Illinois takes a step forward and legalizes smart contracts

Illinois has raised the bar in the U.S. for blockchain adoption. As of January 1, smart contracts, contracts written on a blockchain, are now legal in the state, making them valid documents for securing deals and for use as evidence in court. With the implementation, Illinois becomes the first state to recognize smart contracts in 2020, paving the way for further adoption among other states as the year progresses.

The Blockchain Technology Act (BTA) was sponsored by Rep. Keith Wheeler and establishes the same guidelines and legal parameters associated with paper-based contracts. It even makes smart contracts exempt from local taxation. The law states, in part, “A smart contract, record or signature may not be denied legal effect or enforceability solely because a blockchain was used to create, store or verify the smart contract, record or signature.”

Illinois isn’t the first state to legally recognize smart contracts—that honor goes to Vermont, which approved a blockchain contract law in 2016. Arizona followed suit soon after, but, as blockchain begins to be taken more seriously, the introduction of the law in Illinois is going to have a larger impact on further adoption across the country.

The law further states, “A smart contract, record, or signature may not be denied legal effect or enforceability solely because a blockchain was used to create, store, or verify the smart contract, record, or signature.” It adds, “If a law requires a signature, submission of a blockchain which electronically contains the signature or verifies the intent of a person to provide the signature satisfies the law.”

The BTA saw first light in 2019 and was passed with overwhelming success by lawmakers. Governor J.B. Pritzker then gave his seal of approval in August, setting a launch date of January 1, 2020, for the law to take effect.

It’s important to point out that the law has certain limitations. While it might hold up in court for an in-state contract, if an agreement involves any party beyond state borders, and that other state doesn’t have similar smart contract laws, the contract could be deemed invalid. Explains lawyer Tatyana Ruderman, “The law is likely to be tested in courts by parties who later want to try and invalidate a blockchain transaction.”

However, Ruderman, who works for InfoLawGroup in its Chicago offices, acknowledges that the BTA might actually force other states to get onboard. She asserts, “It may not make sense for businesses who operate outside of Illinois to implement blockchain-based contract management only in Illinois and not elsewhere. This may be an area where it makes sense for industry to come together and agree on some standards to fill the gaps.”

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