As regulatory pressures grow on crypto-asset businesses in the US, the great state of Illinois has put forward a draft law which presents a teachable moment in the difficulties of drafting laws which seek to regulate technology, or which create obligations which are impossible at a technological level for blockchain businesses to meet.
Illinois Senate Bill SB1887 starts from a sensible policy perspective, seeking to protect consumers, but in attempting to do so it will likely have the effect of driving blockchain and crypto-businesses (and any hosting of miners or validators) from the state. This would protect consumers practically only in that they may be blocked from dealing with any blockchain providers at all, who will be concerned at fines and liability for asset loss which they are unable to prevent. Let's unpack it a bit more:-
The Bill permits a court, after being provided an order from the Attorney General, to order:
any appropriate blockchain transaction for digital property or for the execution of a smart contract
Digital property is defined very broadly as:
any form of property recorded on a blockchain, including, without limitation, cryptocurrency, digital tokens, nonfungible tokens, and15tokenized real-world assets.
The Bill also defines a blockchain operator broadly as:
"Blockchain operator" means a person or entity operating a full or partial node, including, without limitation, operating a blockchain mining node, mining pool, validator, validator pool, staking pool, and staking a validator.
The Bill then requires that:
A blockchain network that processes a ... transaction originating in this State ... shall process a court-ordered blockchain transaction without the need for the private key associated with the digital property or smart contract
This of course impossible as validators cannot determine if a transaction has originated in Illinois, and the private key relating to a piece of digital property or a smart contract will not be in the possession of a private key. Despite this impossibility, the Bill proposes:
a USD$5K-$10K fine per day for any "blockchain operator that has mined, validated or otherwise participated in processing a blockchain transaction...which originated in [Illinois]."
AND as an added bonus, the "blockchain operator" is also liable to a plaintiff for "damages suffered due to a violation [of the requirement to change the transaction]" which would presumably be the value of the loss suffered.
The Bill specifically blocks what would be an obvious defence, saying that the
"fact that a blockchain network has not adopted reasonable available procedures to comply with [this law]... shall not be a defense..."
The Bill also seeks to make service on blockchain operators easier, by codifying the ability for a plaintiff to serve court process by "leaving a copy" of pleadings with a miner, validator or operator.
This informs an end result that any blockchain provider could be sued by an Illinois resident who has lost (or had stolen) or has disputed possession of a digital asset, and would be fined for not doing something that is impossible. This is because validators and miners do not individually have the power to alter transactions on the blockchain, as the network would reject those changes. If a validator seeks to change transactions in certain blockchains where those changes are rejected by the network could face slashing of their staked assets as well, meaning the operators would be damned if they complied and damned if they don't. It will also encourage actions similar to the Tulip Trading case underway in the UK which is similarly seeking to hold developers liable for, and require transactions to be rewritten in the Bitcoin blockchain, in relation to lost/stolen digital assets.
Codification of this kind of liability would create a chill colder than any Illinois winder for any blockchain operators, who would all be potentially liable for failing to seize third party assets, which they are unable to do, and would face criminal or civil liability as a result. Plaintiff class action lawyers would presumably jump on this law and take on speculative matters on the hope that publicly identifiable node operators or pools (such as those operated by VCs or foundations) would settle rather than be sued.
Thanks to Drew Hinkes for his thread on Twitter pointing out, should the Bill become law:
This Bill underscores the importance of regulators being educated to understand how blockchain technology functions, so that incentives created by laws can be aligned to work with the technology, and not run counter to how blockchain systems work. Immutability and finality of transactions is one of the core benefits of blockchain systems, and a law which seeks to undermine that finality may well amount to a ban of use of the technology, which would ultimately have the opposite effect of consumer protection, as users will be forced to engage with offshore providers who may not meet standards which fit for purpose laws could establish.
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