Section 5 part (g) of Illinois’ recently proposed Digital Property Protection and Law Enforcement Act states, “Fostering development of technologies to protect blockchain transactions and legal interests in digital property presents an economic opportunity for Illinois businesses.” Over the course of the next five pages, the bill is a mess of legally and technically shoddy rules which render blockchain either illegal or unworkable in Illinois. A brief analysis of this bill demonstrates a failure to deal with basic jurisdictional and service of process issues, as well as being technically improbable. More importantly, this analysis should serve as a warning to other legislatures that jumping head first into crypto regulation without understanding the underlying technology has the chance to create a completely unusable legal framework.
The crux of the bill says the state Attorney General can, “order any appropriate blockchain transaction for digital property or for the execution of a smart contract” to remedy a fraudulent transaction. For failure to follow the Attorney General’s direction, “the court shall assess a civil penalty between $5,000 and $10,000 . . . for each day that the blockchain network fails to comply with the order.” The enforcement order can apply to any, “blockchain operator that has mined, validated, or otherwise participated in processing a blockchain transaction on the blockchain network which originated in this State at any time after the effective date of this Act is liable.” In order to enforce the order, “a blockchain network may be served by leaving a copy of the pleading . . . with a blockchain operator who has participated in the blockchain network at any time after the effective cate of this Act.”
Two important legal issues jump out. First, Illinois’ proposed bill reaches anyone operating the Bitcoin node at any point during the time the allegedly fraudulent transaction takes place. The statute defines a “[b]lockchain operator” as, “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.” Bitcoin (and many other blockchains) works through a simultaneous validation scheme by which computers compete to solve a difficult mathematical problem. Whoever solves the problem first, broadcasts the solution which is then verified by all other Bitcoin nodes. All the transactions which took place during the competition for the solution are recorded on a new publicly viewable block, along with some key information such as the time of transaction and the wallet addresses (think of these like pseudo anonymous bank accounts). Anyone anywhere with a CPU can operate a Bitcoin node, meaning that anyone running it when a fraudulent Bitcoin transaction takes place in Illinois is within the jurisdictional scope of this bill and under part (c)(1) of Section 20 is also, “liable to the secured party for any damages.”
Another legal issue arises with the service of process. The statute says, “a blockchain network may be served by leaving a copy of the pleading . . . with a blockchain operator who has participated in the blockchain network at any time after the effective date of this Act.” The proposed bill wrongfully equates serving process on a single blockchain operator to providing notice for the entire blockchain. In a transaction involving two people from Illinois, the state’s AG could hypothetically serve process on an Icelandic teenager running a Bitcoin miner in his mother’s basement. Even under the most liberal interpretation of civil procedure rules, this seems a bit too broad. As previously stated, under Section 20 part (c)(1) of the proposed bill, that teenager would also be liable for any damages incurred by the injured party.
The service issue also reveals a deeper, more technical issue. Suppose the state served process on a blockchain operator who is also the person who committed the fraudulent act, and who happens to be an Illinois’ resident. The state orders the node operator to “process a transaction” made by the state. How is this to be accomplished?
The operator has no way of legitimately rewriting the blockchain in order to bring the funds back into his possession. Bitcoin specifically, and blockchain more generally, was created to have an immutable record requiring decentralized validation. No individual has the ability to reverse a network-wide transaction on their own.
The bill gets more confusing by stating that, “a blockchain network that processes a blockchain 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.” The only way Bitcoin can currently be sent and received, is with the signature of a private key (think of this as your PIN number). Thus, Bitcoin, has no way to allow the Attorney General of Illinois the ability to mandate a blockchain operator process a transaction without the use of a private key. What the bill requires is technically impossible. Nevertheless, under Section 15 part (d), “the fact that a blockchain network has not adopted reasonable available procedures to comply . . . shall not be a defense to an action.”
Bitcoin is therefore likely subject to fines if this proposed bill is passed and the state’s AG orders an enforcement action. That said, this bill will have little effect on Bitcoin. Even if the jurisdictional issue is meted out in the court, there is no one whom the Attorney General can serve that will be able to rewrite a transaction which occurred on the blockchain. Comically, the fines piled up against Satoshi Nakamoto, the creator of Bitcoin, will never be paid so long as he retains his anonymity.
The biggest issue with the Illinois bill is the effect it will have on other blockchains, such as Ethereum. Ethereum has a known creator, as do the majority of Layer 2 blockchains built off of Ethereum. Fines could easily be piled up against Vitalik for failing to comply with Illinois law. Compliance, although possible, would be extremely difficult to achieve. What it would require is that for every blockchain, including the Layer 1 of Ethereum, the state of Illinois would have to be given a wallet (an account) that has the permission to rewrite or mandate any blockchain transaction. Think of this like the Attorney General of Illinois having full control of the banking system, and could, given legal justification, completely rewrite any transaction. A wise British socialist once warned that the rewriting of such history is one of the most dangerous weapons a state can wield.
In conclusion, the Illinois bill may have the purpose of protecting customers and preventing fraud, but in reality is akin to requiring all cars to be able to fly: a difficult and fruitless mandate that undermines the main purpose of the technology.
Duncan works for the Liberty Justice Center on issues of government overreach. He also works more generally on the topics of artificial intelligence and blockchain technology. He is a board member of Kids Connection Haiti on further integrating AI into 501(c)3 governance.
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