Ohio Embraces Blockchain Technology and Digital Assets – Fin Tech

introduction

Rising interest rates and a general economic slowdown in 2022 have affected the value of digital assets, including the relatively well-established ones like Bitcoin and Ether. In addition to market headwinds, momentum is building around federal regulation of digital assets, culminating in the proposed “Responsible Financial Innovation Act” (“RFIA”). The RFIA will, among other things, clarify the treatment of decentralized autonomous organizations (“DAOs”) and create a new asset class – “ancillary assets” – which will include most digital assets (including those that qualify as investment contracts), and will be regulated as commodities by the CFTC.¹>

Despite the market slowdown, and perhaps in response to moves at the federal level, the Ohio legislature has made digital assets a legislative priority in 2022. First, Ohio House Bill 177.05 (“HB 177.05”) passed in March. HB 177.05 authorizes Ohio governmental entities to utilize distributed ledger technology (“DLT”). Another bill, House Bill 585 (“HB 585”), would codify the legal status of Ohio DAOs and Special Purpose Depository Institutions (“SPDIs”) if passed.

There are important nuances to consider when market regulatory forces collide and the consequences of such collisions reverberate through blockchain technology and the digital asset ecosystem.

II. Analysis of the statutes: HB 177.05 and HB 585

one. HB 177.05: Ohio & DLT

Prior to HB 177.05, state entities in Ohio were limited in how they could utilize DLT. Adoption was relegated to half-baked pet projects, including when in 2018 Ohio became the first state to authorize the collection of taxes in Bitcoin through OhioCrypto.com.² Then-Treasurer Josh Mandel led the effort, ostensibly to solidify Ohio as a blockchain technology destination for entrepreneurs, investors and early adopters. Despite some early momentum, OhioCrypto.com shut down in 2019 after concerns grew that the platform was created illegally.³

Now, with the passage of HB 177.05, governmental entities are explicitly permitted to utilize DLT, including blockchain technology, as long as such use is “in the exercise of [such
governmental entity’s] authority.” ⁴ The scope of “governmental entity” is broad, including any “political subdivision” as defined in Section 2744.01 of the Ohio Revised Code, and thus captures all instrumentalities of the State of Ohio including any “municipal corporation, township, county school” district, or other body and politically responsible for state activities in a geographical area smaller than that of the state.”⁵>

HB 177.05 regains momentum lost by OhioCrypto’s failure by giving government entities the leeway necessary to explore innovative solutions and applications offered by DLT, even if tax collection remains an unviable use case. This momentum comes at an opportune time, as companies, including large, publicly reported companies, are devoting significant resources to exploring applications of blockchain technology to governance. HB 177.05 gives Ohio a competitive advantage over states that ignore the emergence of alternative DLT use cases.⁶ Companies devoted to exploring alternative DLT use cases may now find Ohio an acceptable sandbox in which to play.

B. HB 585: Ohio DAOs

Running or joining a DAO has traditionally been a risky project. If passed, HB 585 would clarify and codify the legal status of DAOs in Ohio.⁷

Under HB 585, all DAOs incorporated in Ohio would be required to file Articles of Organization with the Ohio Secretary of State, the same way a corporation would be organized.⁸ It would be at this point – the first organization – that the organizers would indicate whether the DAO would be member-managed (similar to a limited liability company) or algorithmically managed.⁹ Furthermore, if a DAO formed in Ohio chooses to utilize smart contract technology, its articles of organization must include a publicly available identifier for such smart contract.¹⁰

Critically, Ohio DAOs would not have the ability to self-define what constitutes a quorum.¹¹ A quorum is only met when fifty percent of the DAO members approve an action.¹²> Further, to the extent that an Ohio DAO utilizes smart contract technology as part of its administration, such contract must “be capable of being updated, modified, or otherwise upgraded.”^{1. 3} Seen from a critical eye, these two provisions can signal skepticism management through smart contracts. Alternatively, this could be seen as a critical embrace of smart contract technology as a means of corporate governance – similar to articles of association or an operating agreement, each of which must be disclosed to shareholders in a corporation or limited liability company. may be, smart contracts simply join a wide variety of governance mechanisms, each of which must be agreed to by the participants in their respective corporate forms.

If passed, HB 585 would position Ohio as a destination for DAO formation and the first Midwest state to codify DAOs.¹⁴That said, to maintain a competitive edge, the Ohio legislature must consider increasing flexibility around DAO governance, just as the Wyoming legislature did when it recently passed an amendment allowing Wyoming DAOs to self-define a quorum.¹⁵ This change allows Wyoming DAOs to scale faster – a priority for developers and investors. As developers look for opportunities, jurisdictions unable to accommodate the logistics of scale may fall behind.

C. HB 585: SPDIs

In addition to codifying DAOs, HB 585 would allow the formation of SPDIs – entities formed to provide custody services over digital assets.¹⁶ By allowing the creation of SPDIs, HB 585 would open up Ohio to current and potential entrepreneurs seeking to serve as depositors of digital assets (including cryptocurrencies). The bill distinguishes between three categories of crypto assets:

(1) “Digital Consumer Resources,”

(2) “Digital Securities” and

(3) “Virtual Currencies.”¹⁷

“Consumer digital assets” is defined broadly, including all digital assets “used or purchased primarily for consumption, personal or household purposes”¹⁸ as well as any “open blockchain token that constitutes intangible personal property as prescribed by law,” and “any other digital asset that is not a digital security or virtual currency.” This definition is likely to capture non-fungible tokens (often referred to as NFTs), as long as the NFTs are not used for speculative or investment purposes. “Digital securities” will include any digital “investment property”.¹⁹ “Virtual currencies” will include any digital asset used as money that is not recognized as legal tender in the United States.²⁰

In addition to classifying digital assets, HB 585 contains a number of provisions that reduce risks associated with SPDIs, including the following requirements:

1. SPDIs will be required to hold highly liquid reserves that support 100% of assets on deposit, as well as pledge the assets or post a surety bond to the Ohio Department of Commerce.²¹




2. Reserves must be held as local US dollars, currency held at a Federal Reserve Bank or FDIC insured financial institution, or other highly liquid investments such as government bonds.²²




3. Any group wishing to charter an SPDI must meet a minimum capital of $10,000,000 in fully paid up capital.²³

If passed, HB 585 would position Ohio as an early leader in meeting the growing demand for crypto services. SPDIs will provide institutional legitimacy to crypto holders incorporated or doing business in Ohio, thereby helping to address the growing demand for regulatory clarity and foster a crypto asset market in Ohio.

III. Conclusion

As the value of cryptocurrencies and other digital assets continue to flex in response to market forces, the importance of alternative use cases of DLT, including DAOs, will grow. DLT, and more specifically blockchain technology, offers unique solutions for governance, back office operations, supply chain maintenance and other functions beyond simple value storage.

So-called “fly-over” states, such as Ohio, have the ability to attract market participants and the digital asset ecosystem by enacting comprehensive digital asset legislation ahead of, or in parallel with, federal legislation. As it was then part of the Northwest Territory, the passage of HB 177.05 and the proposal of HB 585 positioned Ohio at the beginning of a new frontier.

*Tanner Dowdy is a summer associate at Dinsmore & Shohl, LLP, and is not licensed to practice law.

Footnotes

1. Act on responsible financial innovation, S. 4356, 117th Congress (2022).

2. Cryptocurrency for Ohio Tax PaymentsBlockchain Research Institute, (May 2019),

3 ID.

4 House bill 177Ohio law,

5 ORC 2744.01

6 ID.

7 House bill 585Ohio law,

8 ID.

9 ID.

10 ID.

11 ID.

12 ID.

1. 3 ID.

14 Research Institute, supra note 12.

15 Troutman Pepper, Wyoming amends DAO legislation allowing DAOs to dictate quorum thresholds on an individual basisJDSUPRA (May 5, 2022).

16 House Bill, supra note 11.

17 ID.

18 ID.

19 ID.

20 ID.

21 ID.

22 ID.

23 ID.

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