This week the Nevada State Legislature approved a bill that will block local governmental entities from taxing blockchain transactions. The blockchain-friendly Senate Bill 398 was introduced by State Senator Ben Kieckhefer in March and unanimously approved by the full Senate in April before moving before the Nevada Assembly in May, where it was amended (under Assembly Amendment 681), approved, and returned back to the Senate who concurred in those amendments. The bill has now moved to Governor Brian Sandoval to be signed.

The bill prevents local governmental entities from:

“(a) Impos[ing] any tax or fee on the use of a blockchain by any person or entity; (b) Requir[ing] any person or entity to obtain from the board of county commissioners any certificate, license or permit to use a blockchain; or (c) Impos[ing] any other requirement relating to the use of a blockchain by any person or entity.”

See S. 398 §§ 4,6, 79th Leg., Reg. Sess. (Nev. 2017).

This text seems like a win for the blockchain community in the state. If this legislation is enacted, it ensures blockchain users and developers that they can freely use the technology in the state without worrying about the possibility of local governments trying to restrict or tax their efforts at some point in the future. It essentially establishes Nevada as a safe-space for blockchain activities and development.

                Shortly before passage, the Nevada Assembly expanded the new statutory definition of “blockchain” to, among other things, delete the word “decentralized” and the Nevada Senate approved that change.  Here are the differences between the definition of “blockchain” in the bill as introduced and the definition in the bill as amended.

Original bill:

“Blockchain” means an electronic record created by the use of a decentralized method by multiple parties to verify and store a digital record of transactions which is secured by the use of a cryptographic hash of previous transaction information.”

S. 398 § 1, 79th Leg., Reg. Sess. (Nev. 2017).

Bill as amended:

“’Blockchain” means an electronic record of transactions or other data which is:

  1. Uniformly ordered;
  2. Redundantly maintained or processed by one or more computers or machines to guarantee the consistency or nonrepudiation of the recorded transactions or other data; and
  3. Validated by the use of cryptography.”

Assemb. Amend. 681 § 1, S. 398, 79th Leg., Reg. Sess. (Nev. 2017).

Three differences stand out between the two versions of the bill:

  1. The removal of the word “decentralized”
  2. The removal of the words “multiple parties”
  3. The insertion of the words “redundantly maintained or processed by one or more computers or machines to guarantee the consistency or nonrepudiation…”

Consequently, the bill as amended does not require that transactions utilize decentralized/distributed systems at all to qualify as “blockchain”! Any transaction documented by an internal, private computer running a modified faux-blockchain protocol (such as a forked version of the Ethereum master code or possibly even an encrypted Excel file saved in triplicate on the same computer) arguably would fall under the new law’s purview.

The foregoing change is material, as it means that private/internal, centralized blockchains are given the same favorable status as public blockchains under the law, and may even leave a backdoor for legacy systems like encrypted Credit Card records stored multiple times to qualify as a “blockchain.”For example, under the amended version of the bill, a company like Visa or Wells Fargo can track its customers’ spending using a forked version of the Ethereum code on its private computers, thereby meeting all of the requirements for the local tax ban without any need for public or even consortium chain verification. According to the new statutory definition, such a centralized payment system is now a “blockchain” since it meets the listed technical requirements. Thus, while it initially appeared that the bill was designed to foster entrepreneurial development of decentralized systems, such as the Ethereum network, to allow individuals to reclaim some power from large companies, the bill does not accomplish that aim as it treats public and private blockchains (and possibly even legacy payment systems) equally.By opening this loophole in the definition of blockchain, Nevada does not appear to be showing any more support for the blockchain upstart community than it shows for multinational financial institutions and banks at large.

As there is no public record evidence indicating whether this definitional change was designed to ensure that private, centralized systems are on equal footing with public blockchains, it is possible that this is an example of legislators who are too eager to act around the hype of the new technology before developing a reasonable understanding of the technical nuances that outline the industry. The amendment was ushered through as an “emergency measure” right before the end of the legislative session, possibly limiting the time that legislators and other onlookers had to analyze its actual effects before a deadline that would have required the bill to be introduced during the next legislative session.

Again, the law can be helpful to both Nevada and the public blockchain community. However, now the bill treats that community in the same fashion as the companies that own the legacy payment systems who only need to make a few technical changes to their otherwise centralized and vulnerable systems to be covered by the bill. We are hopeful that Nevada wants to pursue the goal of being a decentralized blockchain-friendly state, and that the legislature did not realize the full import of its eleventh hours change to the blockchain definition.Thus, if Governor Sandoval signs the bill, we plan to reach out to Nevada state legislators to discuss a bill in the next session that amends the law amend to only exempt blockchain activity on decentralized systems that rely on verification by independent parties using multiple machines that promote the honesty, integrity, validity, and immutability that blockchain represents. Until then, it appears that Nevada has created a loophole that big banks and financial institutions can use to reap the same benefits that it has bestowed on those looking to advance decentralized, public blockchain technology.