As front-runner to be the new “disruptor,” blockchain technology necessarily has many different practical applications. As use cases for this technology continue to impact different industries, a critical question facing clients, courts, and counsel is whether these digital ledgers will be admissible in legal proceedings.
This article begins with a brief overview of blockchain technology, then addresses the current evidentiary hurdles blockchain records face, and concludes with considerations for attorneys seeking to enter blockchain receipts (discussed further below) into evidence and businesses implementing blockchain solutions.
A blockchain is a type of digital ledger or decentralized database that is continuously updated and distributed to different participants in a network. The “ledger,” or database, records the occurrence of some underlying event—whether that is a transfer of cryptocurrency (blockchain technology serves as the foundation of cryptocurrencies such as bitcoin, litecoin, and ethereum) or a digital agreement to perform some service (such digital agreements, or “smart contracts,” are automatically executed using computer software designed to translate contract terms into code and automate execution). “Each transaction is stored with others in a unit of data called a block, and, as the name ‘blockchain’ suggests, those blocks securely link to one another, forming a ‘chain’ of records going all the way back to the very beginning of the ledger.”
Different blockchains add blocks to their ledger through a variety of methods known as “consensus protocols,” which include bitcoin’s proof of work (discussed below) and proof of stake, along with other less common mechanisms. No matter the particulars of a given consensus protocol, a blockchain has some method by which the protocol decides whether a given block, and the transactions in it, are legitimate before adding a block to the chain. Each block added to the chain digitally references the block immediately preceding it on the chain. Thus, any attempt by an individual to erase or change a transaction in a block already added to the chain would alter the character of every subsequent block (think of a domino effect) and generate a ledger inconsistent with every other copy of the ledger that has been distributed across the network. This process makes blockchain records immutable, and makes blockchain a perfect tool for ensuring data integrity over time.
Evidentiary Hurdles and Blockchain Solutions
The admissibility of blockchain receipts—a document that evidences some underlying activity that was recorded on a blockchain—is most likely to arise in the context of evidentiary rules governing hearsay. (The issues addressed in this article may also implicate rules relating to judicial notice, see Federal Rules of Evidence (FRE) 201(b)(2)), and authentication, see FRE 901, both of which consider the accuracy and reliability of the offered evidence. Because the standards governing admissibility in the context of authenticity and judicial notice are largely similar to those governing admissibility in the context of hearsay, this article focuses on hearsay.) Hearsay is an out of court statement offered to prove the truth of the matter asserted, and is generally inadmissible unless it qualifies under an exception in the rule. Hearsay rules, and the exceptions to hearsay, encourage litigants to rely on in-court testimony, and attempt to strike a balance between prohibiting inaccurate testimony and permitting out of court statements that are sufficiently reliable.
Particularly relevant to blockchain receipts, the “business records” exception to the hearsay rule allows a party to enter certain business records into evidence to prove their contents because the circumstances under which the records are created ensure or reinforce their reliability. The Advisory Committee on the Federal Rules notes that the “systematic checking” and “actual experience of business in relying upon” business records give this evidence an “unusual reliability” warranting the exception.
Blockchain technology is designed to create an immutable ledger of activity that, like business records, gives it an unusual reliability that alleviates many of the authenticity and reliability concerns inherent in traditional testimonial evidence. The receipts generated by a blockchain-based system are both authentic and reliable in two ways: (1) by verifying each individual transaction; and (2) by recording authentic transactions in a shared ledger.
Take the cryptocurrency bitcoin for example. The bitcoin protocol ensures every on-network transaction is authentic by verifying digital signatures. When Alice sends a coin to Bob, she digitally signs the coin, communicating both that she owns the coin and that she intends to send it to Bob. The Alice-to-Bob transaction is then broadcast to the nodes in the network, which verify Alice’s signature and check the existing ledger to make sure she was authorized to send the coin. In this example, the bitcoin protocol essentially guarantees that Alice and Bob’s transaction is authentic by confirming Alice is who she says she is, and that she is the last recorded owner of the coin.
Blockchains preserve this authenticity over time by linking together verified transactions into a chain, and distributing a copy of that transaction to multiple locations. Staying with the bitcoin example, the bitcoin protocol adds blocks to its chain through a consensus mechanism known as proof of work. In a proof of work system, miners compete to solve a cryptographic puzzle, and the winner is rewarded with the right to add the next block (which includes information about Alice and Bob’s transaction) to the ledger. Once a majority of network participants agree that the miner’s answer to the puzzle is correct, a block containing Alice and Bob’s transaction is added to the chain and a new copy of the ledger reflecting their transaction is distributed to the network. As this process repeats, Alice and Bob’s transaction becomes cemented in the ledger because altering their transaction would disturb every subsequent block. By design, then, blockchain technology preserves authenticity over time, one of the hallmarks of admissible evidence.
Although admissibility makes sense at a conceptual level, legislatures and courts have yet to embrace this fact. Vermont, as an exception, has explicitly adopted legislation foreclosing debate on evidentiary issues surrounding blockchain-based records. In 2016, Vermont enacted 12 V.S.A. §1913, which declares that a digital record registered on a blockchain is both admissible and authentic under the Vermont Rules of Evidence. Section 1913 provides that a blockchain record is admissible over hearsay objections when it is accompanied by a written declaration of a qualified person testifying to the details of the transaction.
As other authors have pointed out (see James Ching, “Is Blockchain Evidence Inadmissible Hearsay?” Law.com (Jan. 7, 2016)), the closest that courts have come to addressing this issue is cases analyzing the admissibility of machine statements. For example, in United States v. Lizarraga-Tirado, 789 F.3d 1107 (9th Cir. 2015), decided by the U.S. Court of Appeals for the Ninth Circuit, the court admitted—over a hearsay objection—a Google Earth image showing a “pinpoint” of the defendant’s location. Where Google Earth automatically generated the pinpoint graphic without human interaction, the court noted, such evidence could not be considered a “statement.” Id. at 1109 (quoting FRE 201(b)) (“By looking to ‘sources whose accuracy cannot reasonably be questioned’—here, the program—we can ‘accurately and readily determine’ that the tack was placed automatically.”). The court also noted that any potential accuracy or reliability problems might be overcome “with testimony from a Google Earth programmer or witness who frequently works with and relies on the program.” Id. In many ways, the court’s focus on accuracy mirrors the Vermont statute’s requirement that counsel accompany blockchain evidence with a written declaration from a qualified person explaining the transaction.
Considerations for Practitioners and Professionals
To maximize the likelihood of admissibility, counsel seeking to enter blockchain evidence should consider Vermont’s legislation, the policy aims of evidentiary rules, and Lizarraga-Tirado. Each of these sources suggest that counsel should be prepared to bolster their blockchain evidence with expert testimony. To compile a persuasively simple yet technically sound description of blockchain technology, attorneys will need to develop their own knowledge of blockchain technology and establish relationships with appropriate experts.
Ideally, an expert will give a simple explanation of the mechanics of a particular transaction in a way that highlights a particular blockchain’s intrinsic reliability and authenticity. Both counsel and any expert should highlight how blockchain receipts are automatically generated, like the Google Earth pinpoint in Lizarraga-Tirado, in response to a particular set of events. Evidence presented in this way addresses many of the concerns underlying the rules relating to judicial notice and authenticity and so-called “black box dangers” that arise when a fact finder is unclear how a machine statement is generated or the proposition for which it stands. (See Andrea Roth, “Machine Testimony,” 126 Yale L.J. 1972, 1977 (2017)).
To clear the hearsay-hurdle, counsel should consider two approaches: (1) enter the evidence under the “business records” exception; or (2) where appropriate, frame the evidence as an electronic contract.
• To qualify for the FRE 803(6) “business record” exception to hearsay, counsel must demonstrate through the testimony of a programmer-custodian or similarly knowledgeable individual that the blockchain receipt was generated at the time of the transaction and kept in the course of a regularly conducted activity. One potential problem with this avenue is that FRE 803(6) demands that each link in the informational chain is the product of a “regularly conducted activity.” The Advisory Committee Notes illustrate this point with a police report that relays information obtained from a bystander; although the officer acts in the regular course in creating the report, the bystander does not. See FRE 803, Notes of Advisory Committee. In the context of a public transaction (an exchange of bitcoin, for example), a court could find that, although the blockchain receipt (similar to the officer’s report) was produced as part of a regularly conducted activity, the underlying transaction was not. Counsel might more easily overcome this hurdle in the context of enterprise use of blockchain technology where a receipt is generated as the result of a core business function involving one or more businesses.
• Where a given blockchain receipt reflects a smart contract, the receipt may not be hearsay. “In the most basic terms, a smart contract is computer code that programmatically executes transactions in accordance with pre-defined terms.” (Chamber of Digital Commerce, “Smart Contracts”). Therefore, the extent to which a particular smart contract is a legally binding agreement may open up an avenue for admissibility under hearsay rules because the terms of contracts are generally admissible as “verbal acts.” (The Advisory Committee on the Federal Rules notes that a verbal act is one in which the statement itself affects the legal rights of the parties, sometimes referred to as statements carrying independent legal significance.) Thus, a smart contract with the same legally binding force as a traditional contract could carry independent legal significance and fall outside the definition of hearsay. (We note that even though some states, like Arizona, Nevada, and Delaware, recently passed legislation recognizing the legitimacy of smart contracts secured through distributed ledger technology, there is a strong argument that the federal ESIGN law and state level Uniform Electronic Transactions Act, which harmonizes e-signature standards across 47 US states, grant legally binding status to smart contracts. (Chamber of Digital Commerce, “‘Smart Contracts’ Legal Primer”).
In addition to litigators, organizations implementing blockchain-based solutions should also consider these issues when implementing new systems. Whether implementing blockchain based records-management solutions or standardizing smart contracts, companies should design blockchain solutions with an eye for explaining to a judge or jury exactly what their “records” are, and why the evidence is authentic and reliable. For example, a company might consider adopting a record-keeping system where it still records information in a centralized location, but also transmits the information to a blockchain to ensure authenticity over time. This type of “mirror” solution (see Victoria Lemieux, “A Typology of Recordkeeping Solutions and Some Reflections on Their Implications for the Future of Archival Preservation”) may create fewer evidentiary challenges than more innovative systems such as completely tokenizing records, as those solutions muddy traditional notions of what constitutes the actual record (whether it’s the smart contract code, a narrative describing the code, the object or value a particular token represents, etc.).
Time will tell whether Congress or the Supreme Court will amend the Federal Rules of Evidence to include for a uniform solution to these questions, or whether courts will incrementally address these issues as they arise. It also remains to be seen whether other states will follow Vermont’s lead in adopting rules that address these evidentiary uncertainties. In the meantime, practitioners and professionals should consider these issues when working with blockchain-based solutions and litigating cases involving blockchain records.
Neil Gray is a partner in the financial services litigation practice of Reed Smith in New York. Maxwell J. Eichenberger is an associate in the firm’s Chicago office and a member of the IP tech and data group.