How to Regulate Blockchain's Real-Life Applications: Lessons from the California Blockchain Working Group

Abstract

How should legislators write a law regulating a brand-new technology, one that they may not yet fully understand? With the advent of blockchain and other advanced computational technologies, this generation of legislators faces more complex questions than their predecessors.

Drawing on the author’s experience as a member of California’s Blockchain Working Group, this article offers guidance to lawmakers, lawyers, and industry leaders seeking to draft effective laws regulating applications of this new technology. The article focuses on regulation of financial assets created by or facilitated by blockchains, including cryptocurrencies and other types of digital assets. Part II explains why blockchain and crypto-related laws are necessary, but are also more difficult to draft and pass than laws regulating less technical industries. Part III recommends five factors state and federal legislators should consider as they embark on drafting or amending blockchain-related laws, including policy decisions, ethical considerations, transparency, inter-jurisdictional competition, and uniformity. Part IV considers whether these factors exist in current legislative efforts by evaluating the existing federal statutory and regulatory structure. This section uses the Cryptocurrency Act of 2020, a federal bill proposed in early 2020, as a case study in legislative failure. Part V turns the lens to state legislative efforts, analyzing methods used by three states who were among the first to regulate blockchain technology in the United States: California (the “tortoise” approach), Wyoming (the “hare” approach), and New York (the “boomerang”) approach.

The result is a novel article that will do two things for its readers: (1) encourage them to be informed participants in conversations relating to federal and state regulation of blockchain applications, and (2) offer a snapshot of these regulatory processes early in the development of blockchain technology, which will prove to be useful in coming years. Blockchain technology will continue developing quickly, regardless of how governments frame regulation. Everyone—including industry players, members of the public, and governments themselves—will gain if lawmakers can strike the right balance between innovation and public protection.

Keywords: Blockchain, cryptocurrency, crypto, digital assets, central bank digital currencies, regulation, legislation, SEC, securities regulation, IRS, CFTC, California, New York, Wyoming