Will Congressional Stamp of Approval Boost Blockchain?
August 1, 2019
The Blockchain Promotion Act, a Bill Aimed at Providing a Legal Framework for Blockchain, is Picking Up Momentum in Congress
Legislation aimed at providing a legal framework for blockchain and helping the technology gain traction is picking up momentum in Congress. The bill, known as the “Blockchain Promotion Act,” has bipartisan sponsors in both the Senate and the House of Representatives.
Regulatory Uncertainty Surrounding Blockchain
In basic terms, blockchain is a distributed database that maintains a continuously-growing list of transactions. It is protected against revision by publicly-verifiable, open-source cryptographic algorithms and immune to data loss through distributed records sharing.
While blockchain gained notoriety as the backbone of the bitcoin payment system, its potential uses extend to numerous financial and commercial transactions. Currently, most electronic transaction technologies rely on centralized databases that are operated by a single organization, such as banks, clearinghouses, and other financial institutions. Proponents of blockchain technology make the case that these organizations are susceptible to corruption and fraud because they rely on human oversight to guarantee a system’s trustworthiness. The argument is that because the database has one single administrator, there is also little transparency for end-users, which can lead to business disputes.
Proponents of blockchain technology maintain that compared to a traditional, centralized database, blockchain could result in lower risk, decreased operational costs, and greater efficiency. One of the roadblocks holding back the growth of virtual currency or other blockchain applications (such as blockchain-backed equity) is the lack of uniform regulations. As blockchain becomes more mainstream, many states have adopted or are considering legislation. Because the state-level regulations often include different definitions of blockchain, the industry has raised concerns about a patchwork of inconsistent laws.
Blockchain Promotion Act
In February, Rep. Doris Matsui (D-CA),Vice-Chair of the House Energy and Commerce Communications and Technology Subcommittee, and Rep. Brett Guthrie (R-KY), both members of the House Energy and Commerce Consumer Protection and Commerce Subcommittee, and Sen. Todd Young and Sen. Ed Markey, members of the Senate Committee on Commerce, Science, and Transportation introduced the Blockchain Promotion Act. One of its goals is to provide standard definitions for terms used in the blockchain industry.
“Opportunities to deploy blockchain technology range from greatly increased transparency, efficiencies and security in supply chains to more-opportunistically managing next-generation broadband networks,” said Congresswoman Matsui. “This bipartisan, bicameral bill will bring a broad group of stakeholders together to develop a common definition of blockchain, and, perhaps even more importantly, recommend opportunities to leverage the technology to promote new innovations. I am pleased to work with Congressman Brett Guthrie and Senator Ed Markey and Senator Todd Young on this effort and look forward to ensuring our efforts maintain the pace of rapidly advancing technologies.”
The legislation requires the Secretary of Commerce to establish a working group, which would be known as the “Blockchain Working Group.” It would be comprised of representatives from federal agencies, as well as non-governmental stakeholders. Under the Blockchain Promotion Act, the representatives must include: information and communications technology manufacturers, suppliers, software providers, service providers, and vendors; subject matter experts representing industrial sectors other than the technology sector that the Secretary determines can benefit from blockchain technology; small, medium, and large businesses; individuals and institutions engaged in academic research relating to blockchain technology; nonprofit organizations and consumer advocacy groups engaged in activities relating to blockchain technology; and rural and urban stakeholders.
Once formed, the Blockchain Working Group would be tasked with submitting a report to Congress that includes:
- A recommended definition of the distributed ledger technology commonly referred to as “blockchain technology”;
- A study to be conducted by the Assistant Secretary of Commerce for Communications and Information, in coordination with the Federal Communications Commission, on the impact of blockchain technology on electromagnetic spectrum policy;
- A study that examines a range of potential applications, including non-financial applications, for blockchain technology; and
- Opportunities within Federal agencies to use blockchain technology.
Token Taxonomy Act
Separate legislation, known as the Token Taxonomy Act, would exempt certain digital assets from federal securities laws. The bill defines the term “digital token,” and expressly excludes these tokens from the definition of a security under the Securities Act of 1933 and the Securities Exchange Act of 1934. The legislation also includes a preemption provision that would override state-level regulations, such as New York’s BitLicense, which Facebook recently applied for in connection with its roll-out of Libra.
“It is time for the United States to step up and lead in blockchain technology,” said co-sponsor Congressman Darren Soto. “After months of public input, our Token Taxonomy Act and the Digital Taxonomy Act add critical definition and jurisdiction to create certainty for a strong digital asset market in the United States. This is an important first step to promoting innovation and maximizing the potential of virtual currencies for the U.S. economy, all while protecting customers and the financial well-being of investors. The strong support for this bipartisan legislation from U.S. businesses and stakeholders is a clear indication that our friendly, light-regulatory proposal will propel the United States to be at the forefront of this industry.”
A companion bill, the Digital Taxonomy Act of 2019, which was also authored by Rep. Soto, authorizes an additional $25 million in funding to prevent deceptive practices for cryptocurrency and blockchain projects. It also directs the Federal Trade Commission (FTC) to produce an annual report outlining the plan to further protect consumers and ensure the United States remains a global leader in blockchain technologies.
Hearings on the blockchain bills are not expected until the fall. We will be closely watching the debate and will provide updates as they become available. Given the existing regulatory uncertainty, we encourage businesses interested in adopting blockchain technology to work with an experienced business attorney.
If you have any questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Jeffrey Cassin, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.