On January 1, the Blockchain Technology Act went into effect in the state of Illinois, creating a statewide framework for the use of blockchain technology and blockchain based contracts, or “smart contracts.” Similar to other recent state legislation addressing the use of blockchain and smart contracts, the Act recognizes the validity of smart contracts and blockchain based records and signatures in commerce. The legislation also prevents smart contracts both from being denied legal effect and from being excluded as evidence in a legal proceeding solely because a blockchain was used to create, store or verify the contract.

In a departure from other comparable state legislation, the Blockchain Technology Act places several limitations on the use of blockchain. For example, the Act allows a smart contract to be denied legal effect if the blockchain underlying the contract does not allow a record of the transaction to be retained and accurately reproduced for all parties who are entitled a copy of the contract or record of the transaction (even if the parties to a transaction have agreed to conduct the transaction using blockchain). The use of blockchain in providing certain notices and warnings is expressly prohibited. The Act also places limits on the ability of parties to use blockchains in instances where a law other than the Act requires a record to be displayed or communicated in a certain manner or when the use of a blockchain may inhibit another person’s ability to store or retrieve the information contained in the blockchain.

The Blockchain Technology Act goes a step further than most state legislation by addressing the role of local governments in regulating blockchain and smart contracts. While the Act specifically allows local governments to perform their duties using blockchain and smart contracts, it denies local governments the ability to impose taxes or enact other requirements (such as licensing requirements) on the use of blockchain and smart contracts.

Several other states have passed legislation covering a few of the basic points reflected in the Blockchain Technology Act, namely giving legal effect to the use of blockchain to create electronic agreements and signatures. The Blockchain Technology Act expands the current state of blockchain legislation by addressing, both in the affirmative and the negative, uses of blockchain that have not yet been contemplated by other state legislatures. This trend will likely continue as new ways to use blockchain and smart contracts in commerce continue to develop.