block chain

Blockchain Working Group

Annual Report December 2021

Blockchain Working Group

Ruth Day* Chair

Commissioner, Chief Information Officer Commonwealth Office of Technology

Working Group Membership

Jim Barnhart*

Deputy Commissioner Commonwealth Office of Technology

David Carter

Commonwealth Office of Technology

Karen Wilson* Public Service Commission

Robert Thorne*

Energy and Environment Cabinet

Josh Keats* Kentucky Office of Homeland Security

Wesley Hamilton

Recycladata

Grace Simrall Louisville Metro Government

James Meece

Louisville Metro Government

Senator Brandon Smith Kentucky Senate, District 30

Anthony Ellis

Cabinet for Economic Development

Dr. Brian Houillion* University of the Cumberlands

Christopher Poynter*

Owensboro Municipal Utilities Designee, Kentucky Municipal Utilities Association

Chris Hayes*

Kentucky Electric Cooperatives Designee, Kentucky Rural Electric Cooperatives

Adam Koehler Reversed Out

Clark Snowden*

Louisville Gas and Electric

John Woeltz Bluegrass Blockchain

Administrative Support

Alice Lawson Legislative Research Commission

Karen Chrisman Commonwealth Office of Technology

* Members appointed or designated in compliance with KRS 42.747

Blockchain Working Group

Background

The Blockchain Working Group is a collaborative panel of subject matter experts defined in Senate Bill 55, and subsequently codified in Kentucky Revised Statute Chapter 42.747, with the mission to evaluate the feasibility and efficacy of using blockchain technology to enhance the security of and increase protection for the state's critical infrastructure, including but not limited to the electric utility grid, natural gas pipelines, drinking water supply and delivery, wastewater, telecommunications, and emergency services. The membership of the working group is comprised of nine members defined in KRS 42.747 as well as an array of representatives from state and local government, public utilities, and private sector business who were chosen based on their knowledge and engagement with blockchain technology to ensure a broad depth of knowledge and insight. Through spanning these various government and business sectors, the group can explore and document those opportunities that place the Commonwealth in the forefront in the support and usage of blockchain technology as a tool to empower business in the state. The group convened for the first meeting on September 9, 2020 and has held regularly occurring meetings to develop the contents within this report based on the mission as defined within the Senate Bill and resulting Kentucky Revised Statutes. The primary goals of the initial report are to define blockchain in relation to mission of the working group, provide short term tactical recommendations, and highlight those areas of opportunity where a more strategic analysis by the working group will be conducted over the next reporting year.

Working Group Mission Statement

The mission of the Kentucky Blockchain Technology Working Group is to evaluate the feasibility and efficacy of using blockchain technology to enhance the Commonwealth by identifying opportunities for the adoption, utilization, and/or regulation of blockchain technology in critical infrastructure, public utilities, telecommunications, emergency services or other areas that could benefit from the implementation of blockchain technology. Through collaborative efforts, with public and private entities, the Working Group will determine through comprehensive research and reporting if blockchain deployment is warranted to demonstrate its value, applicability, and/or efficiency. Finally, the Working Group will evaluate potential economic development opportunities around the development and implementation of blockchain occurring within the Commonwealth, including identifying key manufacturing and distribution opportunities around the technology.

Blockchain Working Group

Report Abstract

Blockchain technology is a highly diverse and robust technology that can empower business through the sharing, movement and processing of data or transactions in a highly efficient and secure manner. While the most prevalent use of blockchain technology is digital currency such as Bitcoin, there are significant ways that blockchain technology that can enhance the integrity and security of systems that support critical infrastructure such as transportation, public utilities, healthcare, finances, logistics and emergency services. Through the establishment of the Blockchain Working Group, the Commonwealth is approaching this technology in a forward-thinking manner to identify those opportunities that can draw to, or empower current business in, the state.

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Blockchain Working Group

Report Summary

Blockchain technology is an innovative mechanism for protecting the confidentiality, integrity, and availability of data. Blockchain is commonly known as a foundation for digital currency, but the technology is well suited for a multitude of purposes where there is a need to share data or track transaction in a highly secure and efficient manner.

Recognizing the potential of this technology to contribute to the protection of the state’s critical infrastructure and empower business in the Commonwealth, the Kentucky State Legislature passed legislation to convene a working group of subject matter experts to explore this technology and the various ways that it could be used within the Commonwealth. Kentucky Revised Statute 42.747 defined a core group and a clear mission to help move the Commonwealth to the forefront in the exploration of this exciting technology.

In response to this legislation, the Commonwealth Office of Technology, in collaboration with Senator Brandon Smith, established the Blockchain Working Group. Using the legislation to guide the establishment of the initial membership and expanding it to include a range of subject matter experts spanning state and local government, public utilities, private sector business, and academia. Throughout the time that the working group has been in existence additional advisory members have been added bringing a broad spectrum of expertise and experience together to achieve the spirit and intent of this forward-thinking legislation.

Throughout this reporting year, the focus of the group has been to gather information from those in the state and/or nation that are researching or implementing blockchain technology. The group has held special meetings that brought entities in to present their unique perspectives, insights, and challenges to help further define the recommendations put forward by the working group. This report is the result of these efforts.

Finance Blockchain technology has its foundations in the financial sector, in the realm of digital currency such as the popular Bitcoin in particular. While cryptocurrency is a core use case, the transactional and sensitive nature of personal, state, national, and global finances make it an ideal candidate to see the benefits of implementing blockchain. Ranging from inter and intra institution transactions to personal finance, there are a number of use cases that can be explored in greater depth. Records Management The security and integrity aspects of blockchain technology are well suited for various areas of records management. From the execution of legal contracts and agreement to professional and occupational licensing, the ability to protect, track, and validate these documents with tremendous levels of auditing and accountability through the use of blockchain technology makes this sector another ideal candidate. Public Utilities Public utilities such as water and power are the backbone of modern society and represent a sector that is at the very heart of critical infrastructure. The model for the delivery of these services continues to grow in complexity and relies increasingly on geographically diverse and disparate technology. Through the efficiency and security gains available with the integration of blockchain technologies, the delivery and protection of these critical services can be greatly enhanced.

Logistics and Supply Chain Management The Commonwealth is well positioned centrally to serve as a logistics center for the eastern united states making this a highly intriguing use case is the state and a potential draw for businesses within this sector. Modern logistics requires the close collaboration of suppliers, shippers, and receivers makings effective cross communication a vital need to ensure success. Through blockchain technology, these workflows and communications paths can be streamlined with enhanced integrity to ensure smooth operations. Healthcare The Commonwealth is already home to some of the most progressive and leading healthcare providers and research entities on the country. The need to share data among facilities and providers is key to facilitate effective and responsive treatment. In addition, as the nation works through the impacts of a global pandemic, the need to actively share data on a large scale for trending and research is more apparent than ever. Blockchain can serve as a empowering foundation for these use cases. In the report, the working group expanded on the use cases that align to these five areas of focus, with the full knowledge that they represent the tip of the proverbial iceberg of what can be achieved through the creative use of blockchain technology. As the technology matures and adoption increases, it is expected that the use cases will evolve and grow exponentially. While these areas of focus are most prevalent today, the working group will continue to maintain monitor the larger picture and explore new avenues that arise.

As part of the larger perspective, also included in the report is a summary of the state of blockchain today that covers initiatives and legislation, pertaining to blockchain technology, at a national level. Combining the use cases in the report with the knowledge of the benefits and pitfalls experienced by others, the Commonwealth can be well prepared to step to the forefront and help participate in the business revolution that could be spurred by this technology.

Lastly, while there are tremendous benefits to blockchain, the benefits do not come without risk. The working group has put thought into identifying those risks. While difficult to quantify, the risk can be considered at a conceptual level while looking at the efficacy of the technology.

In closing, the initial working group report should be viewed as one of vision and direction. Blockchain technology, while in existence in some form beginning in 1982, remains a technology in its infancy. Over the coming year, the Blockchain Working Group will continue the research needed to identify the more tactical and immediate opportunities for the Commonwealth while maintaining a longer-term search for more strategic opportunities on the horizon. There are recommendations included throughout the detail report, most of which are exploratory in nature, but one overarching recommendation is that the Commonwealth should continue this investment and exploration of blockchain technology to provide real benefit to Commonwealth citizens and to the potential to drive business growth in the state.

Blockchain Working Group Annual Report – December 2021

Table of Contents

Introduction to Blockchain ......................................................................................................................................... 1 Potential Use Cases .................................................................................................................................................... 3 General .................................................................................................................................................................. 3 Recommendation 1.0 ....................................................................................................................................... 3 Finance .................................................................................................................................................................. 3 Cryptocurrency ................................................................................................................................................................ 3 Recommendation 1.1 ....................................................................................................................................... 3 Banking ............................................................................................................................................................................ 4 Recommendation 1.2 ....................................................................................................................................... 4 Payment Systems ............................................................................................................................................................. 4 Recommendation 1.3 ....................................................................................................................................... 5 Public Finance .................................................................................................................................................................. 5 Recommendation 1.4 ....................................................................................................................................... 6 Decentralized Finance .......................................................................................................................................... 6 Recommendation 1.5 ....................................................................................................................................... 6 Case Study: Wave Financial Kentucky Whiskey 2020 Digital Fund .................................................................................. 6 Recommendation 1.6 ....................................................................................................................................... 7 Kentucky Early Adoption of UCC Emerging Tech Amendments ..................................................................................... 7 Recommendation 1.7 ....................................................................................................................................... 8 Records Management ............................................................................................................................................. 8 Contracts .......................................................................................................................................................................... 8 Accounting/Auditing ........................................................................................................................................................ 8 Recommendation 1.8 ....................................................................................................................................... 9 Legal Records and Documents ......................................................................................................................................... 9 Recommendation 1.9 ....................................................................................................................................... 9 Recommendation 1.10 ................................................................................................................................... 10 Recommendation 1.11 ................................................................................................................................... 10 Licensing ........................................................................................................................................................................ 10 Recommendation 1.12 ................................................................................................................................... 11 Public Utilities ...................................................................................................................................................... 11 Logistics and Supply Chain Management ............................................................................................................... 12 Healthcare ............................................................................................................................................................ 12 Data Analytics ................................................................................................................................................................ 13 Recommendation 1.13 ................................................................................................................................... 13 Medical Research ........................................................................................................................................................... 13 Controlled Substances ................................................................................................................................................... 14 Recommendation 1.14 ................................................................................................................................... 14 Blockchain Risks ....................................................................................................................................................... 15 Cost ...................................................................................................................................................................... 15 Lack of Standardization ......................................................................................................................................... 15

Blockchain Working Group Annual Report – December 2021

Lack of Centralization ............................................................................................................................................... 15 Regulation ............................................................................................................................................................ 15 Garbage In, Garbage Out ...................................................................................................................................... 16 Over Exuberance .................................................................................................................................................. 16 Recommendation 2.0 ..................................................................................................................................... 16 Environmental Impacts ......................................................................................................................................... 17 Increased Cyber Threats ........................................................................................................................................ 17

Legislative Analysis 2021 .......................................................................................................................................... 18 Legislative Summary ............................................................................................................................................. 18 Recommendation 3.0 ..................................................................................................................................... 18 Appendix A - Case Study: IoT, Autonomous Agents, & Smart Contracts ..................................................................... 25

Blockchain Working Group Annual Report – December 2021

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Introduction to Blockchain

Blockchain is a highly diverse and secure technology with far reaching potential to enhance and empower business and government. For the purposes of this report, the Blockchain Working Group has adopted the following core definition of blockchain:

‘Blockchain is an encrypted, secure distributed ledger (decentralized database) system that maintains a digital record of transactions. Individual records, called blocks, are linked together in a single list, called a chain. Blockchain is a scalable technology used for recording transactions made with cryptocurrencies, such as Bitcoin, and it has many other applications such as supply chain and logistics monitoring, data sharing, digital voting, real estate and auto title transfer tracking, equities and energy trading, and much more.’

Blockchain technology is purposely built to protect the integrity and confidentiality of data used in transactional systems. In addition to the security benefits inherent in the technology, there are efficiency and trust gains that help foster data sharing as well as improve the effectiveness and speed of business. Some of these key features are:

 Decentralized Digital Ledger By design, blockchain does not rely on a single central ledger for the documentation and validation of transactions. That role is shared among the participants in the blockchain enabled system. This allows the system to be highly secure, redundant, and robust. Without a single point of failure and with common knowledge of the transactions across the participants in the blockchain, business continuity and trust in the integrity of transactions can be assured.

 Industry Standard High Levels of Encryption Industry standard encryption is inherent to blockchain technology and ensures that data in the system is highly protected from exposure or alteration while in transit throughout the system and among the participants in the blockchain.

 Transactional Trust and Nonrepudiation The design of blockchain imparts an inherent trust between the participants and helps ensure the integrity of the transactions by preventing the interception, alteration, or injection of transactions in the blockchain that cannot be validated by the decentralized ledger. Any alteration of any block of the chain will invalidate the entire blockchain.

 Low Latency Peer to Peer Transactions Without the requirement that an intermediary server or authority validate the transactions, and with the ability of participants to communicate directly with each other, the flow of data is greatly improved. This simplifies the data flow and removes additional steps in the data path while maintaining the integrity and trust of transactions.

 Public and Private Options Public blockchains do not rely on a central authority to grant permission to participate in the blockchain to read, write, or proof transactions in the blockchain. One of the most common uses of public blockchain is digital currency such as Bitcoin but can be ideal for any public use system where broad public participation is needed. Private blockchains are restricted networks that require a central authority to grant permission to participants to

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read and write transactions in the blockchain. This would be most applicable to use cases such as critical infrastructure where the security and efficiency of blockchain is needed but requires high levels of control over who can participate in the blockchain.

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Blockchain Potential Use Cases

The efficiency and applicability of blockchain can be realized across any number of business and government sectors. Many public and private sector entities are exploring the efficacy of blockchain. The Commonwealth has taken the bold first step in establishing the Blockchain Working Group setting a path to explore the opportunities that this technology may offer. Some of these possible opportunities are: GENERAL While the legislation currently enacted in the Commonwealth is progressive and sets a strong foundation for further research around the opportunities for blockchain technology, the work of the Blockchain Working Group has found that the potential opportunities span beyond the scope of the original legislation. Expanding the scope of the working group to encompass business and economic development opportunities will allow for more actionable recommendations from the working group.

Recommendation 1.0: Review the legislation to expand the role and mission of the Blockchain Working Group to encompass a broader field of view.

FINANCE

The world of finance is entirely transaction driven. This is the ideal environment for blockchain to have a positive impact. Highly transactional based systems have the highest level of benefit from blockchain and align with the core design and principles of blockchain. This enhances conducting transactions across or in financial institutions, and other sectors involved in commerce, with the highest level of security.

Cryptocurrency The most prevalent use of blockchain in the financial sector is the use of digital currency, also referred to as cryptocurrency such as the popular Bitcoin. Digital currency could empower business and trade through the ease and efficiency of financial transactions in a highly secure and attestable manner. Delays and complexities such as currency conversion and transaction clearing houses can be removed which will greatly enhance the speed and efficiency of business. Nations such as China and Canada have already pursued digital currency implementation and the foundations for the development of a “digital dollar” have been discussed by the U.S Congress. The current Comptroller of the Currency, Brian Brooks, served as Chief Legal Officer for Coinbase, one of the largest digital currency platforms in the world. Though cryptocurrency may not fully replace traditional currency, for quite a while if ever, it is becoming a viable option as it continues to be adopted by younger, tech-centric generations.

Recommendation 1.1: The Commonwealth of Kentucky should explore the benefits of creating a new cryptocurrency to support a closed blockchain system. Rationale: This report has identified risks and opportunities of adopting blockchain. The ideal implementation would be a closed blockchain system where members are able to participate in the block processing for the cryptocurrency. By owning and opting in to the blockchain processing, the

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Commonwealth and other member institutions would have a vested interest in mitigating some of the inherent risks, while amplifying the potential benefits. The closed blockchain system would remove some of the cyber security threats inherent to open systems where processing takes place all over the world, by making the blockchain membership by invite only. Malicious actors attempting to impact or corrupt the blockchain would not have access to the blockchain at the same level as an open blockchain system. Additionally, by owning a cryptocurrency, Commonwealth would be able to extend financial processing capabilities into the digital realm. Finally, financial transactions related to Commonwealth of Kentucky and other member institution business would be processed on a system the members own and protect, which promotes a more secure financial ecosystem.

Banking The state of Wyoming, in anticipation of potential banking needs in the cryptocurrency realm, adopted House Bill 74 in 2019 which authorized the chartering of special purpose depository institutions (SPDI). According to the Wyoming Banking Division these “institutions are banks that receive deposits and conduct other incidental activities, including fiduciary asset management, custody and related activities”. Applications for charters began in October 2019 and the first charter was issued to Kraken Bitcoin Exchange in October of 2020 making it the first digital asset company to secure a bank charter in the United States. There are more charters in the pipeline that will be awarded over the next six months to a year.

Recommendation 1.2: The General Assembly should pursue legislation creating charters for special purpose depository institutions during the 2021 legislative session. Rationale: Though Wyoming was the first state to develop this type of charter for digital asset management other states are predicted to soon follow. Kentucky, with its geographic location and amenities, could have a competitive advantage over other states including Wyoming. As mentioned in other portions of this report, Kentucky sits at the figurative if not literal “crossroads of the Eastern and Central United States”. Kentucky residency requirements for officers of the SPDI would provide Kentucky an added advantage as Kentucky provides significant benefits to relocating executives and employees such as access to low cost of living, major airports, arts and entertainment, major sporting events, metropolitan areas, rural attractions, low energy costs and all the other elements that make Kentucky a great place to live and work.

Payment Systems Harvard Business Review identified two elements to the modern currency system, the “what” and the “how” of transactions. Prior to development of modern financial systems, the “what” was money (paper or coin), gold or some other commodity of value and the “how” was to hand over the commodity for the desired good or service. This process would develop with the development of checks and credit cards and into even more complex systems with further development of technology. As mentioned in a previous section, though cryptocurrency may never supersede traditional currencies the “how” process could be significantly impacted by the implementation of blockchain technologies. Currently, most non-cash transactions, whether in person or online, utilize intermediaries that take a percentage of the transaction amount to complete the transaction between two entities. This increases the cost of business and commerce as each intermediary will take their “cut”. Blockchain technology eliminates the need for any trusted intermediaries and therefore can lead to efficiencies in the system as well as lower the overall cost of transactions.

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The Treasurer of the State of Ohio created a system in Fall of 2018 to allow Ohio citizens and organizations to pay up to twenty-three (23) different taxes via Bitcoin and the OhioCrypto.com website created by his office. However, about a year later, the Ohio Attorney General determined that these payments violated state law as BitPay, the platform utilized for the transactions, charged a fee and therefore made this a financial transaction device and subject to the Ohio Board of Deposit approval.

Recommendation 1.3: The Blockchain Technology Working Group should continue to monitor this ongoing development of alternative currency while also advising the Kentucky State Treasurer’s Office of developments in this area and investigating potential opportunities the Treasurer’s Office can pursue future blockchain technology adoption. Rationale: The adoption and implementation of new payment systems and processes are coming it is just a matter of “how soon”. The state and the Treasurer’s Office should be adequately prepared to adopt to this technology and its uses before it arrives and the state is “playing catch up”.

Public Finance The development of websites such as Kickstarter and GoFundMe have promoted terms such as “crowdfunding” and “crowdsourcing” into the common lexicon. These terms represent a process that individuals or companies can use to source financial backing from a large number of persons through Internet mechanisms. The rapidly growing Braxton Brewery in Covington, KY was launched from the founder’s garage into a brewery with multiple taprooms in the Northern Kentucky area through a Kickstart campaign in 2015. This crowdfunding process is beginning to gain traction in the world of public finance. The traditional instrument for municipal financing is the General Obligation (GO) Bond or the Industrial Revenue Bond (IRB). These tax-free instruments were widely available to investors up until the late 1980’s. There are stories of grandparents purchasing municipal bonds for grandchildren as birthday and Christmas gifts. However, after the late 80’s until today these instruments have become cost prohibitive to most small investors. A single share of a municipal bond can be $5,000 or higher. Small investors are no longer able to take advantage of the tax-free yields of 3% or higher (almost 30 times the yield of a saving account). This has significantly hampered the building of wealth in low- and middle-income homes. Municipal bonds are now usually purchased in whole by large investment firms and inserted into their mutual fund portfolios. The ability of blockchain to fractionalize (break into an almost infinite number of smaller pieces) would allow municipal bonding to be more affordable to those lower income investors looking for opportunities outside of their 401k. This would also allow the financial benefits to remain on “Main Street” versus disappearing to “Wall Street”. Citizens of a city or county could now invest in their own communities and see yield benefits from the taxes they may pay for the bonds. In 2019, the city of Berkeley, CA utilized blockchain “minibonds” to finance the purchase of a new fire truck. A hypothetical grandparent could have potentially bought part of an actual fire truck for their grandchild for their birthday.

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Recommendation 1.4: The Commonwealth of Kentucky should investigate the use of blockchain based municipal bonds to fund future projects while at the same time increasing the opportunity for building wealth in its communities. Rationale: The utilization of blockchain technology could not only aid in the financing of municipal and public infrastructure projects in the state but could lead to wealth development in the state. Eastern Kentucky faces the significant issue of the region’s water and sewer systems needing to be replacement and modernization in the near future. Barring significant state grants and loans, this financing will need to be completed through issuing municipal bonds. The citizens in these areas could purchase small portions of the issued bonds and take advantage of the associated tax-free yields by using blockchain technology.

Decentralized Finance (DeFi) Decentralized Finance is a rapidly growing application of blockchain technology toward critical financial sectors. DeFi protocols currently account for >$100B in total value locked by replicating traditional systems of finance that enable lending, borrowing, swapping and other financial applications.

DeFi protocols can increase the transparency, auditability and reliability of these traditional financial tools while making them more accessible to the average person. Traditional centralized parties are not required for the bookkeeping and enforcement of health factors and interest rates as these are regulated by the software protocols. Collateral can be trustless and digital in the form of cryptocurrency. Additionally, DeFi enables micro- loans and flash-loans which leverage properties of blockchain technology to become more efficient with lower costs than traditional centralized finance options, opening up areas of finance that were previously too inefficient to be viable. The Commonwealth can potentially benefit from an understanding of these new financial technologies to facilitate competitive economic development.

While the barrier to entry is reduced and markets can become more efficient, there are new kinds of risks introduced to systems of finance with DeFi protocols. These new risks are related to the security of the protocol specifications themselves, the implementation codebases, permissioned access, cascading risks of failure of interconnected protocols and risks of the underlying blockchain networks on which they are deployed and secured through their consensus mechanisms and core protocol logic.

Recommendation 1.5: The Blockchain Technology Working Group should continue to define the risks and opportunities of DeFi for Kentucky in collaboration with the Department of Financial Institutions [[and/or other departments?]] to cultivate a healthy understanding of these emerging technologies that provide these financial opportunities and risks.

Rationale: Decentralized Finance is continuing to drive down the costs of offering traditional financial products by removing intermediaries. The barrier of entry is being reduced while the financial opportunities and accessible tools are increasing. This is creating an environment that can become challenging for the Commonwealth to capture opportunities in while safely navigating the risks without a deep understanding of these technologies and their applications.

Current Use Case: Wave Financial Kentucky Whiskey 2020 Digital Fund On October 27, 2021 the Kentucky Blockchain Technology Working Group met to participate in a presentation provided by Wave Financial of Los Angeles, CA, an investment adviser registered with the US Securities &

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Exchange Commission. Wave Financial presenters were Ben Tsai, President & Co-founder, and Sam Eisner, Analyst for Kentucky Whiskey 2020 Digital Fund. Wave Financial launched the Kentucky Whiskey 2020 Digital Fund to capitalize on interest in whiskey as a collectible asset. It acquired the output of 2,700 barrels of whiskey being produced by Danville, Kentucky-based Wilderness Trail. Wave’s “Real Asset” fund is providing the capital to help Wilderness produce and then age the barrels of whiskey for an expected six (6) years. The fund will be tokenized to a create a secondary market to allow liquidity of investment to initial fund participants. Wave Financial provides both asset management and wealth advisory services, marrying traditional investment classes with an expertise in modern digital currencies and non-fungible tokens (NFTs). The firm was founded in 2018 and already manages more than $1 billion in crypto-based assets. Reference: Sterman, D (2021). Two Boozy Platforms Helping Wealth Managers Invest in the Most Liquid of Alts. RIAIntel (https://www.riaintel.com/article/b1v9vg0ty08yq1/two-boozy-platforms-helping-wealth-managers- invest-in-the-most-liquid-of-alts). November 4.

Recommendation 1.6: Digital Assets and, by extension, digital securities have become common place in the US financial marketplace. Current legislation and administrative regulations do not anticipate nor recognize these financial instruments. A comprehensive investigation of the legislative amendments needed to fully recognize and account for digital assets, tokenization of assets, and digital securities needs to be initiated to ensure Kentucky continues to compete in the age of emerging technology.

Kentucky Early Adoption of UCC Emerging Tech Amendments The Uniform Law Commission (ULC) has drafted proposed changes to the Uniform Commercial Code (UCC) to adopt standards for emerging technologies, specifically digital assets/blockchain technology. The proposed amendments would address digital asset custody and transactions in relation to aspects of the Uniform Commercial Code. These proposed amendments were discussed by the ULC during their recent July 2021 annual conference. The ULC did not take any action on the proposed amendments and will officially vote on adoption at their July 2022 Annual Meeting. The anticipated uniform adoption date has been posited as July 1, 2024 as some state legislatures do not meet in 2023. The states of Wyoming, Nebraska and Texas have already enacted changes to their UCC laws to address emerging technologies and digital assets. Other states, specifically South Carolina, are pursuing amendments this coming year as well. Kentucky 2021 Senate Bill 177 was drafted to reflect the verbiage of the Wyoming legislation to ensure some uniformity among states. This bill did not pass out of the Committee on Committees and has been pre-filed for the 2022 session. However, since the UCC amendments reflect expected future uniform changes to the UCC it would be in Kentucky’s best interest to adopt early the proposed language provided by the ULC and to amend as needed during future sessions. Early adoption by Kentucky during the 2022 General Assembly session for incorporation into law in July 2022 would provide Kentucky with the ability to move forward with the implementation of statutes and associated administrative regulation creation. Any amendments that may be made when the ULC officially adopts the changes in July of 2022 can be made during the 2023 General Assembly session. This allows the state to move forward in anticipation of these recommended changes. Any delay in UCC amendment related to digital assets would mean putting the state significantly behind other states in relation to digital asset custody and transactions.

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Options for the Legislature 1. Do nothing at this time. Wait until the ULC adopts the amendments in July 2022 and delay actual adoption until July 2024. 2. Take a hybrid approach similar to 2021 SB 177 where some aspects are passed now but bulk of digital asset custody/transactions wait until ULC adoption in July 2022. 3. Pass the current UCC amendments as drafted to ensure Kentucky does not lag behind other states in the blockchain sector and then amend as needed after July 2022 ULC adoption. Recommendation 1.7: To avoid any delay that would hamper Kentucky’s ability to compete in the digital asset space, the Working Group would recommend that the General Assembly adopt the ULC drafted proposal changes early with the anticipation that this is the path that most states will follow in the future.

RECORDS MANAGEMENT

Contracts Advancement in electronic technology lead to the ability to execute contracts without needing to be present. Previously, the execution of a contract required the signatories of a contract be present and physically sign the contract document. This changed over the last decade with online services such as DocuSign and Adobe Acrobat. These electronic systems allow parties to a contract to sign documents without being physically present.

Though these platforms allowed the execution of contracts to become more efficient there are some basic weaknesses in these systems. The primary weakness is the guarantee of authenticity or validity of the signature. The common process is for the contract documents to be electronically forwarded or supplied to the parties. This is completed through a link provided in an email. The recipient follows the link to the documents that are hosted on a central server. The recipient reviews the documents and then when prepared to sign acknowledges their agreement to the electronic signature process and then attach an electronic signature. The issues in this process are that there is no guarantee the signatory is the actual party intended for the agreement, as the link is usually emailed through unencrypted email. The second issue is that all the signed documents are maintained in a central database that is vulnerable to cyber-attack. A system that enables blockchain as part of the signature process allows the documents to be maintained in a decentralized system reducing the probability of cyber-attack. Additionally, blockchain will validate the identity of the signer. Blockchain provides a key that is unique to the individual allowing assurance that the signatory to the contract is the party intended.

Accounting/Auditing Blockchain is widely considered to be one of the most significant innovations to accounting since the invention of the double-entry ledger system. The double-entry ledger has been the basis for accounting practices for roughly 500 years. The basic nature of double-entry accounting is that all credits and debits are recorded in a single ledger. Though this system may work effectively for the parties involved in a specific transaction it provides no transparency to other interested parties such as investors, auditors, taxing authorities, financial institutions, or other similar entities. The maintenance of a single ledger by the individual or corporation leads to many issues including criminal fraud. The idiom “cook the books” long ago entered into common slang. Recent financial crimes in large corporations and even government entities provide testimony to the potential for manipulation.

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The nature of blockchain creates a transparent and immutable transaction trail that has been identified as “triple- entry accounting”. This creates an incorruptible link between the transactions recorded in a double entry ensuring the integrity of the transaction record. The only solution to identifying manual errors or fraud in the double-entry system was through costly and time-consuming audits. Even with full, comprehensive audits, intentional malfeasance has gone undiscovered. The implementation of blockchain in the accounting system of corporations, individuals and governments provides a transparent record of transactions that are nearly impermeable to fraud. This reduces the necessity for intensive audits leading to efficiencies and cost-savings in the systems, especially for budget restricted governments.

Recommendation 1.8: The Kentucky Auditor’s Office should explore the benefits of implementing blockchain technology in their auditing processes, especially those that occur annually.

Rationale: The immutable audit trail would allow the Auditor’s office to better automate and accommodate the auditing process for the government agencies it is required to audit every year. From the budgeting process through the audit process, a single system built on blockchain could provide significant cost and time savings in completing these regular audits allowing for concentration to be focused on special audits.

Legal Records and Documents State and local governments are a vast depository of legal records and documents. These governments or associated agencies maintain numerous records including but not limited to state issued IDs, property records and land deeds, motor vehicle registrations, driving records, voter registrations, voting records, occupational and business tax records, corporate and non-profit entity registrations, criminal records, professional and occupational licensing records, alcoholic beverage licenses, gaming licenses, and a myriad of other records and documents. These records, when maintained electronically, are usually located on a local server at the county clerk’s office, or a city hall, county courthouse or the state government servers. This central repository is vulnerable to a concentrated cyber-attack. Also, the electronic records may be susceptible to loss of information or data through the potential shut down or corruption of the central server. Sharing of these records and documents should be completed through either providing access directly to the database or providing a copy forwarded through an electronic means such as email.

Blockchain provides the opportunity to manage, transfer and store these legal and governmental documents within a distributed ledger addressing the risks of centralized storage as well as maintaining the custody of the records and ensuring the integrity and accuracy of the electronic documents. As a case study, the nation of Dubai, through the Department of Economic Development, initiates all business registrations, business licenses, and other business-related documents entirely by blockchain.

Recommendation 1.9: Legislation should be amended to include a member of the Blockchain Technology Working Group on the Task Force on Electronic Recording of Official Documents by County Clerks.

Rationale: In 2019, the Kentucky General Assembly created the Task Force on Electronic Recording of Official Documents by County Clerks (2019 SB 114) to study and implement the filing of documents with County Clerks in electronic form. This included identifying methods needed to provide electronic notarization of the official documents. This is an on-going task force with regular meetings. The task force includes representatives from companies that already operate in the e-filing and e-notary services. The inclusion of a member of the Blockchain Technology Working Group on this task force would

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provide the opportunity for blockchain to be researched and potentially implemented in the shift to electronic filing.

Recommendation 1.10: The Kentucky Secretary of State, as custodian of both elections and business filings, should research the benefits of blockchain in the issuance and/or management of these records to ensure the integrity and accuracy of these crucial records.

Rationale: The shift to alternate methods of voting during the Covid-19 pandemic has demonstrated that methods other than in-person voting can be provided. Utilization of blockchain, while not the panacea to cure potential voting issues, could be a large step forward in ensuring that election fraud is impossible. Business registrations and licenses could also be maintained securely and efficiently.

Recommendation 1.11: The Commonwealth of Kentucky should continue to research opportunities that may benefit from blockchain technology in records and document management systems in the state government. To ensure interoperability blockchain will need to be implemented in an organized, centralized and efficient manner.

Licensing From 2017-2019 the Occupational Licensing Policy Learning Consortium was facilitated by the National Council for State Legislatures, the Council for State Governments and the National Governor’s Association through a series of grants, in excess of $3.5 million, from the US Department of Labor. The Commonwealth of Kentucky was one of eleven (11) primary states that participated in this Consortium. The Kentucky team consisted of members from the Governor’s Office, the State House and Senate, the Public Protection Cabinet and the Department for Local Government. The two main objectives of this Consortium were to study the barriers to entry in the state licensing systems as well as to identify opportunities for license portability between states. Blockchain technology can significantly advance the portability of professional and occupational licenses. The current standard for professional and occupational licensing is the establishment of oversight through state control either by individual licensing boards (such as currently utilized in Kentucky) or by central licensing agencies attached directly to a state office (Ohio and Tennessee are examples). Licensees that acquire their license in one state but desire to work in another must subsequently secure their license through the second state. For example, a licensed respiratory therapist may live in Jeffersonville, IN and possess an Indiana license. However, they may secure employment with one of the hospital systems in Louisville, KY. In order for them to be able to work in Kentucky they will have to go through the entire licensing process to secure a second license in the Commonwealth of Kentucky. This may cost the respiratory therapist a great deal of time and money completing the process just be able to practice their profession. They will then be required to maintain all requirements and fees for two licenses. A system which supports portability of licenses would remedy this situation and remove barriers to work.

A current solution utilized to promote portability of licenses is achieved through Interstate Compacts. These compacts are agreements between states and recognize licenses from other states. The portability only applies to the states that are signatories to the charter. The establishment and maintenance of charters are both costly and legislatively complex. In addition, the information for the licensees is either maintained by the individual states or in some cases may be maintained in a central location managed by an entity that oversees the operations

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of the compact. In either case, this provides the opportunity for conflicting data, in the case of individual state- maintained data, or vulnerability to hacking if managed in a central database.

A blockchain system removes the centralized database and replaces it with a distributed ledger system which would allow all the states to have access to the same information on licensees and would significantly reduce the risk of corruption or theft of data. The licensee would have responsibility for the maintenance of their license and would allow access to the desired states in which they wish to practice. With a distributed ledger, the states would have access to all licensees that may wish to practice in their states and would be able to immediately share information with other states if there is a change in the licensees status due to an events such as failure to complete continuing education, disciplinary actions, investigations, escrow or any other event that could impact public protection and the licensees ability to practice.

Recommendation 1.12: The Department for Professional Licensing, the Public Protection Cabinet (PPC) and the Commonwealth Office of Technology (COT) should research the opportunity provided by incorporating blockchain technology into Kentucky’s licensing systems. Rationale: Kentucky is already a signatory on several interstate compacts and new compacts are developing that will enter the legislative pipeline in the near future. During the Consortium process, the Kentucky team secured a 2018 US Department of Labor grant for $400,000. The initial grant $100,000 earmarked for COT to improve the state’s licensing software. The grant went dormant April of 2019 and continued to be dormant through December of 2020. The grant was transferred from the Department for Local Government to the Public Protection Cabinet. At this point less than $40,000 has been expended. From March 2020 through current, the grant has been reviewed and may have been re-activated by PPC, but the extent of any progress is unknown. The grant is due to expire June 30, 2021. This provides a seven (7) month opportunity to examine blockchain use in the Kentucky licensing system.

PUBLIC UTILITIES

Modern public utility infrastructure is highly complex, automated, and distributed across wide areas. Ensuring the integrity of communications across this infrastructure is paramount to maintaining critical utility services for citizens and businesses of the Commonwealth.

While it is difficult to predict the impact of Blockchain technology on utilities at this early stage there are some potential implications for financial transactions, energy generation and distribution, renewable energy, infrastructure management, enhanced customer service, and service delivery. It’s important to note that energy generation and distribution is heavily regulated by the Federal Energy Regulatory Commission (FERC), the North American Electric Reliability Corporation (NERC), and regional organizations such as the Southeastern Electric Reliability Corporation, therefore any integration of Blockchain technology in this process will need to be endorsed by these and other local regulatory organizations.

Financial transactions could utilize secure, innovative solutions that are automatically triggered by specific requirements being met between buyers and sellers at all levels of the supply chain. Retail consumers could benefit from timely and secure payment transactions. Utilities could also utilize similar transactions to simplify financial exchanges for mutual aid and shared resources. Energy generation and distribution could be improved by incorporating Smart Grid functionality.

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Tokens referred to as “Renewable Energy Credits” or RECs are a method of monetizing renewable energy. Currently these tokens are thoroughly audited to ensure the token is only used once. Blockchain enabled RECs would be more efficient and eliminate the need for audits. As carbon emission tracking becomes more common, Blockchain could usher in an acceptable mechanism to track these emissions. The tracking system could be a unified platform offering a single solution for calculations.

Infrastructure management could benefit from far more detailed tracking and easier access to component information such as manufacturer, date and time manufactured, shipping details, time of installation, service life, load capabilities, and so much more. When coupled with augmented reality the real-time benefits of this information almost inconceivable. Blockchain technology could be incorporated into Automated Metering Infrastructure (AMI) processes that allow customers to access real-time usage data, flexible billing options, automatic disconnection/reconnection functionality, and reliable service transactions.

LOGISTICS AND SUPPLY CHAIN MANAGEMENT

The Commonwealth is geographically positioned well to serve as a central point for logistics through the eastern United States. The Commonwealth is recognized as the #1 Location in the U.S. for population served in one day’s drive (Source: Claritas), GRADE A in Logistics Industry Health (Source: Manufacturing Scorecard 2019, Ball State Center for Business #1 and Economic Research) and we are is in 600 miles of 54% of the US population, 56% of US manufacturing and 27 Major Metro markets. The Cincinnati/Northern Kentucky International Airport (CVG) is the 8th largest cargo airport in North America and home to the Amazon Air hub and DHL's North American super-hub. Two Class I railroads (CSX and Norfolk Southern) cross our region and the Port of Cincinnati and Northern Kentucky is the busiest inland river port in the United States (US Army Corps. of Engineers Navigation Data Center, 2016). With the addition of blockchain technology the area could present an even more appealing case to potential businesses looking to expand.

Modern logistics goes well beyond transferring goods from point A to point B and requires the coordination of multiple supply points of origin and a disparate spectrum of destination points ranging from individual consumers to large scale industry. This creates complex communication flows, often between untrusted parties, that not only have to be secure and validated but also timely to meet the speed of business. Blockchain is a much needed and obvious technological upgrade, particularly when paired with big data, IoT, smart contracts, and artificial intelligence. It can greatly reduce costly errors, decrease delivery time, and lower the overall costs that plague most large, centralized logistics platforms. As with many other blockchain use-cases, it can ensure greater transparency and access to information between the parties involved.

HEALTHCARE

The Commonwealth is home to some of the most progressive and nationally leading healthcare providers and institutions in the country. Anyone seeking treatment in the Kentucky healthcare system, beyond routine health concerns, will experiences the disparate nature of a service delivery that includes general practitioners, specialists, hospitals, and more. The effective and efficient flow of critical treatment data among these providers, typically in disparate institutions, could greatly improve the quality of service and the speed the critical health concerns can be treated. This data is extremely sensitive, profoundly critical to human safety, and heavily regulated by standards such as the Health Insurance Portability and Accountability Act (HIPAA). Blockchain has the potential to rapidly share this critical data with the highest level of protection, while also ensuring patient privacy and compliance with regulatory standards.

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The working group met with University of Kentucky Healthcare this reporting period to discuss their insights and efforts that include, or may benefit from, the use blockchain technology. As one of the progressive teaching hospitals in the nation, they are abreast of movement in the Healthcare space that may be leaning towards taking advantage of Blockchain technology. While there is interest in Blockchain technology in the Healthcare sector, there are challenges and concerns that give pause to progress.

 Due to the critical nature of healthcare where speed and consistency of service delivery is critical to human safety, healthcare institutions cannot experience downtime or degradation of services that may be the result of deploying cutting edge technologies such as blockchain. Additional standardization and maturation of the technology is needed to instill the confidence needed to ease these concerns.

 Cost to re-engineer is high. Healthcare institutions leverage high cost and complex technology solutions. Due to the complexity involved with building on Blockchain technology, the transition to such system would require the redesign of the existing architecture and considerable development costs.

While concerns do exist, there still are areas of opportunity as follows:

Data Analytics

The Centers for Disease Control is currently exploring the opportunities for using blockchain technology to monitor diseases at a national level. As seem throughout the global COVID-19 pandemic, the ability to track outbreaks across geographically diverse locations can aid in the rapid identification of outbreak hot spots, speed response times that can assist in containment and provide critical data analysis for tracking community spread of disease. While the benefits at a national level are obvious, the collaborative nature of blockchain enabled information sharing networks will allow for states to leverage the trending data to help drive informed policy decisions.

Currently the Centers for Disease Control are advancing the research into the sharing of information through systems empowered by blockchain technology. While the primary focus is on predictive analytics attempting to pinpoint future spread, it has been identified that another key aspect is the management of response resources. Through rapid and secure sharing of information that can identify ‘hot spots’ in real time, federal resources can be mobilized more quickly to address threats and works towards more rapid containment. The Commonwealth should prepare to take part in these initiatives when the opportunity arises.

Recommendation 1.13: The Commonwealth of Kentucky should explore blockchain related grant and/or partnership opportunities with federal entities such as the Centers for Disease Control.

Rationale: The nature of these efforts at a national level cannot be addressed, nor funded, solely by the states. The efforts around preparing the nation and the states for current and future events such as the global COVID-19 pandemic will require concerted efforts and participation at both a state and national level.

Medical Research

The Commonwealth of Kentucky is home to some of the leading research and teaching hospitals in the country. With key healthcare leaders, such as University of Kentucky Healthcare, University of Louisville Health, Baptist Health, Norton Healthcare, and Jewish Hospital to name a few, there is a significant capacity already in place in the state. Finding those opportunities to enhance the existing capabilities in the state with technology advancements such as blockchain can position Kentucky to draw additional healthcare business to the state and help move the Commonwealth to the forefront of the healthcare industry.

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Controlled Substances

Tracking use of controlled substances such as Opioids, that have a profound impact on the lives of citizens in the state, is critical in helping combat the misuse of these substances. The Commonwealth has made substantial investment in the current eKasper program to help gather and track this information to assist in addressing the national crisis. Blockchain technology could enhance this program by adding efficiency and security to the data flow and open opportunity for effective data sharing at a national level.

Based on the recommendation of the 2020 Blockchain Working Group Report, the working group discussed with the Kentucky Cabinet for Health and Family Services the potential of exploring the use of blockchain technology to facilitate the sharing of opioid and controlled substance information across states at a regional or national level. The feedback received was that there currently no plans to do this at this time. Due to lack of standardization and complexity involved in such endeavors, initiatives such as this would need to be driven at a federal level.

Recommendation 1.14: The Commonwealth should poll neighboring states to determine if sufficient appetite exists to work towards efforts that use the security and efficiency of Blockchain technology to enhance, or implement new, mechanisms to share controlled substance information to contribute to the national fight against substance abuse.

Rationale: Sharing information across multiple entities requires agreement, a unified approach, and standardization. Any attempts to be successful will require a collaborative effort and buy in. The Commonwealth can open the door for this opportunity by initiating the conversation but ultimately it will depend on the ability to execute by all participants.

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Blockchain Risks

This report describes a highly capable and valuable technology, but the technology also has risk. Blockchain is still developing a maturity level needed for a viable solution in some use cases. The technology is in an exploratory state in many industries. While each use case may have specific risks, there are risks that span across most, if not all, lines of business.

COST

Blockchain technology is rarely capable of being layered on top of existing technology. Many times, existing infrastructure and systems require redesign to accommodate the use of blockchain. This represents a high deployment cost in existing complex scenarios.

In addition to the programmatic implementation costs, blockchain technology may impart increased technology overhead requiring increased computing resources. It is likely that additional costs will be incurred to add processing power in systems that leverage blockchain.

LACK OF STANDARDIZATION

While blockchain at a conceptual level is well defined, there are multiple methodologies and mechanisms needed to deploy it. Without standardization and defined common operational standards there exists interoperability concerns.

In addition, there are databases and other software programs/platforms that are being marketed as being blockchain-based but, in reality, are not.

LACK OF CENTRALIZATION

The development of the internet over the last half century has conditioned users to certain expectations with their online experiences. Whether it is email, banking, e-commerce, social media, streaming services or any other of the myriad of platforms developed for the internet, users rely on some central authority to serve as intermediary. For example, Amazon serves this function with online sales transactions, whether through the services they offer, or through the storefronts that they provide other companies and individuals.

Blockchain is a decentralized system of record where individuals or nodes are the responsible entity. A banking customer, in the current system, could potentially lose their log in information to gain access to their account. Because the bank serves as the central authority, the customer follows a process to re-establish their identity and re-gain access to their account. However, in the decentralized system of blockchain, there is no central authority, clearinghouse or repository for this information. A lost key for cryptocurrency could result in that cryptocurrency being lost in the electronic void. This situation has already occurred with lost keys for Bitcoin. As a result, Bitcoin owners lost millions of dollars because they are unable to access their accounts.

REGULATION

Over regulation of a growing technology can be very restrictive to the technology reaching maximum potential. By restricting use, or applying standards that are too narrow, through constricting regulations government, officials can impede the innovation and adoption of the technology and delay or prevent the realization of the benefits of some use cases. However, lack of regulations could have the opposite effect leading to the potential for chaos and uncertainty in the development of a complex technology such as blockchain.

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GARBAGE IN, GARBAGE OUT

Blockchain is designed and utilized as a system of record. Its immutable nature allows it to provide a strong, transparent and auditable record of transactions. However, when logging physical assets on the blockchain, there exists the potential for error or manipulation. For example, in supply chain management, a seller may log a valuable bottle of bourbon on the blockchain ensuring that collectors purchasing the bottle have an adequate record of where the bottle’s location and any changing of ownership. The blockchain ledger securely records these transactions, however it cannot verify that the bottle originally placed on the blockchain was Pappy Van Winkle and not Kentucky Tavern.

OVER EXUBERANCE

Blockchain is heralded as the next greatest technological development since TCPIP was developed leading to the creation of the Internet. While possible, it is still much too early to predict the technology’s scope and influence on everyday lives of individuals. The Internet, through TCPIP, was created in 1972, yet the consumer and public aspects of the Internet where not realized until the mid-1990s when the Dot Com explosion ignited. The Internet initially developed more in isolation through research, academic and military applications. This provided ample time to experiment and create a more usable and unified architecture.

Blockchain is developing in an entrepreneurial manner with corporations and individuals scrambling to be the first to market. Investment, or potentially what is better termed prospecting, is leading to huge influxes of capital into projects that may or may not come to fruition. Where the Internet did not see a bubble/burst cycle until a couple decades into development, blockchain may be seeing it more at its infancy. This may lead to a lack of standardization, as mentioned previously, as well as the risk of failure which may negatively impact future development and investment.

Another facet of over exuberance in the developing technology is that blockchain may be applied in situations where it is not necessarily needed. Blockchain has, or is becoming, a buzzword that attracts attention as something that “you must have”. This could be analogous to when Echinacea was identified as having some health benefits and suddenly every herbal remedy, cough drop, nutraceutical or OTC medication began to add it into their blend and market it to capitalize on its perception and gaining popularity.

Recommendation 2.0: Kentucky should explore the benefits of creating a state blockchain leadership position (officer, liaison, coordinator, etc.) to aid in the research and management of potential implementation of blockchain in the state government. This officer would consult with all branches of government, cabinets, agencies and even other local governments to manage the adoption and implementation of blockchain in a smart, methodical and unified manner. In the interim, the work group should identify an intake process for blockchain related inquiries.

Rationale: This report has identified many opportunities for adopting and implementing blockchain to create efficiencies in the systems of the Commonwealth of Kentucky. This report has also identified that there are many risks and potential “landmines” that exist in pursing blockchain adoption. The state blockchain officer can identify opportunities in the state government where blockchain could be beneficial, but likewise rule out cases where it would be either unnecessary or even redundant. The officer could serve as the point of contact for blockchain inquiries, market the state to potential blockchain companies and investment, serve as liaison to blockchain organizations, aid or coordinate the operations

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of the Kentucky Blockchain Technology Working Group and provide general direction and advice for all things “blockchain”. Additionally, with the creation of this position it will send a clear message nationally and globally that Kentucky is in the vanguard of innovation with blockchain technology.

ENVIRONMENTAL IMPACTS

The implementation of blockchain in support of some use cases can require large computational and support resources, such as cooling, that consumes large quantities of power. This increased power demand could result in increased carbon emissions and overall carbon footprint.

INCREASED CYBERSECURITY THREATS

As blockchain technology becomes more prevalent, it will likely be seen as an increased area of focus for bad actors in the realm of cybersecurity. As blockchain sees more widespread use in critical infrastructure, bad actors will tailor attacks focused on the blockchain as a means to interrupt, corrupt, or infiltrate these services. These threats can be more pronounced in smaller scale blockchain deployments.

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Legislative Analysis 2021 Disclaimer: This legislative analysis is intended to be used as a general reference guide to recent or current legislation only and will be developed more comprehensively over time as the Blockchain Technology Working Group continues to perform its duties under 2020 Senate Bill 55 and KRS 42.747. Recommendation 3.0: Kentucky should review the legislation adopted or enacted in other states.

Rationale: Blockchain is a highly diverse technology that is still somewhat in its infancy. Because of this, effective legislation can help foster adoption of the technology and its success within the state. By leveraging the experience of other states that have already taken some of the preliminary step, the Commonwealth can craft legislation that defines blockchain effectively and avoid the constrains that can be placed on an emerging technology that can stem from over, or under, regulation.

The following represents current legislative initiatives observed other states: Arizona HB 2544 Passed House 2/23/21 Establishes the blockchain and cryptocurrency study committee. California SB 638 Existing law, the General Corporation Law, authorizes the formation of a corporation by executing and submitting articles of incorporation to the secretary of state for filing, according to specified procedures. Existing law, the Social Purpose Corporations Act, authorizes the formation of a social purpose corporation by executing and submitting articles of incorporation to the secretary of state for filing, as specified. Existing law authorizes, until Jan. 1, 2022, a corporation or a social purpose corporation that does not have outstanding securities listed on specified securities exchanges to adopt provisions within its articles of incorporation authorizing records administered by or on behalf of the corporation in which the names of all of the corporation’s stockholders of record, the address and number of shares registered in the name of each of those stockholders, and all issuances and transfers of stock of the corporation to be recorded and kept on or by means of blockchain technology, as specified. Existing law defines “blockchain technology” for these purposes to mean a mathematically secured, chronological, and decentralized consensus ledger or database. This bill makes these provisions operative indefinitely. The bill also revises the definition of “blockchain technology” to mean a decentralized data system, in which the data stored is mathematically verifiable, that uses distributed ledgers or databases to store specialized data in the permanent order of transactions recorded. California SB 689 Existing law requires the state registrar, local registrar, or county recorder, upon request and payment of the required fee, to supply to an applicant a certified copy of the record of a birth, fetal death, death, marriage, or marriage dissolution registered with the official. Existing law requires the certificate to contain certain information and to be printed on chemically sensitized security paper, as specified. This bill authorizes a certified copy of a birth, death, or marriage record issued pursuant to those provisions to be issued, in addition to the required method described above, by means of blockchain technology, as defined. Existing law requires the secretary of the Government Operations Agency to appoint a blockchain working group and requires that group to submit a report containing specified information related to blockchain technology to the Legislature on or before July 1, 2020. This bill revises and recasts the definition of blockchain for purposes of those provisions.

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Connecticut SB 1039 Requires (1) the Department of Administrative Services to issue a request for information for the incorporation of blockchain technology to make a state administrative function more efficient or cost effective, and (2) the Department of Economic and Community Development to develop a plan to promote existing remote work workspaces and incentivize the creation of new remote work workspaces. Florida HB 4119 Provides an appropriation for the Food Equity & Racial Disparities in Food Supply Chain Blockchain Pilot: St. Petersburg. Hawaii HB 622 Requires the Hawaii technology development corporation to establish a blockchain working group to recommend a definition for blockchain technology and make recommendations for individuals, businesses, and state agencies to use blockchain technology and report to the legislature. Appropriates funds. Hawaii SCR 93 Requests the office of enterprise technology services to conduct a study on the potential benefits and value of blockchain technology to state government administration and affairs. Hawaii SR 72 Requests the office of enterprise technology services to conduct a study on the potential benefits and value of blockchain technology to state government administration and affairs. Idaho HB 327 Relates to financial technology; amends title 26, Idaho Code, by the addition of a new chapter 38, title 26, Idaho Code, to provide a short title, to define terms, to provide for utility tokens, to provide for powers and duties of the director, and to provide remedies for violations; and amends title 26, Idaho Code, by the addition of a new chapter 39, title 26, Idaho Code, to provide a short title, to define terms, to provide for a financial technology sandbox and a certain waiver, to provide for a financial technology sandbox application, to provide for the operation of the financial technology sandbox, to provide for revocation or suspension of the financial technology sandbox authorization, to provide for extension of the sandbox period, and to provide for rules and orders, bonds, restitution and applicability of the administrative procedure act. Iowa HF 799 Code chapter 554D, the uniform electronic transactions Act, facilitates the use of electronic transactions in commerce by giving legal recognition to electronic records, signatures, and contracts. This bill modifies the Code chapter by permitting the use of distributed ledger technology and smart contracts in electronic transactions. The bill defines “distributed ledger technology” as an electronic record of transactions or other data that is uniformly ordered, 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 is validated by the use of cryptography. The bill defines “smart contract” as an event-driven program or computerized transaction protocol that runs on a distributed, decentralized, shared, and

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replicated ledger that executes the terms of a contract by taking custody over and instructing transfer of assets on the ledger. The bill adds contracts secured through distributed ledger technology and smart contracts to the definition of “contract.” The bill adds the concept of security through distributed ledger technology to the definitions of “electronic record” and “electronic signature.” The bill provides that a person who, in engaging in or affecting interstate or foreign commerce, uses distributed ledger technology to secure information that the person owns or has the right to use retains the same rights of ownership or use with respect to such information as before the person secured the information using distributed ledger technology, unless in connection with a transaction with terms that expressly provide for the transfer of rights of ownership or use with respect to such information. The bill provides that a contract shall not be denied legal effect or enforceability solely because the contract is a smart contract or contains a smart contract provision. Iowa SF 303 Code chapter 554D, the uniform electronic transactions Act, facilitates the use of electronic transactions in commerce by giving legal recognition to electronic records, signatures, and contracts. This bill modifies the Code chapter by permitting the use of distributed ledger technology and smart contracts in electronic transactions. The bill defines “distributed ledger technology” as an electronic record of transactions or other data that is uniformly ordered, 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 is validated by the use of cryptography. The bill defines “smart contract” as an event-driven program or computerized transaction protocol that runs on a distributed, decentralized, shared, and replicated ledger that executes the terms of a contract by taking custody over and instructing transfer of assets on the ledger. The bill adds contracts secured through distributed ledger technology and smart contracts to the definition of “contract.” The bill adds the concept of security through distributed ledger technology to the definitions of “electronic record” and “electronic signature.” The bill provides that a person who, in engaging in or affecting interstate or foreign commerce, uses distributed ledger technology to secure information that the person owns or has the right to use retains the same rights of ownership or use with respect to such information as before the person secured the information using distributed ledger technology, unless in connection with a transaction with terms that expressly provide for the transfer of rights of ownership or use with respect to such information. The bill provides that a contract shall not be denied legal effect or enforceability solely because the contract is a smart contract or contains a smart contract provision. Iowa SF 541 Code chapter 554D, the uniform electronic transactions Act, facilitates the use of electronic transactions in commerce by giving legal recognition to electronic records, signatures, and contracts. This bill modifies the Code chapter by permitting the use of distributed ledger technology and smart contracts in electronic transactions. The bill defines “distributed ledger technology” as an electronic record of transactions or other data that is uniformly ordered, 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 is validated by the use of cryptography. The bill defines “smart contract” as an event-driven program or computerized transaction protocol that runs on a distributed, decentralized, shared, and replicated ledger that executes the terms of a contract by taking custody over and instructing transfer of assets on the ledger. The bill adds contracts secured through distributed ledger technology and smart contracts to the definition of “contract.” The bill adds the concept of security through distributed ledger technology to the definitions of “electronic record” and “electronic signature.” The bill provides that a person who, in engaging in or affecting interstate or foreign commerce, uses distributed ledger technology to secure information that the person owns or has the right to use retains the same rights of ownership or use with respect to such information as before the person secured the information using distributed ledger technology, unless in connection with a transaction with terms that expressly provide for the

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transfer of rights of ownership or use with respect to such information. The bill provides that a contract shall not be denied legal effect or enforceability solely because the contract is a smart contract or contains a smart contract provision. Nevada AB 163 Relating to elections; requires, with certain exceptions, proof of identity for voting in person; requires the Department of Motor Vehicles, under certain circumstances, to issue voter identification cards at no cost; authorizes, under certain circumstances, a county or city clerk to use a voting system with blockchain technology; revises the deadlines for returning and counting absent ballots; prohibits, with certain exceptions, a person from returning an absent ballot or mailing ballot on behalf of a voter; requires a county or city clerk to allow any member of the public to observe the counting of ballots; revises the deadline for the completion of the canvass of an election by a board of county commissioners; eliminates the authority for a person to register to vote after the close of registration; requires the secretary of state to enter into a cooperative agreement with the state registrar of vital statistics to obtain certain information relating to the statewide voter registration list; repeals provisions relating to voting by mail ballot and conducting certain elections affected by a disaster or emergency; and provides other matters properly relating thereto. Nevada SB 110 Creates the Emerging Technologies Task Force within the Department of Business and Industry; prescribes the membership, powers and duties of the Task Force; authorizes the director of the Department to create an Opportunity Center for Emerging Technology Businesses as part of the Office of Business Finance and Planning of the Department; and provides other matters properly relating thereto. New Jersey AB 320 This bill requires the state of New Jersey to review and approve a viable blockchain-based, digital payment platform to provide payment services to legal and licensed businesses in this state that do not have access to traditional financial services and are forced to operate in cash-only or cash-heavy environments. The purpose of the payment platform is to provide a safe, secure, and compliant system that does not exclude these businesses from participating in digital commerce. The bill requires the payment platform to provide businesses with access to cashless transactions and to secure revenue on a one-to-one basis of virtual currency to U.S. dollars. A business shall only have access to the payment platform with approval from the state. The payment platform shall provide the ability to manage and process all business expenditures and allow all transactions to be recorded on an immutable blockchain ledger. The payment platform shall facilitate regulatory compliance, provide for audits by the state, and allow for payment of sales tax to local municipalities. New Jersey AB 1178 Passed Assembly 10/29/20 SB 898 Permits corporations to use blockchain technology for certain recordkeeping requirements. New Jersey AB 2891 SB 3132 Creates the Digital Asset and Blockchain Technology Act.

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New Mexico HB 296 Passed House 3/12/21 Provides that the unexpended balance of the appropriation to the higher education department in Subsection 2 of Section 39 of Chapter 81 of Laws 2020 to plan, design and construct a blockchain center at Central New Mexico Community College in Albuquerque in Bernalillo county shall not be expended for the original purpose but is changed to conduct feasibility studies, to design, develop, acquire, build, improve, furnish and equip information technology and to install a distributed ledger technology system at Central New Mexico Community College. New York AB 3099 SB 5643 Establishes the office of financial resilience to develop and implement new programs and initiatives for the purpose of supporting local economies and promoting resilient financial models. New York AB 3587 Establishes the test, trust, and certify act to establish a protocol for COVID-19 testing, contact tracing, and immunity certification and to protect individuals' right to privacy; grants individuals the right to control their self-sovereign identification data; provides for the anonymization of biometric data for protection from law enforcement. "Tracking" or "contact tracing" shall mean the protocol through which the infectious spread of the novel SARS-CoV-2 coronavirus and corresponding propagation of COVID-19 is monitored in individuals. Such protocol may be implemented through, but not limited to, the use of smart phone applications, an anonymized or pseudonymous digital tracing identifier, and blockchain, GPS, or Bluetooth technology. New York AB 3760 SB 1801 Passed Senate 2/10/21 Allows signatures, records and contracts secured through blockchain technology to be considered in an electronic form and to be an electronic record and signature; allows smart contracts to exist in commerce. New York AB 3813 SB 1800 Passed Senate 2/22/21 Relates to the development and creation of distributed ledger technology, which is a mathematically secured, chronological, and decentralized consensus ledger or database, whether maintained via internet interaction, peer-to- peer network, or otherwise used to authenticate, record, share and synchronize transactions in their respective electronic ledgers or databases, and business entities that develop distributed ledger technology. New York AB 3862 SB 4195 Establishes a task force to study and report on the potential implementation of blockchain technology in state record keeping, information storage, and service delivery.

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New York AB 4332 Directs the state board of elections to study and evaluate the use of blockchain technology to protect voter records and election results. Ohio HB 177 Enacts §9.16 of the Revised Code to allow a governmental entity to utilize distributed ledger technology, including blockchain technology. Rhode Island HB 5425 This bill establishes an economic growth blockchain act, sets regulations for the sale of hemp, regulates virtual and digital assets and establishes depository banks for these purposes. Rhode Island SB 345 This bill establishes an economic growth blockchain act, sets regulations for the sale of hemp, regulates virtual and digital assets and establishes depository banks for these purposes. South Carolina HB 3493 Creates the South Carolina blockchain voting verification study committee to address utilizing blockchain technology to allow South Carolina voters to verify their votes. South Carolina HB 3495 Enacts the "South Carolina Blockchain Industry Empowerment Act of 2021" in order to establish this state as an incubator for tech industries seeking to develop innovation by using blockchain technology; adds s§33-6-245 so as to further provide for the construction of terms relating to stock and certificate tokens; amends §33-6-250, relating to the form and content of corporate stock certificates, so as to authorize corporations to issue certificate tokens in lieu of stock certificates; adds chapter 47 to title 34 to provide that a person who develops, sells, or facilitates the exchange of an open blockchain token is not subject to specified securities and money transmission laws, and provides specified verification authority to the attorney general and banking commissioner; adds chapter 51 to title 34 so as to specify that digital assets are property within the uniform commercial code, authorizes security interests in digital assets, establishes an opt-in framework for banks to provide custodial services for digital asset property as custodians, specifies standards and procedures for custodial services, clarifies the jurisdiction of South Carolina courts relating to digital assets, authorizes a supervision fee, and provides for other related provisions to digital assets; amends §35-11-105, relating to definitions under the South Carolina anti-money laundering act, so as to define the term "virtual currency"; and amends §35-11-110, relating to matters and transactions to which the anti-money laundering act does not apply, so as to provide that the act does not apply to buying, selling, issuing, or taking custody of payment instruments or stored value in the form of virtual currency or receiving virtual currency for transmission to a location within or outside the United States by any means.

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Texas HB 1576 SB 1076 Relates to the creation of a work group on blockchain matters concerning this state. Texas HB 2199 SB 1077 Relates to the establishment of the digital identity work group. Texas SB 344 Relates to the use of electronic signatures that employ blockchain or distributed ledger technology in certain business or governmental transactions. Wyoming HB 142 Relates to corporations, partnerships and associations; authorizes the secretary of state to develop and implement a blockchain or other distributed ledger filing system; provides requirements for the filing system; provides definitions; authorizes the supreme court to develop a similar filing system for the chancery court; authorizes the promulgation of rules; repeals the previous enabling legislation; creates an account; provides appropriations for the updating of filing systems by the secretary of state and the chancery court and for advertising; and provides for retention of a consultant and a report. Wyoming SF 38 Relates to corporations; provides for the formation and management of decentralized autonomous organizations and provides definition.

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Appendix A – Case Study: IoT, Autonomous Agents, & Smart Contracts How Blockchain Technology Can Reinvent The Power Grid BY DON TAPSCOTT AND ALEX TAPSCOTT May 15, 2016 10:34 AM EDT https://fortune.com/2016/05/15/blockchain-reinvents-power-grid/ A power pole collapses at 8 p.m. on a hot night in the remote outback of Australia. This is a problem for William and Olivia Munroe, who raise sheep and cattle 100 miles outside an old gold mining town on the edge of the Great Victoria Desert. In the summer, the temperature frequently soars close to 120 degrees Fahrenheit. Their children attend school via satellite link, the family’s only means of accessing health services in case of illness or emergency. Although the Munroe’s’ have a backup generator, it can’t power the water pumps, communications, and air-conditioning for long. In short, their lives depend entirely upon reliable energy. Nine hours later, the power utility sends out a team to find and fix the downed pole. Customer complaints give the company an idea of where the break occurred, but the team takes more than a day to identify, reach, and fix the pole. Meanwhile, the Munroe’s and nearby residents, businesses, and institutions go without power and connectivity at considerable inconvenience, economic impact, and physical risk. In the outback, blackouts are not just paralyzing; they’re dangerous. To minimize these hazards, at great expense the company deploys teams of inspectors to check the network regularly. Imagine how much safer, easier, and cheaper it would be if each power pole were a smart thing. It could report its own status and trigger actions for replacement or repair. If a pole caught fire or began to tip or fall, it would generate an incident report in real time and notify a repair crew to come with the appropriate equipment to the precise location. Meanwhile, the pole could potentially reassign its responsibilities to the nearest working pole. After all, they’re all on the grid. The utility could restore power to the community more quickly without the huge ongoing costs of field inspection. Using emerging software and technologies associated with the Internet of Things, we can instill intelligence into existing infrastructure such as a power grid by adding smart devices that can communicate with one another. Imagine creating a new flexible and secure network quickly and relatively inexpensively that enables more opportunities for new services, more participants, and greater economic value. This configuration is known as a mesh network, that is, a network that connects computers and other devices directly to one another. They can automatically reconfigure themselves depending upon availability of bandwidth, storage, or other capacity and therefore resist breakage or other interruption. Communities can use mesh networks for basic connectivity where they lack access or affordable service. Mesh networks are alternatives to traditional top-down models of organization, regulation, and control; they can provide greater privacy and security because traffic doesn’t route through a central organization. Organizations are already combining mesh networks with blockchain technology to solve complex infrastructure problems. Filament, an American company, is experimenting with what it calls “taps” on power poles in the Australian outback. These devices can talk directly to each other at distances of up to 10 miles. Because the power poles are approximately 200 feet apart, a motion detector on a pole that’s falling will notify the next pole 200 feet away that it’s in trouble. If for any reason the tap on that pole isn’t available, it will communicate with the next pole, or the next pole, for up to 10 miles, that will communicate to the company through the closest Internet backhaul location within 120 miles.

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Customers can connect to the devices directly with their own phone, tablet, or computer. The tap can contain numerous sensors to detect temperature, humidity, light, and sound, all of which customers could use to monitor and analyze conditions over time. They could meter these data as an information service or license the data set through the blockchain to another user, such as a government, broadcaster, pole manufacturer, or environmental agency. Filament’s business model is a service model involving three parties: Filament, its integration customer, and the utility company. Filament owns the hardware; its devices continually monitor the condition of the power poles and report changes. It sells the sensor data stream to the integrator, and this integrator sells to the utility. The utility pays monthly for a monitoring service. The service enables the power company to eliminate the very expensive field inspection of its operations. Because power poles rarely fall, the power company rarely uses the actual communication capability of the mesh network “Since Filament owns the devices, we can sell extra network capacity on top of this network that spans most of the continent,” said Eric Jennings, Filament’s cofounder and CEO. “Filament could strike a deal with FedEx” and FedEx drivers could use the mesh network for communications and vehicle tracking to indicate estimated arrival times and breakdowns. This Internet of Things application depends on a Ledger of Things. With tens of thousands of smart poles collecting data through numerous sensors and communicating that data to another device, computer, or person, the system needs to continually track everything—including the ability to identify each unique pole—to ensure its reliability. “Nothing else works without identity,” said Jennings. “The blockchain for identity is the core for the Internet of Things. We create a unique path for each device. That path, that identity, is then stored in the Bitcoin blockchain assigned to Filament. Just like a Bitcoin, it can be sent to any address.” The blockchain also ensures that the devices are paid for so they continue to work. The Internet of Things cannot function without blockchain payment networks, where Bitcoin is the universal transactional language. Now, instead of poles, imagine digitizing every node in a power system to create entire new peer-to-peer models of power production and distribution. Most homeowners, businesses, governments, and other organizations in urban North America get their power from regulated utilities at regulated prices. The local utility captures excess power in its supply for redistribution at wholesale rates, often with considerable leakage. The consumer, who may be located across the street from a local power source, still must go through the utility and pay full retail for renewable energy generated by their neighbor. “Instead of the command-and-control system the utilities have now where a handful of people are actually running a utility grid, you can design the grid so that it runs itself,” said Lawrence Orsini, cofounder and principal of LO3 Energy. “The network becomes far more resilient because all of the assets in the grid are helping to maintain and run the utility grid.” It’s a distributed peer-to-peer Internet of Things network model with smart contracts and other controls designed into the assets themselves (i.e., the blockchain model). When a hurricane destroys transmission towers or fire cripples a transformer substation, the grid can quickly and automatically reroute power to prevent a massive blackout.

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Locally generated power, used locally, is significantly more efficient than the utility-scale model, which relies on transmitting energy across vast distances, where energy is lost. LO3 Energy is working with local utilities, community leaders, and technology partners to create a market where neighbors can buy and sell the local environmental value of their energy. With increasing generation of renewable power at the local level, the Internet of Things is challenging the regulated utility model. While the utilities are looking at benefits to their existing infrastructure (“smart grid”), connecting microgrids could lead to entirely new energy models. Potential Utilization of Unused Broadband As mentioned in the case study article there are several potential uses for unused broadband within the monitoring devices. The primary purpose of the “smart mesh” grid was to monitor utility poles to ensure stability of the pole. However, the “smart mesh” system would allow opportunity for expanded use of the broadband network created and utilized by the “smart mesh”. These are some potential utilizations of that expanded broad band network.

1. Weather monitoring – IoT sensors can be employed to monitor weather conditions to aid in prediction and potential response to weather hazards

2. Air Quality monitoring – IoT sensors could monitor air quality for potential issues from pollutants to fires.

3. Supply Chain/Logistics – the article provides this utilization in conjunction with major delivery services such as FedEx, but this could be expanded to any number of delivery services.

4. E911/Public Safety – the surplus broadband capability could be utilized by law enforcement and fire/ALS to provide better communication capabilities especially in areas with in frequent or unreliable cell services. For example, mountainous areas may block signals between responding agencies and units based upon scale of the response.

5. “Power brokers” – the IoT sensors can be programmed to act as autonomous agents brokering power loads between lines using smart contract technology. Each of the “power broker” sensors could identify when a line is becoming overloaded and shift the load to another line. The smart contract aspect of this technology would be that the independent autonomous agents would understand their own capabilities and not accept shifted loads more than it could handle. Or, in the case of the “smart mesh” or “smart grid” system this brokering could be accomplished across numerous different lines almost instantaneously.

Current/Similar Implementation in Kentucky (LG&E/KU Energy) LG&E and KU Energy received approval for a significant investment to deploy a smart meter mesh network to 1.3 million customers The smart mesh network will enable improved outage detection (last gasp reporting), new energy conserving rate structures and many other new services/benefits for our customers. Unlike the Filament/Australia Case Study, the network is focused solely on providing utility services to customers and its scope does not include ancillary services such as ISP. Several years of substantial pilots provided insight into the operational and security requirements associated with a distributed infrastructure at this scale.

Blockchain technology is not broadly used within the current generation of distributed utility mesh networks, but shows great potential for future applications in larger IoT networks which will involve node counts many orders of magnitude larger than current use cases. It is likely that traditional

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technologies for security and authentication will not scale effectively to this level. Utilities are typically conservative technology adopters and it is likely that LG&E/KU Energy will be in a ‘monitor’ mode on these developments until IoT networks are widely adopted and embedded technologies like blockchain are well proven for the use case. Also, as a regulated utility they must be able to clearly demonstrate low risk and substantial customer benefit to receive approval for substantial investments such as an expanded IoT network.