New Jersey Governor Phil Murphy recently signed legislation establishing the Blockchain Initiative Task Force (the “Task Force”). The Task Force will work to ensure that the State of New Jersey is prepared to take advantage of the opportunities blockchain has to offer and oversee its use.
Blockchain-based digital currencies continue to grow and are gaining legitimacy. JPMorgan recently announced its plan to launch the country’s first bank-backed cryptocurrency. Facebook is also working on its own cryptocurrency, known as “Libra.” Moreover, blockchain technology has a wide range of potential uses that can be transformative for both the public and private sectors.
In basic terms, blockchain serves as a public ledger for executed transactions. Each time a transaction is completed, a new “block” representing the transaction is added to the database in a linear, chronological order.
Transactions are authorized using a mathematical formula. This technology-based verification system is revolutionary because it requires no human oversight and no centralized authority, such as a bank, to confirm the transactions that occur.
Blockchain can underpin any transaction, not just those for cryptocurrency. As financial institutions and other entities explore new ways to use blockchain, several states have adopted blockchain laws or are currently considering legislative proposals. Delaware was one of the first states in the country to adopt blockchain-friendly laws. The state authorized corporations to use the technology to maintain shareholder lists, as well as other corporate records. Delaware has also launched several pilot projects that are testing how to use blockchain to collect, record, and store corporate and government filings.
New Jersey’s Blockchain Initiative Task Force
On August 9, 2019, Gov. Phil Murphy signed Senate Bill 2297 into law, establishing the New Jersey Blockchain Initiative Task Force. As the legislation highlights, blockchain has “reached a point where the opportunities for efficiency, cost savings, and cybersecurity deserve study.” Among the potential uses, the Bill notes, “Blockchain technology is a promising way to facilitate a transition to more efficient government service delivery models and economies of scale, including facilitating safe, paperless transactions, and permanent recordkeeping nearly resistant/impervious to cyber-attacks and data destruction.” The Bill specifically highlights medical records, land records, banking, and property auctions as potential blockchain applications.
Established in the Office of Information Technology, the Task Force will study whether State, county, and municipal governments can benefit from a blockchain-based system for recordkeeping and service delivery. The Task Force must specifically address:
- Opportunities and risks associated with using blockchain and distributed ledger technology;
- Different types of blockchain uses, both public and private, and different consensus algorithms (i.e., blockchain verification systems);
- Projects and use cases currently under development in other states and nations, and how those cases could be applied in New Jersey; and
- How the Legislature can modify current State laws to support secure, paperless recordkeeping.
Within 180 days of its formation, the Task Force must issue a report to the Governor and Legislature, outlining a general description of the costs and benefits of State and local government agencies utilizing blockchain technology; recommendations concerning the feasibility of implementing blockchain technology; the best approach to finance the cost of implementation; and any draft legislation the Task Force deems appropriate to implement.
New Jersey Cracking Down on ICOs
In addition to exploring governmental uses, New Jersey is also being proactive in enforcing fraudulent initial coin offerings. As detailed in prior articles, ICOs involve the sale of virtual coins, which are created and disseminated using blockchain technology. Purchasers may use U.S. dollars or virtual currencies to purchase virtual coins or tokens.
The profits of ICOs may be used to fund the development of a digital platform, software, or other projects. In addition, investors may use the virtual tokens or coins to access the platform, use the software, or otherwise participate in the project. After they are issued, the virtual coins or tokens may also be resold to others on virtual currency exchanges or other secondary market platforms.
While they are increasingly popular, ICOs are still extremely risky investments and in some cases, may be completely fraudulent. Unlike traditional investments, cryptocurrencies are not insured or controlled by a central bank or other governmental authority. While a regulatory framework is evolving, virtual currencies are still subject to little or no regulation. As a result, defrauded ICO investors may have limited recourse.
To protect investors, state and federal regulators have been stepping up enforcement. In July, the New Jersey Bureau of Securities (Bureau) within the Division of Consumer Affairs announced that prosecutors filed a lawsuit against Pocketinns, Inc., a Princeton-based blockchain-driven online rental marketplace, and its president Sarvajnya G. Mada. The lawsuit alleges that Pocketinns and Mada offered and sold more than $400,000 of unregistered securities from New Jersey in the form of a cryptocurrency called “PINNS Tokens.” According to the Bureau, the ICO constituted a securities offering; however, the defendants failed to comply with the associated regulatory requirements.
As set forth in the Complaint, the PINNS Tokens were sold pursuant to a federal registration exemption that requires all purchasers to be verified as accredited investors who meet certain net worth or income thresholds. However, only 11 investors provided documentation that they qualified as accredited investors.
“By failing to take reasonable steps to verify that purchasers were accredited investors capable of bearing the increased risks associated with unregistered securities, the defendants violated the law and exposed investors to financial losses that could have been devastating,” Paul Rodríguez, the Acting Director of the Division of Consumer Affairs, said in a press statement. “We’re reminding investors to be extra vigilant about fully vetting what is being sold, especially before investing with cryptocurrency.”
For both investors and businesses, it is important to recognize that blockchain is ever-evolving, with respect to both its applications and the legal landscape. Before entering the market, it is always wise to consult with an experienced New Jersey securities attorney.
If you have questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Nicholas Pellegrino, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3664.