. Prior to designing a regulatory framework, it is vital to identify potential technical, regulatory, and governance hurdles.”

Additionally, the author states that, “AB 2658 will establish a blockchain working group to study the uses of, risks, and benefits associated with, and the legal implications of the use of blockchain by state government and California-based businesses.”

Blockchain. Blockchain is a term widely used to represent a new suite of technologies. Because of its infancy and the many ways it can be implemented, there is substantial confusion around its definition. In very simple terms, blockchain technology is designed to let an individual safely transfer digital property (money) without the need for any middlemen (financial institutions). MIT professor Christian Catalini, an expert in blockchain technologies, provides a more detailed description:

At a high level, blockchain technology allows a network of computers to agree at regular intervals on the true state of a distributed ledger. Such ledgers can contain different types of shared data, such as transaction records, attributes of transactions, credential, or other pieces of information. The ledger is often secured through a clever mix of cryptography and game theory, and does not require trusted nodes like traditional networks. On a blockchain, transactions are recorded chronologically, forming an immutable chain, and can be more or less private or anonymous depending on how the technology is implemented. The ledger is distributed across many participants in the network — it doesn’t exist in one place. Instead, copies exist and are simultaneously updated with every fully participating node in the ecosystem. A block could represent transactions and data of many types — currency, digital rights, intellectual property, identity, or property titles, to name a few.

The main value of a blockchain is that it enables a database to be directly shared without a central administrator. In other words, blockchain technology removes the need for third parties to check transactions. Because blockchain and Bitcoin were invented together, they are often talked about together. However, Bitcoin is only the first use of the technology. Proponents of blockchain state that it can be used to remove middlemen from hundreds of industries and completely revolutionize the world.

One of the biggest critiques of blockchain is that it is simply too complicated. Critics argue that not only is the technology behind blockchain complex but once added to the complexity of a heavily regulated businesses environment; blockchain may not even get off the ground.

The author states that “prior to enacting a legal framework to regulate blockchain, it is important for the Legislature to fully understand the technology and potential effect regulation would have on the adoption and use of the technology.”

Prior/Related Legislation

SB 838 (Hertzberg, 2018) authorizes corporations to include a provision in their articles of corporation, allowing the use of blockchain technology to record and track the issuance and transfer of stock certificates. (Pending in the Assembly Banking and Finance Committee)

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT:

Association of National Advertisers

California Cable and Telecommunications Association

CalChamber

California Credit Union League

CompTIA

Med-Legal, LLC

Microsoft

TechNet

OPPOSITION:

None received

ARGUMENTS IN SUPPORT: According to Med-Legal, LLC, “blockchain is one of the most auspicious new digital technologies emerging as a secure network for individuals and businesses to more efficiently execute transactions. Secure by design, blockchain technology ensures that only those who ‘own’ particular parts of the blockchain are able to edit it. Because of this protection, blockchain could be ideal for maintenance and use of digital records. This type of open ledger technology can be traced, audited and is tamper free and could be relevant to transactions involving a chain of custody. It would also assuage any concerns from affected parties regarding the data being comprised.”

ASSEMBLY THIRD READING

ATR Bill Id:AB 2658

Author:(Calderon)

As Amended Ver:May 9, 2018

Majority vote

SUMMARY: This bill defines blockchain technology and establishes a blockchain working group, appointed by the Secretary of the Government Operations Agency, as specified, to evaluate the use of blockchain technology by California's businesses and state government. Specifically, this bill:

1. Defines "blockchain" as an electronic record of transactions or other data in which the record or data is:
   1. Uniformly ordered;
   2. Redundantly maintained or processed by one or more computers or other machines to guarantee the consistency or non-repudiation of the record or data; and
   3. Is validated by the use of cryptography.
2. Creates a blockchain working group and requires the Secretary of the California Government Operations Agency to appoint, by July 1, 2019:
   1. Three appointees from the technology industry;
   2. Three appointees from non-technology related industries;
   3. Three appointees with a background in law chosen in consultation with the Judicial Council of California;
   4. Two appointees representing privacy organizations;
   5. Two appointees representing consumer organizations;
   6. The State Chief Information Officer, or their designee;
   7. The Director of Finance, or their designee;
   8. The Chief Information Officer of three other state agencies, departments or commissions; and
   9. One Member of the Senate, appointed by the Senate Committee on Rules, and one Member of the Assembly, appointed by the Speaker of the Assembly.
3. Requires the blockchain working group to evaluate the following:
   1. The uses of blockchain in state government and California-based businesses;
   2. The risks, including privacy risks, associated with the use of blockchain by state government and California-based businesses;
   3. The benefits associated with the use of blockchain by state government and California-based businesses;
   4. The legal implications associated with the use of blockchain by state government and California-based businesses; and
   5. The best practices for enabling blockchain technology to benefit the State of California, California-based businesses, and California residents.
4. Requires the blockchain working group to take input from a broad range of stakeholders with a diverse range of interests affected by state policies governing emerging technologies, privacy, business, the courts, the legal community, and state government.
5. Requires, on or before July 1, 2020, the blockchain working group to report to the Legislature on the potential uses, risks, and benefits of the use of blockchain technology by state government and California-based businesses, including potential reforms to the definition of blockchain technology and recommendations for amendments to other code sections that may be impacted by the deployment of blockchain technology.
6. Provides that the provisions of the bill shall remain in effect until January 1, 2022, and are repealed as of that date, unless subsequent legislation is enacted.

FISCAL EFFECT: According to the Assembly Appropriations Committee, "GF costs, likely in the range of a couple hundred thousand dollars, for the Government Operations Agency to convene a working group and prepare the required report."

COMMENTS:

1. Purpose of this bill: With blockchain technology being widely perceived to hold exciting promise and new uses due to its security features in the private industry, this bill seeks to establish a working group to evaluate the uses, risks, and benefits of blockchain technology and develop recommendations, including recommendations surrounding a definition of blockchain definition for statutory purposes, that would help inform future legislation.
2. Author's statement: As stated by the author, "California has long been a global leader in fostering innovation and new technology. In order to continue in this role California must create an environment in which entrepreneurs and innovators are encouraged to develop new products, applications, and business models with blockchain technology. Blockchain technology has near limitless applications and has the opportunity to upend society and our economy like the internet did in the 90s and 00s. It is in California's best interest to encourage innovation with and investment in blockchain technology. Doing so will benefit consumers, result in economic growth, and maintain California's role as a leader in technology and innovation."
3. Blockchain, generally: As society has evolved, so too has trade and society's reliance on institutions to facilitate trade between individuals who may not know one another or even be located near one another. When consumers use "eBay," "Amazon," etc., they are effectively using digital marketplaces and platforms that help facilitate an exchange of value.

Blockchain is a new network that allows individuals to conduct transactions, "peer-to-peer," with fewer (or no) intermediaries (i.e., middle men, such as banks, clearing houses, payment networks). In place of those traditional intermediaries or institutions, blockchain relies on a software code run by different computers that are guaranteeing these transactions as they happen. It uses cryptography techniques to encode its transactions as they are added to the digital ledger, and the ledger of transactions is owned by a larger number of parties and verified against one another, instead of by one company (the intermediary). Notably, the ledger of transactions can be added to, but never erased from. In other words, the data that has been added to the ledger, can never be changed. It does all this though a mechanism for creating census between scattered or distributed parties that do not need to otherwise trust each other, but need to trust the mechanism by which their consensus is arrived at. It is, in so many words, a decentralized, transparent, immutable, append-only, cryptography-transmitted, digital, distributed public ledger.

In simple terms, a blockchain is a distributed ledger–that is, 'a list of transactions that is shared among a number of computers, rather than being stored on a central server.' Blockchain technology was originally developed in conjunction with the virtual currency Bitcoin. In the Bitcoin context, blockchain "replaces [the] trusted third party" that would otherwise be needed to ensure that a transferor's title to virtual Bitcoin is valid–that is, to ensure that the Bitcoin has not been illegally replicated or stolen. In Bitcoin transactions, blockchain functions as "[a] database that contains the payment history of every bitcoin in circulation" and "provides proof of who owns what at any given juncture. The strength and security of the blockchain database is guaranteed by an elaborate 'consensus mechanism" by which various computers in the system must agree to update the blockchain after any legitimate Bitcoin transfer. Through blockchain's "mixture of mathematical subtlety and computational brute force," computers on a peer-to-peer network alert one another to shoddy transactions and respond to legitimate transactions by updating the blockchain permanently. Because legitimate transactions are irreversibly recorded, illegitimate transactions can be spotted and rooted out. (Svikhart, Blockchain's Biggest Hurdle (Nov. 2017) <https://www.stanfordlawreview.org/online/blockchains-big-hurdle/> [as of Mar. 21, 2018] (internal citations omitted) (hereinafter "Svikhart").)

1. Blockchain uses: While bitcoin is commonly associated with blockchain, bitcoin is in fact just one of blockchain's many applications. Blockchain technology "can maintain accurate chains of title to securities and other legal instruments in a reliable electronic form" and has been identified as having incredible value in its potential to record and secure an immense volume of trades and financial transactions on a perpetual basis. (Svikhart.) Blockchain's most disruptive aspect is its ability to eliminate the need for third-party intermediaries in some transactions – in other words, removing the costly "middle men" who have policed such financial transactions or trades in the past, or been needed as guarantors, authenticators, or trusted third parties to aid in a transaction between two other willing parties. (See id.; see also Vermont Study, p. 4.)

As highlighted by a recent Forbes article, aside from its use in bitcoin, "[b]lockchain can ensure that the terms of programmable autonomous contracts, known as smart contracts, are met. It can be used for online voting to address voter fraud. It can be used to secure identity and many other situations where transparency and security is lacking." (Moy, Forbes, Forget Bitcoin, It's All About the Blockchain (Feb. 22, 2018).)

What makes blockchain so attractive, at this point, is its security. "Blockchains, like Bitcoin and Ethereum, have not yet been hacked. They are considered to be very secure. It is very challenging, almost impossible, to change any transaction information once it is validated and becomes part of a block." (Id.) This security appears to be built into blockchain's very structure, "where each block is linked to another block [. . .] in a time-stamped chronological order. [Thus, to] access data of the first ever created block, you have to traverse from the last created block, then the block before that, so on and so forth till you reach the first block. Each block contains elements like the version # [hash], reference of the address of the previous block, timestamp, transactional data, block size etc." (Vaidya, Medium, Decoding the Enigma of Blockchain (Nov. 28, 2016).) As a result, corruption or hacking of blockchain transactions are made incredibly unlikely, if not impossible given that the hacker would have to manipulate each block starting from the latest block added to the network in order to corrupt or hack any single transaction of a certain block.

As described by a blockchain report by the State of Vermont: "Because of the distributed, consensus driven nature of the blockchain it is nearly impossible for an attack to compromise the entire system. The number of nodes [i.e., computers](and attendant computing power) required to confirm an error or malicious attack would be impractical in a large blockchain like Bitcoin. Trying to forge a previously verified block would be akin to changing the shape of a brick in an ever growing stack – each subsequent brick would also need to be modified to fit with the previous one. The blockchain is resistant to compromise due to the nature of the linked blocks. However [ …] there are ways the use of this technology is vulnerable to compromise, but they are not fundamental vulnerabilities with the blockchain itself." (State of Vermont, Blockchain Technology: Opportunities and Risks (Jan. 2016) p. 10.)

As stated in a 2017 Harvard Business Review article, however, "[b]lockchain, the distributed ledger technology underlying bitcoin, may prove to be far more valuable than the currency it supports. But it's only as valuable as it is secure. As we begin to put distributed ledger technology into practice, it's important to make sure that the initial conditions we're setting up aren't setting us up for security issues later on." (Berke, Harvard Business Review, How Safe are Blockchains? It Depends (Mar. 7, 2017).) Again, given the possibility for human errors, adoption of blockchain should arguably still be undertaken with some caution and potentially greater study. This bill would facilitate that study.

Analysis Prepared by: Ronak Daylami / P. & C.P. / (916) 319-2200 FN: 0003211

Date of Hearing: May 16, 2018

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 2658

Author:(Calderon) – As Amended Ver:April 5, 2018

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill defines “blockchain” technology and establishes a blockchain working group, appointed by the Secretary of the Government Operations Agency to evaluate the use of blockchain technology by California’s businesses and state government. Specifically, this bill requires the Secretary of the California Government Operations Agency, by July 1, 2019, to convene a working group. This bill requires the working group to report to the Legislature by July 1, 2020, on the potential uses, risks, and benefits of blockchain technology.

FISCAL EFFECT:

GF costs, likely in the range of a couple hundred thousand dollars, for the Government Operations Agency to convene a working group and prepare the required report.

COMMENTS:

1. Background. Blockchain technology is an, electronic ledger used to record transactions that, unlike a paper ledger, is maintained across a network of computers, or nodes. In order for a transaction to be deemed valid, all of the individual nodes within a network must confirm the transaction. When a series of transactions are validated, they are then grouped together into a block. Blocks, generally, consist of four pieces of information; a hash (a digital link to the prior block), a summary of the included transactions, a time stamp, and a proof of work that is used to secure the block. Once a block is compiled, the nodes verify the block using a complex algorithm and then link, or chain, one block to its predecessor, hence the name blockchain. The block is then redistributed to the various nodes in the network.
2. Purpose. This bill establishes a working group to evaluate the risks and benefits of blockchain technology.

Analysis Prepared by: Jessica Peters / APPR. / (916) 319-2081

Date of Hearing: May 8, 2018

ASSEMBLY COMMITTEE ON JUDICIARY

Mark Stone, Chair

ABPCA Bill Id:AB 2658

Author:(Calderon) – As Amended Ver:April 5, 2018

As Proposed to be Amended

SUBJECT: Electronic records: blockchain technology: working group

KEY ISSUES:

1. SHOULD A DEFINITION OF BLOCKCHAIN BE ADDED TO CALIFORNIA LAW?
2. SHOULD THE SECRETARY OF THE GOVERNMENT OPERATIONS AGENCY CONVENE A BLOCKCHAIN WORKING GROUP TO DEVELOP RECOMMENDATIONS TO THE LEGISLATURE FOR THE IMPLEMENTATION OF BLOCKCHAIN TECHNOLOGY IN CALIFORNIA?

SYNOPSIS

This bill seeks to address the growing use of blockchain technology by the private and public sectors across California, and to ensure that blockchain can be deployed in an efficient and legally sound manner. Blockchain provides a secure means of recording transaction records and other data by using computer algorithms and unchangeable time stamps to verify recorded transactions and store information across a distributed network of computers. Thanks to the distributed storage of data, blockchain purports to be significantly more secure against hacking, and other means of data theft, than the computer servers or cloud-based systems that have historically been utilized to save large quantities of data. Despite the potentially large improvements in the security of information technology systems, the diffuse nature of blockchain poses potentially significant legal issues, including the questions surrounding validity of contracts electronically signed using blockchain and the choice of laws applicable to information stored across several jurisdictions. These challenges may impact the implementation and enforcement of transactions and agreements made using blockchain technology.

To ensure that all of the risks and benefits of blockchain technology are fully appreciated, studied, and managed, as proposed to be amended, this bill would create a blockchain working group to be appointed by the Secretary of the Government Operations Agency. The working group would consist of a broad group of participants from technology industry, and business; courts and the legal profession; consumer and privacy organizations; and state officials. The group would report to the Legislature on potential changes to existing law that would be prudent to ensure the efficient and legally valid deployment of blockchain technology across the public and private sectors. Additionally, as proposed to be amended, the bill provides a definition of blockchain. This bill is supported by a coalition of technology, financial, and other related business organizations who tout the information security benefits of blockchain. Although several groups expressed concerns with the definition of blockchain in the bill as in print, as proposed to be amended, the bill has no known opposition. The bill previously passed the Committee on Privacy & Consumer Protection by a vote of 10-0.

SUMMARY: Defines blockchain technology and establishes a blockchain working group, appointed by the Secretary of the Government Operations Agency to evaluate the use of blockchain technology by California’s businesses and state government. Specifically, this bill:

1. Defines “blockchain” as an electronic record of transactions or other data in which the record or data is:
   1. Uniformly ordered;
   2. Redundantly maintained or processed by one or more computers or other machines to guarantee the consistency or non-repudiation of the record or data; and
   3. Is validated by the use of cryptography.
2. Creates a blockchain working group and requires the Secretary of the California Government Operations Agency to appoint, by July 1, 2019:
   1. Three appointees from the technology industry;
   2. Three appointees from non-technology related industries;
   3. Three appointees with a background in law chosen in consultation with the Judicial Council of California;
   4. Two appointees representing privacy organizations;
   5. Two appointees representing consumer organizations;
   6. The State Chief Information Officer, or their designee;
   7. The Director of Finance, or their designee;
   8. The Chief Information officer of three other state agencies, departments or commissions; and
   9. One Member of the Senate, appointed by the Senate Committee on Rules, and one Member of the Assembly, appointed by the Speaker of the Assembly.
3. Requires the blockchain working group to evaluate the following:
   1. The uses of blockchain in state government and California-based businesses;
   2. The risks, including privacy risks, associated with the use of blockchain by state government and California-based businesses;
   3. The benefits associated with the use of blockchain by state government and California-based businesses;
   4. The legal implications associated with the use of blockchain by state government and California-based businesses; and
   5. The best practices for enabling blockchain technology to benefit the State of California, California-based businesses, and California residents.
4. Requires the blockchain working group to take input from a broad range of stakeholders with a diverse range of interests affected by state policies governing emerging technologies, privacy, business, the courts, the legal community, and state government.
5. Requires, on or before July 1, 2020, the blockchain working group to report to the Legislature on the potential uses, risks, and benefits of the use of blockchain technology by state government and California-based businesses, including potential reforms to the definition of blockchain technology and recommendations for amendments to other code sections that may be impacted by the deployment of blockchain technology.
6. Provides that the provisions of the bill shall remain in effect until January 1, 2022, and are repealed as of that date, unless subsequent legislation is enacted.

EXISTING LAW:

1. Establishes the Uniform Electronic Transactions Act and defines the following terms:
   1. “Electronic” means relating to technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities. (Civil Code Section 1633.2 (e).)
   2. “Electronic agent” means a computer program or an electronic or other automated means used independently to initiate an action or respond to electronic records or performances in whole or in part, without review by an individual. (Civil Code Section 1633.2 (f).)
   3. “Electronic record” means a record created, generated, sent, communicated, received, or stored by electronic means. (Civil Code Section 1633.2 (g).)
   4. “Information processing system” means an electronic system for creating, generating, sending, receiving, storing, displaying, or processing information. (Civil Code Section 1633.2 (k).)
   5. “Record” means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form. (Civil Code Section 1633.2 (m).)
2. Provides that an electronic record or electronic signature is attributable to a person if it was the act of the person, which may be shown in any manner, including a showing of the efficacy of any security procedure applied to determine the person to which the electronic record or electronic signature was attributable. Provides that the effect of an electronic record or electronic signature attributed to a person is determined from the context and surrounding circumstances at the time of its creation, execution, or adoption, including the parties’ agreement, if any, and otherwise as provided by law. (Civil Code Section 1633.9.)
3. Provides that evidence of a writing made as a record of an act, condition, or event is not made inadmissible by the hearsay rule when offered to prove the act, condition, or event if:
   1. The writing was made in the regular course of a business;
   2. The writing was made at or near the time of the act, condition, or event;
   3. The custodian or other qualified witness testifies to its identity and the mode of its preparation; and
   4. The sources of information and method and time of preparation were such as to indicate its trustworthiness. (Evidence Code Section 1271.)
4. Provides that a printed representation of computer information or a computer program is presumed to be an accurate representation of the computer information or computer program that it purports to represent. This presumption is a presumption affecting the burden of producing evidence. If a party to an action introduces evidence that a printed representation of computer information or computer program is inaccurate or unreliable, the party introducing the printed representation into evidence has the burden of proving, by a preponderance of evidence, that the printed representation is an accurate representation of the existence and content of the computer information or computer program that it purports to represent. (Evidence Code Section 1552.)
5. Establishes the Department of Technology within the Government Operations Agency. (Government Code Section 11545 (a)(1).)
6. Provides that the Director of the Department of Technology shall be the State Chief Information Officer. (Government Code Section (a)(3).)
7. Provides that the Department of Technology shall do the following:
   1. Advise the Governor on the strategic management and direction of the state’s information technology resources;
   2. Establish and enforce state information technology strategic plans, policies, standards, and enterprise architecture, including the periodic review and maintenance of the information technology sections of the State Administrative Manual and procurement procedures related to information technology projects, except for sections on information technology fiscal policy;
   3. Minimize overlap, redundancy, and cost in state information technology operations by promoting the efficient and effective use of information technology;
   4. Provide technology direction to agency and department chief information officers to ensure the integration of statewide technology initiatives, compliance with information technology policies and standards, and the promotion of the alignment and effective management of information technology services;
   5. Work to improve organizational maturity and capacity in the effective management of information technology;
   6. Establish performance management and improvement processes to ensure state information technology systems and services are efficient and effective;
   7. Approve, suspend, terminate, and reinstate information technology projects; and
   8. Perform enterprise information technology functions and services, including, but not limited to, implementing Geographic Information Systems (GIS), shared services, applications, and program and project management activities in partnership with the owning agency or department. (Government Code Section 11545 (b).)
8. Requires the Director of Technology to produce an annual information technology strategic plan that shall guide the acquisition, management, and use of information technology and provide the plan to the joint legislative budget committee by January 15 of every year. (Government Code Section 11545 (c).)

FISCAL EFFECT: As currently in print this bill is keyed non-fiscal.

COMMENTS: The acceptance of blockchain technology in business and government is growing rapidly. Ensuring that California remains a global leader in the development and deployment of emerging technologies, as proposed to be amended, this bill would define blockchain and establish a working group to evaluate the risks, benefits, legal implications, and best practices associated with the use of blockchain technology in business and state government. In support of this bill, the author states:

California has long been a global leader in fostering innovation and new technology. In order to continue in this role California must create an environment in which entrepreneurs and innovators are encouraged to develop new products, applications, and business models with blockchain technology. Blockchain technology has near limitless applications and has the opportunity to upend society and our economy like the internet did in the 90s and 00s. It is in California’s best interest to encourage innovation with and investment in blockchain technology. Doing so will benefit consumers, result in economic growth, and maintain California’s role as a leader in technology and innovation.

So…what’s a blockchain? Defining blockchain technology in lay terms is no easy task. Most technology experts utilize terms that include; “distributed ledger,” “tokenized,” “immutable,” and “crypto economics.” To many lay persons and legal experts, these terms are difficult to understand on their own, much less together in a definition. At its simplest, blockchain is an, electronic ledger used to record transactions that, unlike a paper ledger, is maintained across a network of computers, or nodes. In order for a transaction to be deemed valid, all of the individual nodes within a network must confirm the transaction. When a series of transactions are validated, they are then grouped together into a block. Blocks, generally, consist of four pieces of information; a hash (a digital link to the prior block), a summary of the included transactions, a time stamp, and a proof of work that is used to secure the block. Once a block is compiled, the nodes verify the block using a complex algorithm and then link, or chain, one block to its predecessor, hence the name blockchain. The block is then redistributed to the various nodes in the network.

In order to unlock records once they are in a blockchain, a user would need a key, which requires cryptography to verify the user. While a key can quickly reach a record, by distributing the transaction information across a series of nodes, blockchain eliminates the centralized data storage systems that can be breached easily, thus exposing records to hacking. Furthermore, because blocks contain time stamps, and are placed into the chain chronologically, any attempt to access or modify records is easily detected by examining the timestamp.

In essence, blockchain is a large, secure spreadsheet or ledger in which the data is saved across several locations such that without a proper password, created using cryptography, one cannot access the data. Many business and governmental entities view the added security provided by blockchain as a beneficial tool to combat the growing threat from hackers and data thieves. To the degree that blockchain will protect consumer’s personal data, while properly maintaining records, its uses in government and business are extremely promising.

Despite its data security benefits, blockchain raises significant legal considerations. The primary security benefit of blockchain is its ability to spread data storage across distributed network of computers, and thus limit the ability for a hacker to gain access to a centralized database. However, it is the distributed nature of a blockchain that poses significant legal issues. Most notably, the nodes that make up the blockchain network may be spread across numerous legal jurisdictions, with potentially conflicting legal standards for contracts, data management, banking, and other issues related to business transactions. Furthermore, should it become necessary, it’s unclear how a court would be able to assert jurisdiction over all of the records within a blockchain if the node storing data relevant to a case in one jurisdiction is physically located in another. Additionally, blockchain creates potential evidentiary issues regarding original records. Because the original records are distributed across many nodes, generating a truly original copy of a record, as typically required by the Evidence Code, is difficult.

Furthermore, blockchain can enable self-authenticating smart contracts where the nodes authenticating and fully facilitate a transaction. For example, if a contract specifies that payment for services is contingent upon the completion of an event, the nodes can automatically process the payment. This raises potential liability issues should the performance of a contract not actually occur, or if a dispute arises as to the adequacy of performance. Moreover, technology experts note that it is unclear if the existing technology can stop the transaction. Without a central authority to oversee and resolve issues related to contracts, it’s unclear if blockchain can ensure compliance of valid offer and acceptance of contracts.

Blockchain also poses important questions regarding business practices. As noted, in order to access a record in the block, a party must have the key that is secured using cryptography. This may raise issues related to proprietary business practices. For example, if a bank customer seeks to move funds from an account in one bank to an account with another bank, the two banks may be required to access each other’s blockchain records. Doing so would require the two banks to divulge their key, and potentially the unique cryptography used to develop it. In most settings, it is difficult to expect that two, competing, business entities would want to share such information.

Additionally, as large companies move toward adopting blockchain technology, existing information technology security issues may remain. Several large data breaches were caused when one party was duped into turning over a password. For example, the massive theft of campaign related e-mails during the 2016 Presidential Election was the result of a person turning over password data. While blockchain’s cryptography is arguably more secure than an e-mail password, as blockchain becomes more prevalent in business, enterprising hackers are likely to try to access sensitive information by assisting unwitting employees.

This bill seeks to better guide California’s use of blockchain. Given the potential benefits of blockchain to improve transaction records and data security, California should lead the nation in developing innovative means to incorporate the technology into government and business. Nonetheless, as noted above, these benefits are not without significant legal and operational risks. Accordingly, as proposed to be amended, this bill would require the Secretary of the Government Operations Agency, which oversees the Department of Technology, to appoint a working group to study the use of blockchain technology.

The working group would bring together a diverse group of technology experts, legal experts, privacy and consumer rights advocates, business leaders, and state officials to study blockchain. Additionally, the group would receive input from a diverse group of stakeholders. The goal of the group would be to report back to the Legislature on potential modifications to state law to ensure that blockchain can be implemented in an efficient manner while preserving Californians’ rights under the law.

The record keeping in a blockchain might be standardized, but definitions in state laws are not. This bill would make California the seventh state to address issues related to blockchain in statute. Thus far, none of the other states have adopted identical definitions of a blockchain. The inter-state disagreements in the definition of blockchain is result of the goals of different statutes, with some states applying blockchain to securities law, others to electronic contracting, and yet others creating working groups similar to this bill. Additionally, the lack of uniform definitions is also the result of the complex nature of blockchain itself.

As proposed to be amended, this bill adopts the definition of blockchain recently enacted by our neighbors in Nevada. Similar to this bill, Nevada defines blockchain as, “an electronic record of transactions that is uniformly ordered, redundantly maintained or processed by one or more computers or other machines to guarantee the consistency or non-repudiation of the record or data, and is validated by the use of cryptography.” (Nevada Revised Statutes Section 719.) Highlighting the divide between existing state laws, Senate Bill 838 (Hertzberg, 2018), currently pending before the Senate Judiciary Committee, proposes to adopt the statutory definition utilized in Vermont providing that a blockchain is a, “mathematically secured, chronological, and decentralized consensus ledger or database, whether maintained via Internet interaction, peer-to-peer network, or otherwise.” (12 V.S.A. Sec. 1913 (a).)

Both bills, and the out-of-state statutes they model, provide workable definitions for blockchain. As this bill moves forward the author is pledging to work on merging the two definitions to ensure that California produces one workable definition of blockchain.

ARGUMENTS IN SUPPORT: In support of this measure technology groups including TechNet and CompTIA, as well as a coalition of companies under the California Chamber of Commerce, promote the information security benefits of blockchain. They note:

Distributed ledger technology has incredible potential to enable secure and efficient business transactions. AB 2658 will enable the development of blockchain applications.

REGISTERED SUPPORT / OPPOSITION:

Support

Association of National Advertisers

California Cable & Telecommunications Association

California Chamber of Commerce

California Credit Union League

CompTIA

Med-Legal, LLC

Microsoft

TechNet

Opposition

None on file

Analysis Prepared by: Nicholas Liedtke / JUD. / (916) 319-2334

Date of Hearing: April 3, 2018

ASSEMBLY COMMITTEE ON PRIVACY AND CONSUMER PROTECTION

Ed Chau, Chair

ABPCA Bill Id:AB 2658 (

Author:Calderon) – As Introduced Ver:February 15, 2018

SUBJECT: Electronic records: the Uniform Electronic Transactions Act: blockchain technology

SUMMARY: This bill would expand the state’s Uniform Electronic Transactions Act (UETA) definitions of “contract,” “electronic records,” and “electronic signatures,” as specified, to validate the use of blockchain technology for purposes of that Act and authorize the use of “smart contracts” in California. This bill also would generally provide that any person who uses blockchain technology to secure information that the person owns or has the right to use, for specified purposes, retains the same rights of ownership or use with respect to that information as before they secured it using blockchain technology. This bill would make other conforming changes. Specifically, this bill would:

1. Redefine for purposes of UETA:
   • “Contract” to include a smart contract.
   • “Electronic record” to include a record that is secured through blockchain technology.
   • “Electronic signature” to include a signature that is secured through blockchain technology.
2. Define for purposes of UETA:
   • “Blockchain technology” as distributed ledger technology that uses a distributed, decentralized, shared, and reciprocal ledger, that may be public or private, permissioned or permissionless, or driven by tokenized crypto economics or tokenless. The data on the ledger is protected with cryptography, is immutable, is auditable, and provides an uncensored truth.
   • “Smart contract” as an event-driven program that runs on a distributed, decentralized, shared, and replicated ledger that can take custody over, and instruct transfer of, assets on that ledger.
3. Provide that, notwithstanding any other provision, a person who, in or affecting interstate or foreign commerce, uses blockchain technology to secure information that the person owns, or has the right to use, retains the same rights of ownership or use in this state with respect to that information as before the person secured the information using blockchain technology. This would not apply to the use of blockchain technology to secure information in connection with a transaction to the extent that the terms of the transaction expressly provide for the transfer of rights of ownership or use with respect to that information.
4. Make conforming changes to cross-references to these and other UETA definitions throughout various code sections.

EXISTING LAW:

1. Generally validates, under the federal Electronic Signatures in Global and National Commerce Act (E-SIGN) law, the use of electronic signatures and electronic records in any transaction in and affecting interstate and foreign commerce, as specified. (15 U.S.C. Sec. 7001.)
2. The federal E-SIGN law does not apply to a contract or other record that is governed by:

• a statute, regulation, or other rule of law governing the creation and execution of wills, codicils, or testamentary trusts;
• a state statute, regulation, or other rule of law governing adoption, divorce, or other matters of family law; or
• the Uniform Commercial Code, as in effect in any state, as specified. (15 U.S.C. Sec. 7003(a).)

1. Further excludes, under federal E-SIGN law, the following specific transactions:

• court orders or notices, or official court documents (including briefs, pleadings, and other writings) required to be executed in connection with court proceedings;
• any notice of (A) the cancellation or termination of utility services (including water, heat, and power), (B) default, acceleration, repossession, foreclosure, or eviction, or the right to cure, under a credit agreement secured by, or a rental agreement for, a primary residence of an individual, (C) the cancellation or termination of health insurance or benefits or life insurance benefits (excluding annuities), or (D) recall of a product, or material failure of a product, that risks endangering health or safety; or
• any document required to accompany any transportation or handling of hazardous materials, pesticides, or other toxic or dangerous materials. (15 U.S.C. Sec. 7003(b).)

1. Generally authorizes, under the state’s UETA, the transaction of business, commerce, and contracts by electronic means, and establishes standards for conducting electronic transactions in this State. (Civ. Code Sec. 1633.1 et seq.) UETA applies only to a transaction between parties that have agreed to conduct the transaction by electronic means, as specified. (Civ. Code Sec. 1633.5(b).)
2. Sets forth, under UETA, certain principles governing the legal effect of conducting transactions electronically. Specifically:

• a record or signature may not be denied legal effect or enforceability solely because it is in electronic form;
• a contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation;
• if a law requires a record to be in writing, an electronic record satisfies the law; and
• if a law requires a signature, an electronic signature satisfies the law. (Civ. Code Sec. 1633.7.)

1. Provides that an electronic record or electronic signature is attributable to a person if it was the act of the person, which may be shown in any manner, including a showing of the efficacy of any security procedure applied to determine the person to which the electronic record or electronic signature was attributable. Provides that the effect of an electronic record or electronic signature attributed to a person is determined from the context and surrounding circumstances at the time of its creation, execution, or adoption, including the parties’ agreement, if any, and otherwise as provided by law. (Civ. Code Sec. 1633.9.)
2. Defines for purposes of UETA:
   • “contract” to mean the total legal obligation resulting from the parties’ agreement as affected by this title and other applicable law.
   • “electronic record” for purposes of UETA to mean a record created, generated, sent, communicated, received, or stored by electronic means. (Civ. Code Sec. 1633.2 (e); (g).)
3. Defines “electronic signature” for purposes of UETA, as well as the Levying Officer Transfer Act, California Franchise Investment Law, Corporate Securities Law, brokerage agreements, the Code of Civil Procedure, and various purposes under the Financial Code, to mean an electronic sound, symbol, or process attached to or logically associated with an electronic record and executed or adopted by a person with the intent to sign the electronic record. (Civ. Code Secs. 1633(f), 1633.2(h); Code Civ. Proc. Sec. 263.1(c), Corp. Code Secs. 31158(b)(1)(H)(2), 25620(b)(1)(H)(2); Code Civ. Proc. 17(b)(3); Fin. Code Secs. 12201(c)(1)(H)(2), 17201(c)(1)(H)(2), 22101(h)(1)(H)(2).)
4. Further includes for purposes of UETA, a “digital signature” as defined under Section 16.5 of the Government Code as a type of “electronic signature.” (Civ. Code Sec. 1633.2(h).)
5. Authorizes a specified digital signature to be used in any written communication with a public entity in which a signature is required or used. Provides that the use or acceptance of a digital signature is at the option of the parties, and that nothing in these provisions requires a public entity to use or permit the use of a “digital signature.” Defines “digital signature” for these purposes, but also specifies that a digital signature is a type of “electronic signature” as defined under UETA. (Gov. Code Sec. 16.5(a), (b), (d).) Provides that the use of a digital signature shall have the same force and effect as the use of a manual signature if and only if it embodies certain attributes, including that it is unique to the person using it, is under that person’s sole control; and is linked to data in such a manner that if the data are changed, the digital signature is invalidated. (Gov. Code Sec. 16.5(a).)

FISCAL EFFECT: None. This bill has been keyed nonfiscal by the Legislative Counsel.

COMMENTS:

1. Purpose of this bill: With blockchain technology being widely perceived to hold exciting promise and new uses due to its security features in the private industry, this bill seeks to expressly allow for the use and recognition of blockchain technology under the state’s UETA, which generally allows for commerce to be conducted electronically throughout the state, and ultimately throughout the country given the adoption of similar laws throughout the nation. To do so, this bill follows a small number of states that have enacted such laws to expand what UETA recognizes as valid “electronic records” and “electronic signatures” to encompass electronic records and signatures obtained by way of blockchain technology as well. This is an author-sponsored bill.
2. Author’s statement: As stated by the author, “[c]urrently, California defines an electronic record under the [UETA] as a ‘record created, generated, sent, communicated, received, or stored by electronic means.’ Defining ‘blockchain technology’ in statute will provide businesses and industry greater certainty such that if they decide to utilize this technology it will be recognized as an electronic record under UETA. Without knowing the legal standing of blockchain, businesses and industry might avoid innovating or utilizing blockchain as part of their business.”
3. Blockchain, generally: As society has evolved, so too has trade and society’s reliance on institutions to facilitate trade between individuals who may not know one another or even be located near one another. When consumers use “eBay,” “Amazon,” etc., they are effectively using digital marketplaces and platforms that help facilitate an exchange of value. Blockchain is a new network that allows individuals to conduct transactions, “peer-to-peer,” with fewer (or no) intermediaries (i.e., middle men, such as banks, clearing houses, payment networks). In place of those traditional intermediaries or institutions, blockchain relies on a software code run by different computers that are guaranteeing these transactions as they happen. It uses cryptography techniques to encode its transactions as they are added to the digital ledger, and the ledger of transactions is owned by a larger number of parties and verified against one another, instead of by one company (the intermediary). Notably, the ledger of transactions can be added to, but never erased from. In other words, the data that has been added to the ledger, can never be changed. It does all this though a mechanism for creating census between scattered or distributed parties that do not need to otherwise trust each other, but need to trust the mechanism by which their consensus is arrived at. It is, in so many words, a decentralized, transparent, immutable, append-only, cryptography-transmitted, digital, distributed public ledger.

In simple terms, a blockchain is a distributed ledger–that is, ‘a list of transactions that is shared among a number of computers, rather than being stored on a central server.’ Blockchain technology was originally developed in conjunction with the virtual currency Bitcoin. In the Bitcoin context, blockchain “replaces [the] trusted third party” that would otherwise be needed to ensure that a transferor’s title to virtual Bitcoin is valid–that is, to ensure that the Bitcoin has not been illegally replicated or stolen. In Bitcoin transactions, blockchain functions as “[a] database that contains the payment history of every bitcoin in circulation” and “provides proof of who owns what at any given juncture. The strength and security of the blockchain database is guaranteed by an elaborate ‘consensus mechanism” by which various computers in the system must agree to update the blockchain after any legitimate Bitcoin transfer. Through blockchain’s “mixture of mathematical subtlety and computational brute force,” computers on a peer-to-peer network alert one another to shoddy transactions and respond to legitimate transactions by updating the blockchain permanently. Because legitimate transactions are irreversibly recorded, illegitimate transactions can be spotted and rooted out. (Svikhart, Blockchain’s Biggest Hurdle (Nov. 2017) <https://www.stanfordlawreview.org/online/blockchains-big-hurdle/> [as of Mar. 21, 2018] (internal citations omitted) (hereinafter “Svikhart”).)

1. Other states: In 2015, Vermont became the first state to address blockchain in legislation when it directed its Attorney General, Department of Financial Regulation, and Secretary of State to report to its General Assembly on the opportunities and risks of creating a presumption of validity for electronic facts and records that employ blockchain technology. Vermont’s study found, among other things, that:
   • A valid blockchain is a reliable way of confirming the party submitting a record to the blockchain, the time and date of its submission, and the contents of the record at the time of submission;
   • A blockchain is an electronic ledger (register) of digital records, events, or transactions that are represented in condensed form known as a hash (digital security feature), authenticated, and maintained through a “distributed” or “shared” network of participants using a group consensus protocol (multiple users).
   • At present, the costs and challenges associated with the use of blockchain technology for Vermont’s public recordkeeping outweigh the identifiable benefits.
   • Providing legal recognition of blockchain technology may create a “first mover” advantage with the potential to bring economic activity surrounding the development of blockchain technology to Vermont, but this potential is difficult to quantify and challenging to capture due to the nature of the technology.

Subsequently, in 2016, the Vermont General Assembly created the evidentiary standards to determine the authenticity of records using blockchain technology within the state’s rules of evidence. The following year, in 2017, four states–Arizona, Delaware, Illinois and Nevada–enacted or adopted legislation related to blockchain. Arizona enacted two bills, the first of which established guidelines for electronic signatures and records using blockchain technology under its version of UETA, similar to this bill. Likewise, Nevada enacted legislation recognizing blockchain technology as a type of electronic record for the purposes of its UETA, and further prohibited local governments from taxing or restricting the use of blockchain. (See National Conference of State Legislatures, LegisBrief, How Blockchain Works (Nov. 2017) <http://www.ncsl.org/documents/legisbriefs/2017/lb_2544.pdf> [as of Mar. 22, 2018]; see also State of Vermont, Blockchain Technology: Opportunities and Risks (Jan. 2016) p. 3 (hereinafter “Vermont Study”).)

Currently, New York’s Legislature is considering AB 8780, a bill that is substantially similar to this bill and the Arizona law.

1. Adoption of UETA to recognize certain contracts even where electronic records or signatures are used in their formation: In 1999, based on the model law proposed by the National Conference of Commissioners on Uniform State Laws to set rules by which electronic commerce may be conducted across the country, California enacted UETA into state law. (SB 820 (Sher, Ch. 428, Stats. 1999).) One of the critical motivators for enacting a law validating electronic records was the Statute of Frauds, which requires that certain contracts be in writing. In California, the Statute of Frauds is codified at Section 1624 of the Civil Code, which expressly states that certain contracts are invalid (i.e., unenforceable) unless they, or some note or memorandum thereof, are in writing and subscribed (signed) by the party to be charged or by the party’s agent. Such contracts include, for example: an agreement for the sale of real property, or of an interest therein; or specified contracts, promises, undertakings, or commitments to loan money or to grant or extend credit, in an amount greater than $100,000; and contracts that cannot be completed in a year, among others.

Today, California’s UETA provides that a record or signature may not be denied legal effect or enforceability solely because it is in electronic form, that a contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation, and that an electronic record or signature satisfies a requirement in the law that a record be in writing or a signature be affixed or if a law provides consequences if there is no record or signature. Collectively, these provisions ensure that electronic records and signatures carry the same legal authority as physical documents and signatures, recognizing that consent can be conveyed by electronic means. This act, however, does not apply to all contracts. For example, expressly excluded from UETA are transactions that are subject to a law governing the creation and execution of wills, codicils, or testamentary trusts; specified transactions in the Uniform Commercial Code that were specifically drafted in consideration of electronic records, including those governing negotiable instruments, bank deposits and collections, letters of credit, investment securities, secured transactions, and fund transfers; and transactions subject to a law that requires that specifically identifiable text or disclosures in a record or a portion of a record be separately signed, including initialed, from the record (such as real estate transactions).

This bill would now expand UETA’s contract provisions to also cover what the bill terms as a “smart contract.” For these purposes, a “smart contract” would be defined as an event-driven program that runs on a distributed, decentralized, shared, and replicated ledger that can take custody over, and instruct transfer of, assets on that ledger. Staff notes that the definition of smart contract appears to intentionally use similar terminology as that used with blockchain technology. This bill would also expand UETA’s definitions of “electronic record” and “electronic signature” to include a record or a signature that is secured through blockchain technology, as specified under this bill. As a result, under the terms of UETA, this bill would ensure that a neither a contract, nor a smart contract, may be denied legal effect or enforceability solely because an electronic record or signature was used in its formation, including those records or signatures obtained by way of blockchain technologies.

To be clear, a smart contract is not simply a paper contract in electronic form. It is an agreement in digital form that is self-executing and self-enforcing as well. In other words, smart contracts contain not only all the terms, but they execute all envisaged actions automatically. So for example, a contract requiring payment if certain conditions unfold (say, a bet on whether particular team wins the Super Bowl at the end of the season, or requiring a royalty be paid on a particular work of art), would result in that payment automatically if and when those conditions are met—the party is not required to approach the other party and seek out payment to fulfill the contract. A term first coined by a computer scientist in the mid-1990s, “smart contracts” current implementations appear to be based on blockchains and allow for the performance of credible transactions without third parties (such as lawyers) in a trackable and irreversible manner. (See Comment 5 for more on “blockchain,” more generally.) According to one website that covers technology, finance, blockchain and markets - cryptocurrency news, the work can be compared to that of a vending machine, where they execute the instructions given to them. To create the smart contract one would need the subject of the contract, contract terms, digital signatures (using private keys) and a decentralized platform where the smart contract is deployed to the blockchain of this platform and distributed to the nodes of this platform.

This can arguably provide security, economy, speed, and standardization, but can also have issues in terms of human error (if the smart contract is in the blockchain, it cannot be changed), have implementation cost, and currently have uncertain legal status given that they are not expressly recognized by any legislative framework. While blockchain is alluring to many given its security features, the possible human error issue when it comes to smart contracts is one that has already proven concerning. (See Tar, Cointelegraph, Smart Contracts, Explained (Oct. 31, 2017) <https://cointelegraph.com/explained/smart-contracts-explained> [as of Mar. 25, 2018].)  Because a blockchain-based smart contract is visible to all users of said blockchain, this leads to a situation where bugs, including security holes, are visible to all yet may not be quickly fixed. At least in one instance in 2016, a smart contract “error” was exploited to the tune of $60 million. (See Aru, Cointelegraph, Expert: The DAO Was Exploited, Not Hacked, Ethereum Should Do Nothing (June 21, 2016) < https://cointelegraph.com/news/expert-the-dao-was-exploited-not-hacked-ethereum-should-do-nothing> [as of March 25, 2018].)

As a matter of public policy, the technology may be at a point where the benefits to clarifying the effect of electronic signatures and records obtained by way of blockchain technology are relatively known and outweigh risks (see comments below for more), but there is arguably a question as to whether there is sufficient security in “smart contracts” at this time to add their recognition to the state’s UETA. Once a contract is executed, or errors are exploited, it can be difficult to unravel. This issue, in contrast, does not automatically arise simply from recognizing electronic records or signatures that used blockchain technology. As such, the author has agreed to the following amendment to remove “smart contracts” and the associated definition from this bill:

Author’s amendment:

On page 3, line 25, strike “‘Contract’ includes a smart contract.”

On page 4, strike lines 38-39

On page 5, strike lines 1-2

1. Increasing use of electronic or digital signatures in California: Over the last 20 years, California has taken various steps to utilize more electronic resources within the various branches of government, beginning in 1995, when AB 1577 (Bowen, Ch. 594, Stats. 1995) was enacted to provide public entities an option to use a “digital signature” that would have the same force and effect as the use of a manual (or “wet”) signature if it met certain conditions. (See Gov. Code Sec. 16.5.)

Separately, as mentioned in Comment 3, above, in 1999, the Legislature enacted UETA into state law, regulating the electronic transmission of documents and signatures. That same year, the Legislature authorized courts to adopt local rules of court permitting electronic filing and service of documents, as specified. (SB 367 (Dunn, Ch. 514, Stats. 1999).)

Ultimately, due to the enactment of various laws over the years around the use of electronic or digital signatures, legislation was needed to bring consistency around the use of that terminology. Specifically, in 2015, AB 432 (Chang, Ch. 32, Stats. 2015) sought to bring consistency throughout the California statutes in relation to the term “electronic signature” and also provided that such an electronic signature by a court or judicial officer shall be as effective as an original signature. AB 432 did not, however, in any way affect the Government Code section first enacted in 1995 relating to “digital signatures.” As a result, some confusion remained as to how “digital signatures” compared to “electronic signatures” under UETA and the ability of public entities to use an electronic signature, as opposed to digital signature. That confusion ultimately led to the 2016 enactment of AB 2296 (Low, Ch. 144, Stats. 2016), to provide industry clarity that a “digital signature,” as defined under the Government Code, is also a type of “electronic signature” for purposes of UETA.

This bill would now, among other things, revise provisions of the state’s UETA that define “electronic record” and “electronic signature” to include an electronic record or a signature that is secured through what is known as “blockchain technology,” in order to provide businesses and industry greater certainty that this technology it will be recognized as an electronic record under UETA if they decide to use it. As a matter of public policy, this is arguably consistent with past legislative actions to adapt to new technologies and provide clarity to industry as to the types of electronic signatures that qualify for purposes of UETA.

1. Blockchain uses: While bitcoin is commonly associated with blockchain, bitcoin is in fact just one of blockchain’s many applications. Blockchain technology “can maintain accurate chains of title to securities and other legal instruments in a reliable electronic form” and has been identified as having incredible value in its potential to record and secure an immense volume of trades and financial transactions on a perpetual basis. (Svikhart.) Blockchain’s most disruptive aspect is its ability to eliminate the need for third-party intermediaries in some transactions – in other words, removing the costly “middle men” who have policed such financial transactions or trades in the past, or been needed as guarantors, authenticators, or trusted third parties to aid in a transaction between two other willing parties. (See id.; see also Vermont Study, p. 4.)

As highlighted by a recent Forbes article, aside from its use in bitcoin, “[b]lockchain can ensure that the terms of programmable autonomous contracts, known as smart contracts, are met. It can be used for online voting to address voter fraud. It can be used to secure identity and many other situations where transparency and security is lacking.” (Moy, Forbes, Forget Bitcoin, It’s All About the Blockchain (Feb. 22, 2018) <https://www.forbes.com/sites/jamiemoy/2018/02/22/forget-bitcoin-its-all-about-the-blockchain/#40a644685f6b> [as of Mar. 21, 2018].)

What makes blockchain so attractive, at this point, is its security. “Blockchains, like Bitcoin and Ethereum, have not yet been hacked. They are considered to be very secure. It is very challenging, almost impossible, to change any transaction information once it is validated and becomes part of a block.” (Id.)  This security appears to be built into blockchain’s very structure, “where each block is linked to another block [. . .] in a time-stamped chronological order. [Thus, to] access data of the first ever created block, you have to traverse from the last created block, then the block before that, so on and so forth till you reach the first block. Each block contains elements like the version # [hash], reference of the address of the previous block, timestamp, transactional data, block size etc.” (Vaidya, Medium, Decoding the Enigma of Blockchain (Nov. 28, 2016) <https://medium.com/all-things-ledger/decoding-the-enigma-of-blockchain-e0861fcab4b7> [as of Mar. 21, 2018].) As a result, corruption or hacking of blockchain transactions are made incredibly unlikely, if not impossible given that the hacker would have to manipulate each block starting from the latest block added to the network in order to corrupt or hack any single transaction of a certain block.

As described by a blockchain report by the State of Vermont: “Because of the distributed, consensus driven nature of the blockchain it is nearly impossible for an attack to compromise the entire system. The number of nodes [i.e., computers](and attendant computing power) required to confirm an error or malicious attack would be impractical in a large blockchain like Bitcoin. Trying to forge a previously verified block would be akin to changing the shape of a brick in an ever growing stack – each subsequent brick would also need to be modified to fit with the previous one. The blockchain is resistant to compromise due to the nature of the linked blocks. However [ …] there are ways the use of this technology is vulnerable to compromise, but they are not fundamental vulnerabilities with the blockchain itself.” (Vermont Study, p. 10.)

As stated in a 2017 Harvard Business Review article, however, “[b]lockchain, the distributed ledger technology underlying bitcoin, may prove to be far more valuable than the currency it supports. But it’s only as valuable as it is secure. As we begin to put distributed ledger technology into practice, it’s important to make sure that the initial conditions we’re setting up aren’t setting us up for security issues later on.” (Berke, Harvard Business Review, How Safe are Blockchains? It Depends (Mar. 7, 2017) <https://hbr.org/2017/03/how-safe-are-blockchains-it-depends> [as of Mar. 21, 2018].) Again, given the possibility for human errors, (see Comment 3 above), adoption of blockchain should arguably still be undertaken with some caution and potentially greater study.

1. Bill’s definition of “blockchain technology” potentially requires further clarification: As indicated above, the author seeks to provide businesses and industry greater certainty that if they decide to utilize blockchain technology, it will be recognized as an electronic record under UETA. As currently drafted, the bill defines blockchain technology for these purposes as “distributed ledger technology that uses a distributed, decentralized, shared, and reciprocal ledger, that may be public or private, permissioned or permissionless, or driven by tokenized crypto economics or tokenless. The data on the ledger is protected with cryptography, is immutable, is auditable, and provides an uncensored truth.”

On the one hand, this definition tracks the definition used in at least one other state, Arizona that has enacted a similar law to their state versions of UETA. (A.R.S. Sec. 44-7061(E).) On the other hand, it is not clear that this definition provides the best direction for users and the courts. Staff notes that, in contrast to this definition, Nevada recently amended its state UETA statute to more generally define blockchain as “an electronic record of transactions or other data which is (1) uniformly ordered; (2) redundantly maintained or processed by one or more computers or machines to guarantee the consistency or nonrepudiation of the recorded transactions or other data; and (3) validated by the use of cryptography.” (2017 Nev. Stat. 391.) Separately, a recent Vermont statute defined the term for purposes of its Rules of Evidence to mean “a mathematically secured, chronological, and decentralized consensus ledger or database, whether maintained via Internet interaction, peer-to-peer network, or otherwise.” (12 V.S.A. Sec. 1913(a).)

While there are no formal letters of opposition or concern on file, the author has indicated to Committee staff that it has received some concerns about the definition of “blockchain technology,” as well as questions about the need for the bill, noting that the definition of “electronic record” likely encompasses blockchain technology. As a matter of public policy, it is important that the final definition strive to be as clear, straightforward, unambiguous, accurate, and intelligible as possible for statutory interpretation purposes. Many of the terms used in the definition currently, arguably require some further definition for the average individual, and more than likely, the courts.

At this time, the author commits to continuing discussions with stakeholders as the bill moves through the legislative process to work on possible amendments to this definition, but also notes that he has introduced this bill “to start a conversation about the proper role for the state in encouraging innovation with blockchain technology.” Staff notes that, if approved by this Committee, this bill will be heard in the Assembly Judiciary Committee next for further discussions.

1. Blockchain technology is still relatively untested in the government space but it may already be covered under existing law when it comes to UETA: The underlying function of UETA is to ensure that a signature or record will not be held legally ineffective because it is in electronic form. This bill now seeks to allow for parties to be able to rely on the validity of electronic signatures and records obtained by way of blockchain technology, but it may very well be that this technology is covered under UETA already. As argued in a Georgetown Law Technology Review article on the subject:

[O]ne way for a party to express agreement with the terms of a blockchain-based smart contract is to provide its digital signature utilizing a cryptographic key. This signature, expressed using the blockchain’s asymmetric key encryption, is similar to the initial digital signatures that early forms of UETA envisioned. UETA defined “electronic signature” as “an electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record.” An electronic signature therefore has two components: the signature, in whatever form it is, and the intent to sign.

Courts have interpreted the requirement for the signature and the intent to sign broadly. For example, courts have found that typing “Thanks” plus the sender’s name in an email constitutes a signature. The court in that case noted that the plaintiff manually typed her name, as opposed to having a default signature automatically attached by her email program. This is a low bar to set to allow UETA to enforce the contract.

By contrast, parties using blockchain-based smart contracts would negotiate terms and then each party would need to use their cryptographic key, unique to them, to sign off on the contract. The cryptographic key would be either a “symbol or process attached to or logically associated with a record,” and the deliberate signing off would demonstrate each party’s “intent to sign the record.” Regardless of the specific contract terms, the fact that a blockchain-based smart contract can require the participants to sign the contract through the cryptographic key should assure courts that a blockchain-based smart contract is a legally-binding agreement under UETA and ESIGN. (Cohn, West, Parker, Smart After All: Blockchain, Smart Contracts, Parametric Insurance, and Smart Energy Grids (2017) 1 Geo.L.Tech.Rev. 273, 288-289.)

That being said, this bill would presumably remove any uncertainty on the matter, in line with the author’s stated intent.

1. Federal E-SIGN law: The issue of federal preemption under the Supremacy Clause in the U.S. Constitution is one of both express preemption (when a federal statute explicitly confirms Congress’s intention to preempt state law) and implied or “field” preemption (which can arise in two ways: (1) where the federal law is so pervasive as to imply that Congress intended to “occupy the field” in that area of law; or (2) where there is a “conflict” between federal and state law such that the two laws cannot logically co-exist or that state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress).

On June 30, 2000, the same year that California’s UETA went into effect, E-SIGN was signed into law and established legal parity between electronic records and signatures and their paper and ink counterparts. (Wittie & Winn, Electronic Records and Signatures Under the Federal E-SIGN Legislation and the UETA (2000), 56 Bus. Law 293.) E-SIGN’s main provision simply restates UETA’s major provision, such that a signature, contract, or other record cannot be denied legal force and effect solely because it is in electronic form.

While such a law might ordinarily preempt state rules to the contrary, an additional section of E-SIGN, Section 102 (15 U.S.C. Sec. 7002) expressly exempts two categories of state laws from possible preemption, one of which is the original version of UETA. As explained by the Uniform Law Commission (ULC), there is little question that E-SIGN does not preempt uniform adoption of UETA; it is the non-uniform adoption of UETA that is more problematic. To that end, the ULC looks to Section 102(a) (2) of the E-SIGN law, which essentially states that State law may modify, limit or supersede the federal legislation provided that it meets three statutory requirements. (Fry, ULC, UETA and Preemption Article: A Preliminary Analysis of Federal and State Electronic Commerce Laws <http://www.uniformlaws.org/Narrative.aspx?title=UETA%20and%20Preemption%20Article> [as of Mar. 22, 2018].)

Those Section 102(a)(2) requirements set forth that: (1) any alternative procedures or requirements must consistent with the ESIGN law; (2) the alternative procedures must not require, or give greater legal status or effect to use or application of a specific technology or technological specification; and (3) any such state law must, if enacted after enactment of E-SIGN, specifically refer to the federal legislation.

While it is possible to interpret E-SIGN to preempt non-uniform provisions in two other ways—namely, (1) that non-uniform provisions are ineffective and E-SIGN governs; or (2) that if the state statute has any non-uniform provisions, the entire statute becomes ineffective, and E-SIGN governs)—the ULC article advocates that this Section 102(a)(2) language provides the best interpretation of how to resolve preemption issues when it comes to non-uniform provisions:

It is the most consistent with existing preemption doctrine, which would enforce State law to the extent not inconsistent with the federal statute except in cases where Congress clearly has indicated an intention to block all state legislation. Given the explicit reference to the uniform version of UETA in subsection (a)(1), it seems inappropriate to require judicial review of identical provisions because a State legislature has chosen to include some non-uniform language. In the 18 State enactments of UETA which have preceded the approval of E-Sign by Congress, non-uniform language ranges from changes made to conform to legislative drafting protocols to the addition of provisions designed to insure that consumers have assented knowingly to deal electronically. Certainly changes to conform to legislative drafting protocols should not result in the entire packet of legislation being preempted. On the other hand, provisions on consumer assent represent substantive additions to UETA which could be inconsistent with the consumer provisions of E-Sign. These should be evaluated under subsection (a)(2). In addition, there is nothing in [Sec.]102 to suggest that an enactment of UETA which does not satisfy in full detail subsection (1) is ineligible for consideration under the second provision. Assuming that the intention of Congress was to defer to State enactments of UETA, rendering such enactments ineffective if even mechanical changes are made, such as those which conform UETA to state drafting protocols, does nothing to further the goals of the legislation. (Id.)

With that in mind, and applying the three part test from Section 102(a)(2) above, nothing in this bill appears to be in direct conflict with the federal E-SIGN law, as that law is silent on the application of blockchain technologies. As it stands, E-SIGN currently is silent on the issue of whether signatures or records procured by way of blockchain technologies constitute electronic signatures or records for purposes of E-SIGN. Given that E-SIGN does not appear to mention or contemplate blockchain technology, it would be difficult to argue that the federal law expressly preempts this bill, or that this bill is inconsistent with E-SIGN in violation of the first prong of the test above. As to the second prong, that the alternative procedures not require, or give greater legal status or effect to use or application of a specific technology or technological specification, this bill does not give any greater legal status or effect to this “specific” blockchain technology than other digital technologies that meet the electronic signature or electronic records requirements. It merely gives it the same status. The one potential issue, here, appears to be that the bill does not make any specific reference to the federal legislation, and any statute that is designed to operate despite E-SIGN must refer to it specifically if enacted or adopted subsequent to E-SIGN. As such, the author may wish to consider an amendment that would make express reference to that law.

1. Prior legislation: AB 2296 (Low, Ch. 144, Stats. 2016) See Comment 4.

AB 432 (Chang, Ch. 32, Stats. 2015) See Comment 4.

SB 367 (Dunn, Ch. 514, Stats. 1999) See Comment 3 and 4.

AB 1577 (Bowen, Ch. 594, Stats. 1995) See Comment 4.

1. Double-referral: This bill is double-referred to the Assembly Judiciary Committee, where it will be heard if passed by this Committee.

REGISTERED SUPPORT / OPPOSITION:

Support

Association of National Advertisers

California Chamber of Commerce

CompTIA

TechNet

Opposition

None on file

Analysis Prepared by: Ronak Daylami / P. & C.P. / (916) 319-2200