Blockchain and U.S. state governments: An initial assessment

Blockchain is no longer just a tool to mine cryptocurrencies or manage databases. Now U.S. state governments have recognized the technology’s potential for the delivery of public services, and are at various stages of implementation. For blockchain to emerge as the technological imperative for public services, states will have to change existing regulations. They must address concerns about scalability,  the difficulty of removing and editing data once uploaded, and investment in the new technology.

Blockchain’s appeal

The defining characteristic of a blockchain is its decentralized verification system. Once a transaction is committed to the blockchain, the record cannot be easily reverted by a single stakeholder, regardless of their social, economic, and political power. Second-generation blockchains such as Ethereum have also introduced a feature called “smart contracts”—software code stored on the blockchain that will execute a transaction automatically when certain conditions are met.

For many blockchain enthusiasts, one of the most promising aspects is the “trustless” nature of a blockchain – no need for a trusted third party such as a bank, credit card company, or real estate title company in the transfer of assets from one party to another. Most recently, in the 2018 Joint Economic Report submitted by the Joint Economic Committee of the US Congress provides several recommendations to policymakers, regulators, and entrepreneurs regarding applications of the blockchain technology.

State blockchain initiatives

Not surprisingly, states across the US have shown interests in leveraging blockchain technology to stimulate local economies and improve various aspects of public service. For example, the state of Delaware announced in 2016 the Delaware Blockchain Initiative, a comprehensive program intended to spur adoption and development of blockchain and smart contract technologies in both private and public sectors in the state. Then Governor Jack Markell noted that “Smart contracts offer a powerful and innovative way to streamline cumbersome back-office procedures, lower transactional costs for consumers and businesses, and manage and reduce risk,” and suggested that the state will “lead the way in promoting blockchain technology and its growing role in digital commerce.” As Delaware hosts over 60 percent of Fortune 500 companies and numerous startups, it was widely considered a major development at the state level.

In 2017, the state of Illinois announced the Illinois Blockchain Initiative, which calls for a consortium of state and county agencies to “collaborate to explore innovations presented by Blockchain and distributed ledger technology”. Similar to Delaware, the state of Illinois aims to utilize blockchain and distributed ledger technologies to “transform the delivery of public and private services, redefine the relationship between government and the citizen in terms of data sharing, transparency and trust, and make a leading contribution to the State’s digital transformation.” While some have called for caution in pursuing such broad-stroke initiatives due to the highly disruptive nature of the technology, some states have started to explore the use of blockchain in specific applications in government functions. West Virginia, for example, will pilot test a blockchain-based platform for mobile voting in the upcoming 2018 primary elections.

Promotion and Regulation

As part of an ongoing research on blockchain technology and state governments, we found that the vast majority of US states have taken at least some form of regulatory stance concerning cryptocurrencies and blockchain technology. However, many state legislatures have only introduced or passed regulations to clarify cryptocurrency exchange vis-à-vis existing money transmission laws. There was a clear wave of over 20 states enacting cryptocurrency related regulations starting in 2014. Around the same time, government officials from over ten states (e.g. California, New Mexico) issued public warnings about investing in cryptocurrencies.

In the past two years, another wave of states started to shift attention to blockchain technology and explore the potential roles of the technology in public and private services. Some of these states took a more cautionary approach. Colorado, for example, saw a bipartisan bill introduced recently to promote the use of blockchain specifically for government record keeping. A few other states have sought initiatives with broader impact on the state economy. Several bills favorable to the blockchain technology are also processing through the Wyoming state legislature. One particular bill, SB 111, has passed both legislatures in Q1 2018. It would exempt cryptocurrencies from state property taxes, potentially making Wyoming the friendliest state to investors of crypto assets.

Based on these preliminary findings, we classify the states according to their levels of engagement with the blockchain technology into the following categories:

Unaware: State that have taken no actions – states for which we were not able to find any relevant information through publicly available sources (e.g., Arkansas, South Dakota), although there are substantial activities within private industries and academia in some of these states

Reactionary: States that have taken a negative stand against cryptocurrencies or flagged them as potentially risky (e.g., Indiana, Iowa, Texas).

Appreciative: States that have made initial attempts to pass bills concerning cryptocurrencies without any successes (e.g., North Dakota).

Organized: States that have succeeded in passing some legislation in this regard (e.g., Washington, New Hampshire).

Active Engagement: Seven states have gone beyond cryptocurrencies and examined the governmental use of blockchain, either as isolated applications in specific government functions, or as integration across different government functions. Vermont, for example, recognizes data stored on a blockchain as admissible in the court system.

Recognizing Innovation Potential: States that envision a broader role for blockchain in their economies. In addition to Delaware and Illinois, Arizona has introduced or passed regulations ranging from making signatures, transactions, and contracts on a blockchain legally valid to allowing residents to pay their income tax in cryptocurrencies.

As the blockchain space is constantly evolving, we would expect to see the grades given to states to evolve as well.