Arizona Authorizes Smart Contracts on a Blockchain

Last week, Arizona Governor Doug Ducey signed into law HB 2417 that amends Arizona ar132831354439152law to provide that signatures secured through blockchain are valid electronic signatures and that smart contracts are legal, enforceable contracts under Arizona law.  Arizona’s House and Senate approved HB 2417 bill on a nearly unanimous basis.  Arizona joins a growing number of states to incorporate blockchain-based technology as a part of recognized legal commerce.

What is Blockchain?

Blockchain is the distributed ledger technology at the heart of digital cryptocurrencies like bitcoin, but it also has the potential to transform and re-imagine various industries outside of banking, including healthcare, supply chain management, and even certain government services.

The Arizona statute defines blockchain technology as: “distributed ledger technology that uses a distributed, decentralized, shared and replicated ledger, which may be public or private, permissioned or permissionless, or driven by tokenized crypto economics or tokenless.  The data on the ledger is protected with cryptography, is immutable and auditable and provides an uncensored truth.”

Blockchains are built on a ledger of accounts. A ledger is a list that tracks asset ownership and transactions over time.  Corporate balance sheets, property registries and medical records all rely on a form of ledgers.

What is unique about a blockchain ledger is that it is distributed rather than centralized. In a blockchain, each participant – called nodes – maintains an identical copy of the ledger. When a transaction – or block – is added or changed, all the data from that block is represented by a cryptographic set of random numbers and letters called a hash. The same hash will always result from the same data, but modifying the data by even one bit will completely change the hash.  These transaction blocks are verified by super-computers called miners through a process called consensus, which leads to a verified, immutable chain of blocks or blockchain.  This gives the blockchain significant security benefits and makes cyber attacks on the blockchain difficult.  However, like anything of value, thieves have targeted security flaws at cryptocurrency exchanges that allow users to exchange digital currency for standard currency, including a reported $68 million theft of 120,000 bitcoins from a Hong Kong financial exchange last summer.

Implications of Smart Contracts

Smart contracts are essentially computer code written onto the blockchain that facilitate, verify, or enforce the negotiation or performance of a contract, which essentially makes these smart contracts partially or fully self-executing, self-enforcing, or both.

Although Arizona now authorizes smart contracts, many of its neighbors do not.  Both Federal and State governments will need to do more to explain how smart contracts will be enforced across different jurisdictions. In addition, the process of translating current agreements into smart contracts composed of software code will require a wholesale, different relationship between lawyers, their clients, and computer programmers. Both lawyers and judges will need to develop an expertise in understanding the smart contract’s code and in the underlying blockchain technology.  Stay tuned for further developments.

This entry was posted in Arizona, Blockchain, Government Regulations.

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