[L]awmakers in the Vermont House are working on a bill that could pave the way for businesses and other organizations in the state to use blockchain technology.
Blockchain is widely known as the technology underlying cryptocurrencies, such as Bitcoin.
But tech experts and politicians see opportunity to apply blockchain to a variety of other industries. They also recognize a possible opening in Vermont to boost economic development by making it easier for businesses to harness the technology.
Blockchain is a system of recordkeeping through which transactions and data are recorded in a chain of “blocks” across a network of computers.
The distributed “ledger” of transactions is often public and secured using cryptography.
Through the system, many computers, or nodes, have to work to verify that the data being recorded is unchanged.
And because of its decentralized nature, experts say the information on these ledgers is hard — or impossible — to hack or change, unlike records kept in a single database.
“All a blockchain really is, is a really good way of keeping a record,” said Professor Oliver Goodenough, co-director of the Vermont Law School’s Center for Legal Innovation.
The Center for Legal Innovation worked on a December 2017 report that recommended the Legislature act to inspire blockchain and financial technology innovation in Vermont.
A bill passed by the Senate last month, S.269, takes up that charge and is now being broadened in the House Committee on Economic Development.
Sen. Alison Clarkson, D-Windsor, its sponsor, pointed out that Vermont’s thriving captive insurance industry also provides inspiration for the bill.
For years, Vermont has worked to pass laws and regulations that clear a path for captive insurance companies to settle and do business in Vermont. This year, Gov. Phil Scott signed into law the latest legislation aimed at growing the industry.
Captive insurers, also known as “captives,” are small insurance companies set up and owned by larger companies. As of this year, there are more than 1,100 of them in the state.
“The financial success of captive insurance makes us all want to look at financial technologies as an opportunity for Vermont,” Clarkson said in an interview last week.
“These are other areas that Vermonters can really earn terrific salaries doing exciting cutting edge stuff,” she said, “and making Vermont one of the innovative centers for business technologies.”
The House committee’s draft of S.269 would allow companies that use blockchain technology “for a material portion of its business activities” to form blockchain-based limited liability companies.
“The proposition was, let’s have a structure that would be available to recognize … and give legal regularization to the structures of blockchain,” Goodenough said of the provision.
“The hope would be that by doing that, we would become an attractive place for blockchain,” he said. “And that would both encourage the domestic industry and would encourage others to come to us.”
The bill as originally introduced in the Senate would have only allowed digital currency companies to form specialized LLCs. Cryptocurrencies typically rely on blockchain technology to verify their transactions.
But seeing that blockchain has a much wider array of possible applications, lawmakers decided to broaden the LLC provision.
As drafted, the bill would also instruct the Department of Financial Regulation to look into how the technology could be used in the banking and insurance industries and consider “any necessary regulatory changes in Vermont.”
Companies across the world are working with blockchain to do things such as automating real estate contracts and tracking global food supply chains.
And blockchain has already found a way to make itself useful in one of Vermont’s municipal governments.
In January, Propy Inc., a blockchain startup based in Palo Alto, California, partnered with the South Burlington City Clerk’s office on a pilot program to record property transactions using blockchain technology.
Vermont passed a law in 2016 that made blockchain records admissible in court.
The House Committee on Economic Development’s chairman, Bill Botzow, D-Pownal, said Thursday that the committee’s is draft of S.269 isn’t set in stone.
In continuing to work on the proposal this session, Botzow said the panel will be balancing the interests of economic development with consumer protection.
There are still questions to be considered about potential risks involved with the technology, he said.
“Since this is an immutable record, what if something gets thrown into that record and you can’t get it out and it shouldn’t be there: it’s wrong, it’s hurtful and damaging,” he said. “How do you protect against that?”
However, while lawmakers need to move ahead with the proposal carefully, he said time may be of the essence as many other states are also considering blockchain legislation.
This year, Wyoming already passed a sweeping bill that approved the use of blockchain records for corporations and exempted cryptocurrencies from its money transmission laws, according to Bitcoin Magazine.
Jeremy Hansen, an associate professor of computer science at Norwich University, said another important provision in the bill would create something called a “personal information trust company.”
This part of the bill would design a legal structure for companies who have access to consumers’ personal information and owe the duty of managing and protecting the data to consumers.
Goodenough, who proposed the idea in the Center for Innovation’s report, said the provision is aimed at encouraging companies in the world of data to be consumer advocates instead of “making the most money they can” from personal information.
“This is a great idea,” Hansen said. “Companies that are going to take responsibility for private data should be required to have a fiduciary duty toward that data.”
Hansen and Goodenough said they weren’t aware of any companies in the U.S. that already have this relationship with consumers.
“The point is to establish the legal principle for these companies … and then be open to what is the marketplace going to throw up for that,” Goodenough said.
