Computer

The

& Internet
Lawyer
Volume 34 ▲ Number 11 ▲ NOVEMBER 2017 Ronald L. Johnston, Arnold & Porter, LLP, Editor-in-Chief

The Risks of Segregated Witness: Problems

under Electronic Contract and Evidence Laws
By Jimmy Nguyen

F or bitcoin, a critical question is how to

increase the network’s scalability to achieve
the vision of faster transactions and greater usage.
from transaction data. (In May 2017, a group of
companies supported an agreement for SegWit
2x, which would both implement SegWit and
That is important to enable the greater “Bitcoin then supposedly later lift the block size from 1MB
2.0” vision where bitcoin tokens become not to 2MB.) Other forces in the bitcoin commu-
just a widely-used currency, but also fulfill their nity believe larger block sizes are the answer, and
potential as “programmable money” used to oppose SegWit as fundamentally changing the
perform technological functions such as smart nature of bitcoin for little benefit. But in addi-
contracts. The Bitcoin Core development team’s tion to its technical problems, SegWit also could
proposed scaling solution is Segregated Witness, create significant risks under legal systems; by
which would separate signature data (witnesses) separating and discarding signature data, SegWit

Jimmy Nguyen is Chief Intellectual Property, the Beverly Hills Bar Association’s IP, Internet and New
Communications and Legal Officer for the nChain Media section, and co-chaired the California Minority
Group of companies. nChain is the global leader in Counsel Program. Mr. Nguyen has been recognized
research and development of innovations in blockchain by Lawdragon as one of the 500 Leading Lawyers in
technology. Mr. Nguyen is an intellectual property and America (2008) and a “dynamo talent,” by the Century
digital technology lawyer who joined nChain after a City Bar Association as “Intellectual Property Lawyer of
21-year legal career in the United States. During his the Year” (2011), by Diversity MBA Magazine” as a “Top
private practice career as a partner in major US law 100 Under 50 Diverse Executive Leader” (2015), by the
firms, he represented multinational corporates and California Minority Counsel Program as an inductee
emerging companies in the technology, entertainment into its “Diversity Leader Hall of Fame” (2015), and by
and media, financial services, consumer products and the Association of Media & Entertainment Counsel with
retail sectors. A leader in the legal community, Mr. its Industry Leader Award (2017). As data protection
Nguyen was formerly Chair of the State Bar of issues grew increasingly important, Mr. Nguyen also
California’s Intellectual Property Law section, co-chaired became a Certified Information Privacy Professional/US.
Cryptocurrency

would make two forms of proof more difficult: (1) legal serves two purposes: (1) to verify the transaction to be
proof of electronic contracts which could be signed sent and validated to the bitcoin network, and also (2) to
with bitcoin signatures; and (2) evidentiary authentica- confirm her assent to the transaction or smart contract
tion of blockchain transactions. terms for purposes of electronic contract law.
These legal issues could create major practical prob- A normal bitcoin transaction stores both transaction
lems in the business world. Ideally, we are moving to a and signature (witness) data together in a block, with
world in which the bitcoin network can power smart the signatures accounting for approximately 60 percent
contracts and be used for numerous types of data trans- of the data size. As described below, this means bitcoin
actions. But in such a world, what happens if companies transactions signatures could satisfy e-signature laws,
and consumers cannot easily authenticate and prove which often require the electronic contract signature
those transactions later when there are legal disputes? to be “attached to or logically associated” with the con-
tract terms (which could, for example, be coded into
How Bitcoin Transactions Operate bitcoin transaction data). It also allows bitcoin transac-
Bitcoin is a decentralized cryptocurrency that allows tions to more easily be authenticated for evidentiary
its unit of value (bitcoin) to be sent without trusted purposes.
intermediaries. Bitcoin transactions are recorded to the
blockchain, an immutable ledger that records transac- SegWit Creates Risk by Encouraging
tions in groups, added as a block (approximately every Signature Data to be Dropped
10 minutes) to the chain of prior blocks. How does SegWit change the picture? Rather than
directly raising the 1MB block size, SegWit would indi-
rectly increase a block’s capacity to store more trans-
All bitcoin digital signatures are not actions by separating the signature (witness) data from
meant to be electronic contract the transaction data. It then creates two hashes: (1) a
signatures; however, they originally “regular” hash of just the transaction data, without the
were set up in a manner that could signatures; and (2) a “witness hash” consisting of a hash
satisfy the requirements of electronic of both the transaction data and the witness data. How
would this data be stored in a block? The bitcoin proto-
contract signature law if the parties col already uses a Merkle tree (a hierarchical data struc-
wanted to use them for that purpose. ture composed of hashes of information) to efficiently
store transaction data, and places the Merkle root into
The original bitcoin white paper by Satoshi the block header of every mined block. SegWit cre-
Nakamoto defines “an electronic coin” as “a chain of ates a second Merkle tree to separately store the witness
digital signatures. Each owner transfers ownership con- hashes, but importantly does not require nodes to keep
trol of the coin to the next owner by digitally signing the signature data.
a hash of the previous transaction and the public key of In fact, SegWit assumes that signature data is needed
the next owner and adding these to the end of the coin. only when transactions are being validated, and can
A payee can verify the signatures to verify the chain thereafter be discarded as unimportant. As described by
of ownership.”1 The transaction data conveys the inputs its original proponent Pieter Wuille, “[t]hese signatures
and outputs of coins being spent, and also could carry are only needed at time of validation”; SegWit treats
additional data to be recorded in the bitcoin transaction. “signatures [as] not part of the transaction” its “redesign
For example, Alice is the controller of unspent coins, would allow you to drop this [signature] data.”2 (Mr.
and digitally signs, using her private key, a transaction to Wuille is a co-founder of Blockstream, a blockchain
“spend” those coins. Her digital signature confirms she technology company which helps support Bitcoin Core
controls the coins and can transfer ownership control to and advocates for SegWit).
a recipient (Bob) at his bitcoin address. Moreover, bitcoin nodes would not be required to
All bitcoin digital signatures are not meant to be elec- keep the signature data. “[SegWit] allows you to drop
tronic contract signatures; however, they originally were the signatures from relay whenever you are relaying to a
set up in a manner that could satisfy the requirements of node that is not actually doing full-validation at the time.
electronic contract signature law if the parties wanted to It also allows us to effectively prune this data from his-
use them for that purpose. For example, Alice could sign tory, maybe we’re fine with not all nodes in the network
her bitcoin transaction—or at a more advanced level, a actually maintaining these gigabytes of signatures that are
smart contract whose terms are encoded with the trans- buried under years of proof-of-work now.”3 This is a key
action data—using her bitcoin digital signature which point because SegWit opens up the likelihood that most

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 Cryptocurrency

bitcoin nodes do not keep the signature data, because it is SegWit’s Impact on Electronic
simply less efficient and costs more to do so. This creates Contract Signatures
three possible scenarios on the bitcoin network:
In 1996, the American Bar Association reviewed the
1. Some nodes maintain signatures; need for electronic signatures to facilitate online trans-
actions. In its Digital Signature Guidelines, it identified
2. No nodes maintain signatures; two attributes that were key to replicating physical sig-
natures in a digital environment: (1) Signer authentication:
3. The most likely scenario: The majority of signatures a digital signature should demonstrate who signed, and
will be discarded. it should be difficult to reproduce by an unauthorized
party; and (2) Document/Transaction authentication: a digi-
If most nodes drop the signatures, the blockchain can tal signature should identify what is signed, to make it
only reliably serve as a ledger for worldwide business hard to falsify or alter the signed matter.4 Most digital
transactions if: signature regimes, including the National Institute of
Standards and Technology (NIST) and eIDAS in the
1. Some nodes choose to specialize in storing all sig- European Union, follow similar principles.
nature data. This gives those nodes special weight (as Indeed, bitcoin’s digital signature method can satisfy
a trusted source) to verify and authenticate bitcoin these electronic contract signature principles by using
transactions and signatures. But this is antithetical to the public-private key approach to signing transactions.
the idea of bitcoin as a decentralized, trustless sys- As noted previously, the original Satoshi Nakamoto bit-
tem, with no central authority; or coin white paper even defines an electronic coin “as a
chain of digital signatures,” and explains that a payee can
2. Companies and consumers operating on the block- “verify the signatures to verify the chain of ownership.”5
chain must keep their own copy of transaction Thus, the entire system relies on the ability of digital
records (or their own nodes storing all blockchain signatures to be used to verify both the signer and own-
transactions with signature data), so they have access ership of the coins being sent. In contrast, SegWit favors
to the signature data later if needed for legal pro- transaction authentication over signer authentication,
ceedings or audits. But this requires massive data with little thought to the havoc this might cause when
duplication and eliminates the efficiencies of using transactions are later disputed.
the blockchain as a decentralized ledger.
The Federal e-SIGN Act
Consider how this would operate in the world of SegWit could make it very difficult for parties to an
paper transactions. After parties sign the hard copy of electronic contract to later prove its authenticity. In the
a contract, the signature block is cut off from the body United States, electronic contracts (and electronic signa-
(where the terms are written). The signature block is tures) between businesses and consumers generally are
then converted to an identifier for indexing and that valid under the federal e-SIGN Act.6 That law defines
identifier is placed into a filing cabinet with hundreds an “electronic signature”—a more flexible concept than
of other signature identifiers. The actual signature block a digital signature such as those used by bitcoin—to be
itself is discarded in most instances. Years later, unless something “attached to or logically associated with a contract
you personally kept the signature block, if you want to or other record and executed or adopted by a person with
prove that you signed (or did not sign) a specific con- the intent to sign the record.”7 This requirement provides
tract, you could find the signature block identifier but the basis for authenticating that a contract has been signed
you may not be able to retrieve the physical signature and authorized by all parties, much like a physical signa-
block itself. Or you could have to depend on the good ture block on paper can be used to show later that the
graces of a storage facility that has kept all signatures, parties actually signed the contract. But under SegWit, can
and that storage facility now gains extra influence as a it really be said that the electronic signature is “attached
transaction verifier. to or logically associated with” the transaction data in a
For the bitcoin network, the end result of SegWit manner sufficient to show intent to approve, given the
would be unreliability. SegWit’s option to “drop” sig- segregated data trees and the possibility for signature data
natures will make it more difficult for business and being discarded? Or does SegWit detach and disassociate
consumers to use bitcoin signatures to also act as elec- the digital signature from the transaction data?
tronic contract signatures and to authenticate transac- Moreover, the federal e-SIGN Act indicates the
tion records. legal validity or enforceability of an electronic contract

Volume 34 • Number 11 • November 2017 The Computer & Internet Lawyer • 3

Cryptocurrency

record “may be denied if such electronic record is not in For example, in Young v. Rose, an Arizona Court of
a form that is capable of being retained and accurately Appeals explained that whether a “thank you” email
reproduced for later reference by all parties or per- sent in response to an email with an agreement attached
sons who are entitled to retain the contract or other was an “electronic signature” was not clear; it required
record.”8 That is a key provision of the statute—that is, a review of facts outside the court pleadings and the
an electronic contract may be denied validity or enforce- agreement. SegWit threatens to further complicate this
ability if it is not kept in a form that can be accurately type of factual inquiry about what constitutes a satis-
reproduced later. Yet, as we have seen, SegWit is not factory “electronic signature” in a world where bitcoin
concerned with maintaining digital signatures—only digital signatures may be used to sign contracts.11
with validating transactions as they occur. The SegWit
approach creates significant uncertainty as to whether
only a hash of signature data can meet the e-SIGN Arizona law requires that qualifying
statutory requirements to prove an electronic contract blockchain technology be “immutable
signature. and auditable and provides an
Under SegWit, a business or consumer wishing to uncensored truth.” In a SegWit world
definitely prove an electronic contract signed using a where signature data is pruned off, will
bitcoin digital signature could—at most—re-associate blockchain records truly be auditable
the witness hash with the corresponding transaction
data. But if there is no way to recover the digital sig- and provide an uncensored truth?
nature itself, the electronic contract or record may be
denied legal validity or enforceability under the e-SIGN Certainly, laws can be updated to address these
Act. Digital signatures could be reliably recovered only questions in a world of bitcoin-enabled contracts. For
if some node chose to retain all signature data. Yet a example, in March 2017, the state of Arizona passed leg-
node only has economic incentive to do so if it acts as islation (HB 2417) to amend its version of the UETA
a commercial archive service, charging fees to retrieve (the Arizona Electronic Transactions Act) to confirm
and authenticate full digital signatures. This would cre- that electronic signatures, records, or contracts secured
ate a new form of trusted intermediary needed to verify through blockchain technology are valid under the state
digital signatures, which is exactly the opposite of bit- law.12 It also recognizes that smart contracts are valid.
coin’s decentralized, trustless system. However, the Arizona law requires that qualifying block-
chain technology be “immutable and auditable and pro-
US State Laws vides an uncensored truth.”13 In a SegWit world where
Similar problems would arise under US state laws. signature data is pruned off , will blockchain records
The vast majority of the US states (47, plus the District truly be auditable and provide an uncensored truth?
of Columbia and the US Virgin Islands) have codified Potentially creating even more uncertainty, the Arizona
a version of the Uniform Electronic Transactions Act bill does not address whether transactions, smart con-
(UETA), which also recognizes that electronic transac- tracts, or blockchain signatures must be recorded fully
tions are valid. Similar to the federal e-SIGN Act, the intact (with transaction and signature data together in
UETA defines an electronic signature as an “electronic the block), or if they are no longer presumed valid if
sound, symbol or process attached to or logically associated signature data is discarded. If SegWit is activated, the
with a record and executed or adopted by a person with validity of such contracts may become unclear under
the intent to sign the record.”9 New York’s version goes Arizona’s new law and other state laws.
even further to state that an electronic signature is con-
sidered to be “attached to or logically associated with an Foreign Laws
electronic record” if the electronic signature is “linked Outside the United States, these risks of SegWit also
to the record during transmission and storage.”10 But would arise under laws of other countries. Across the
with SegWit not requiring signature data to be stored, a European Union, electronic signatures are governed by
party seeking to repudiate an electronic contract signed the Electronic Identification Regulation No 910/2014.
with a bitcoin digital signature might argue that SegWit Like the United States’ federal e-SIGN Act and most
signatures generally cannot meet this New York defini- state laws, the EU Electronic Identification Regulation
tion of an electronic signature. defines an electronic signature “as data in electronic
The question of whether an “electronic sound, sym- form which is attached to or logically associated with other
bol or process” is “attached to or logically associated data in electronic form and which is used by the signa-
with a record” is often a complicated factual question. tory to sign.”14

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 Cryptocurrency

Each EU member country enacts its own laws to Regulation sets out a framework for its member gov-
implement this EU Regulation. For example, United ernments to recognize “qualified trust service pro-
Kingdom law defines an electronic signature as “so viders” who are authorized to validate “qualified
much of anything in electronic form as: electronic signatures” so parties can rely upon their
validation.18 Likewise, China’s Electronic Signature
(a) is incorporated into or otherwise logically associated with Law also allows for verification of electronic signatures
any electronic communication or electronic data; and by a government-approved third-party “electronic
verification service.”19 In a SegWit world, nodes who
(b) purports to be used by the individual creating it save full signature data would be better positioned to
to sign.”15 fulfill this service provider role; it means those nodes
could become government-authorized validators of
Therefore, SegWit will create similar issues in the what is—or is not—a “qualified electronic signature.”
European Union because it allows bitcoin digital signa- That would move bitcoin from a trustless system to
tures to be dropped from transaction data. one where a centralized authority gains government-
China is another important jurisdiction to examine approved trust power, a move which would contravene
because the bitcoin community—especially for bitcoin bitcoin’s spirit.
mining—remains very strong in the country (despite
recent Chinese government action against bitcoin activ- Evidence Authentication Issues
ities). China’s Electronic Signature Law defines an elec- Another key legal issue arises under evidence law.
tronic signature as “data in electronic form contained in Could SegWit make it more difficult to authenticate
and attached to a data message to be used for identify- blockchain-recorded transactions under courtroom
ing the identity of the signatory and for showing that the evidence laws? In civil and criminal court proceed-
signatory recognizes what is in the message.”16 Chinese law ings, evidence needs be authenticated before it can
thus makes explicit that an electronic signature be actually be admitted. Under US federal evidence rules, “[t]o
“contained in and attached to” the data message it verifies. satisfy the requirement of authenticating or identify-
This is reinforced by Article 13 of the Chinese law, which ing an item of evidence, the proponent must produce
deems an electronic signature to a data message to be reli- evidence sufficient to support a finding that the item
able if it meets four conditions: is what the proponent claims it is.”20 This requirement
is important to ensure litigants do not try to introduce
1. When the creation data of the electronic signature falsified or tampered evidence.
are used for electronic signature, it belongs to an How does this work in practice? Consider a lawsuit
electronic signatory, concerning an automobile accident. Drivers often seek to
introduce pictures of the accident scene. They could tes-
2. When the signature is entered, its creation data are tify from personal knowledge that they used their smart-
controlled only by the electronic signatory, phones to take pictures immediately after the accident
and confirm the images are authentic. Similarly, trans-
3. After the signature is entered, any alteration made to the action and other business records can be admitted into
electronic signature can be detected; and court proceedings, but a witness typically must testify to
authenticate the records. For example, if you are involved
4. After the signature is entered, any alteration made to the in a dispute with your stock exchange over a stock
contents and form of a data message can be detected.17 trade, the stock exchange could introduce its electronic
records of your account and trades, but one of its employ-
If alterations to the electronic signature or the data message ees needs to testify about the authenticity of the data.
contents occur, they must be detectable. SegWit’s altera- Likewise, you could produce your own printed copies of
tion of a bitcoin transaction structure can be detected, your stock trade history and testify about those printouts.
but may be difficult to reconstruct if nodes do not keep Thus, transaction records generally require a witness to
full signature data.This can create risk that a bitcoin digi- explain what the transaction record is, how it is kept or
tal signature cannot qualify as an electronic signature in was generated, and what it represents.
China because it is separated from the data message.
SegWit also opens up the very real possibility that How Can Blockchain Receipts Be
some nodes (who save full signature data) could be Authenticated without Signature Data?
anointed as more “trusted” to verify transactions and How would this work in the blockchain world? If
signatures. Indeed, the EU’s Electronic Identification signature data is kept, it is easier to later authenticate

Volume 34 • Number 11 • November 2017 The Computer & Internet Lawyer • 5

Cryptocurrency

the transaction record by referring to the bitcoin digi- Need for a Witness
tal signature used to validate the transaction. This helps If signature data is not kept by any bitcoin nodes
meet the evidentiary requirement that the block- or only some of them, it creates a serious question of
chain record “is what the proponent claims it is”—in what witness (if any) can adequately authenticate bit-
other words, the blockchain receipt for the specific coin transactions from the blockchain. Although it was
transaction. not dealing with blockchain, the US Court of Appeals
But SegWit allows signature data to be dropped from for the Ninth Circuit decided an immigration case—
the transaction data, making the task of evidentiary U.S. v. Lizarraga-Tirado—that addressed questions about
authentication more difficult. If all nodes do not main- the admissibility of machine-generated evidence.22
tain signature data, who can testify as to the authenticity The case led James Ching, a Law.com contributor, to
of signature data to match it to the relevant transac- write a January 2016 blog asking “Is Blockchain Evidence
tion data? Although the direct parties to a transaction Inadmissible Hearsay?”23 and triggered other online
could hopefully do so, what happens if they relied upon articles questioning whether blockchain evidence is
bitcoin nodes to maintain the signature and transaction admissible in court.24 As Ching describes, a blockchain
data and did not keep (or lost) their own records? Would verification “receipt must be introducible in litigation
that place nodes who opt to keep full signature data in in order to be of any value as a verifier of a transac-
a special “trusted” position to verify bitcoin transactions tion. Because a receipt obviously is asserting the exis-
for legal proceedings (such as a government-approved tence of the transaction, it must qualify as a business
service provider, as described previously)? Or would record or it is inadmissible hearsay under the Federal
mere evidence that a signature was necessary at the time Rules of Evidence.”25 (These blockchain evidence
of the bitcoin transaction satisfy a court, if no such sig- issues were further examined in a June 2017 law review
nature can now be produced? article entitled “Blockchain Receipts: Patentability and
Admissibility in Court.”26)
The Lizarraga case involved the deportation of a
Blockchain advocates need to defendant who was found improperly entering (again)
champion the reliability and the United States through the Mexico border.The defen-
immutability of blockchain records. dant claimed he had not actually crossed over the bor-
der to the US side. However, the government sought to
But would legislators be so quick to introduce the evidence of a Google Earth satellite view
recognize blockchain records if they of the scene where the defendant was arrested, includ-
knew the basic signature data that ing a tack marker to reflect the border agent’s notation
has always been saved with bitcoin (on a mobile device) of where the arrest occurred (on
transaction data could be dropped? the US side of the border, according to the agent). But
that pin marker was manually added to the machine-
generated satellite image to record the agent’s contem-
These evidence issues also will play out at the US state poraneous impressions of where the arrest occurred.
level. As more blockchain technology enthusiasm grows, To evaluate the admissibility of the Google Earth
US state legislatures are beginning to examine what is map image and the tack marker indicating whether the
sufficient proof of blockchain business transactions. In defendant crossed the US border, the Ninth Circuit
2016, the state of Vermont enacted H.868; it adds a decided that machine-generated evidence can be admis-
statute to Vermont’s Rules of Evidence stating that sible in court (and is not hearsay because it is a machine,
a blockchain-based digital record is now considered a rather than a person, making an assertion); however, the
business record and thus admissible over hearsay objec- evidence still requires that some witness authenticate
tions.21 One wonders, however, whether other states it. The party offering the machine-generated evidence
will follow suit, if SegWit reveals that key components must show that the “machine is reliable and correctly
of bitcoin transactions (such as signature data) can be calibrated, and that the data put into the machine (here,
dropped or altered from blockchain records. In order to the GPS coordinates) is accurate.”27 The court noted
pass statutes such as the Vermont evidence law, block- that the rules of evidence allow for authentication of a
chain advocates need to champion the reliability and “process or system” with evidence “describing the pro-
immutability of blockchain records. But would legisla- cess or system and showing that it produces an accurate
tors be so quick to recognize blockchain records if they result.” In the case of Google Maps, its satellite map-
knew the basic signature data that has always been saved ping and GPS coordinates could be authenticated by
with bitcoin transaction data could be dropped? a Google employee or other witness who works with

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 Cryptocurrency

the program frequently, if they can testify about how that enough to authenticate that transaction record for
the Google Earth system works. The key is “to establish evidence purposes? And more importantly, even if that
Google Earth’s reliability and accuracy.”28 limited transaction record is authenticated and admissible
How would this authentication requirement be applied in court, the signature data is missing and a key question
to a blockchain receipt offered as evidence in court? A wit- in the case cannot be answered from the evidence.
ness would have to testify about the bitcoin network and
its “reliability and accuracy” as a mechanism for maintain- Law is very slow to catch up with
ing business records. The Blockchain Receipts law review
article noted previously gives examples of what types of transformative technology and
witnesses could serve this function to explain the block- SegWit makes the challenges harder.
chain and its transaction record system:“an exchange pro-
grammer, an avid Bitcoin user, a programmer attempting Take Peter Rizun’s example a step further with this
to replicate the blockchain, a digital currency expert, or thought experiment based upon potential smart con-
an investor could all be brought in at trial.”29 That is cer- tracts that could be recorded on the blockchain and
tainly possible with respect to the original form of bitcoin electronically signed by one party using a bitcoin digital
transactions (which retain both transaction and signature signature:
data). But the task is more difficult with SegWit, which
allows nodes to drop the signature data, and could lead Alice enters into a smart contract to pay you 5 BTC
to complex evidentiary battles about the “reliability and to buy your used automobile. The contract’s terms
accuracy” of the blockchain-stored data. are recorded on the blockchain as part of a transac-
tion by sending the 5 BTC to a SegWit address.
Thought Experiments about the Alice’s digital signature to validate the bitcoin
Legal Risks transaction is also the means Alice uses to digitally
At the 2017 Future of Bitcoin conference in Arnhem, sign to signify acceptance of the smart contract (for
Netherlands, Bitcoin Unlimited’s Chief Scientist Peter purposes of e-contract law). [In other words, Alice
Rizun gave a presentation about why bitcoins with does not manually sign a paper contract, does not
SegWit are not real bitcoins. To illustrate his point, he affix a digital copy of her handwritten signature to
offered this thought experiment: any document, and does not electronically sign a
document using other means.]
Imagine that you have 100 BTC in a segwit address
and a few days later you notice that they’ve been Alice later disputes the smart contract, claim-
transferred to an address that you do NOT con- ing that she did not authorize the transaction.
trol. You try to find the signature that authorized You have a legal dispute over whether she in fact
the transfer to prove the theft (you’re sure your digitally signed the smart contract. But Alice’s sig-
private keys were secure so you think the signature nature data was pruned after the transaction was
must be bogus) but conveniently nobody seems to validated onto the blockchain, and she claims she
have it saved. did not digitally sign the transaction. You have no
record of Alice’s private key used for the digital
Can you prove that your funds were stolen?30 signature.

In Rizun’s thought experiment, assume you sue your Can you prove that Alice digitally signed the smart
bitcoin wallet provider over the 100 BTC that you contract?
believe were stolen from your wallet. As Rizun points
out, you need to find the signature associated with the This thought experiment illustrates the potential proof
transaction in order to prove it was fake and not autho- challenges of a SegWit world. It can be more difficult
rized by you. But, of course, you would not have kept it to prove that Alice digitally signed the disputed smart
because you did not initiate the transaction. And if your contract if you have no record of Alice’s private key used
wallet provider and no node has kept the signature for for the digital signature, and no node has kept the sig-
the disputed transaction, you are out of luck. At most, nature data.
you or your wallet provider may only be able prove: Can legal systems in the United States and other
(a) a transaction occurred on a particular date and time countries solve these problems? That is always possible,
for the 100 BTC; and (b) there is a string of hashes that but law is very slow to catch up with transformative
indicate that transaction was authorized at that time. Is technology and SegWit makes the challenges harder.

Volume 34 • Number 11 • November 2017 The Computer & Internet Lawyer • 7

Cryptocurrency

In a SegWit world, signature data may not always be 11. Young v. Rose, 286 P.3d 518 (Az. App. 2012).
“attached to or logically associated” later with trans- 12. Arizona HB 2417 (2017).
action data. That would contravene the leading legal 13. Id.
framework for electronic contracts and trigger addi- 14. Regulation (EU) No 910/2014 of the European Parliament and
tional hurdles for authenticating blockchain records as of the council, July 23, 2014, Article 3(10) (emphasis added).
evidence in legal proceedings. These risks could deter 15. United Kingdom Electronic Communications Act 2000, sec-
businesses from operating more on the blockchain, and tion 7(2) (emphasis added).
impede the greater vision of a Bitcoin 2.0 network
16. Electronic Signature Law of the People’s Republic of China,
powering smart contracts and greater functionality in Article 2 (emphasis added). See WIPO English translation avail-
the future. To achieve greater Bitcoin 2.0 vision, the able at http://www.wipo.int/wipolex/en/text.jsp?file_id=182409.
bitcoin community needs to demonstrate to businesses, 17. Id., Article 13.
courts, regulators, and legislators that bitcoin records— 18. EU Regulation No. 910/2014, Article 33(1).
and in particular, signatures—are reliable and authen- 19. Electronic Signature Law of the PRC, Articles 16-18.
tic; this effort is just getting started and should not be 20. Fed. R. Evid. 901.
undermined by proposals such as SegWit which funda- 21. 12 Vermont Statutes Annotated § 1913.
mentally change the nature of bitcoin.
22. U.S. v. Lizarraga-Tirado, 789 F.3d 1107 (9th Cir. 2015).
23. James Ching, “Is Blockchain Evidence Inadmissible
Notes Hearsay?,” Law.com, January 7, 2016, available at http://www.
law.com/sites/jamesching/2016/01/07/is-blockchain-evidence-
1. Satoshi Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash
inadmissible-hearsay/.
System” (2008), available at http://bitcoin.org/bitcoin.pdf.
24. Casey Sullivan, “Could Blockchain Evidence Be
2. “Bitcoin scalability with SegWit,” speech by Pieter Wuille Inadmissible?,” FindLaw.com, May 5, 2016, available at http://
on December 6, 2015, at Scaling Bitcoin conference, blogs.findlaw.com/technologist/2016/05/could-blockchain-evidence-
Hong Kong. Transcript available at https://diyhpl.us/wiki/ be-inadmissible.html; Lester Coleman, “Blockchain Receipts:
transcripts/scalingbitcoin/hong-kong/segregated-witness-and-its-impact- Admissible as Evidence or ‘Hearsay?,” CryptocoinsNew.com,
on-scalability/; video available at https://www.youtube.com/ August 1, 2016, available at https://www.cryptocoinsnews.com/
watch?v=fst1IK_mrng&t=36m. blockchain-receipts-admissible-evidence-hearsay/.
3. Id. 25. James Ching, “Is Blockchain Evidence Inadmissible Hearsay?,”
4. “Digital Signature Guidelines,” Information Security Law.com, January 7, 2016.
Committee, Electronic Commerce and Information 26. Angela Guo, “Blockchain Receipts: Patentability and
Technology Division, Section of Science and Technology, Admissibility in Court,” Chicago-Kent Journal of Intellectual
American Bar Association, August 1, 1996, pp. 7-8. Property, Vol 16, Issue 2, p. 440 (June 21, 2017), available
5. Nakamoto, S., (2008a) “Bitcoin: A Peer-toPeer Electronic Cash at http://scholarship.kentlaw.iit.edu/cgi/viewcontent.cgi?article=
System,” available at http://bitcoin.org/bitcoin.pdf. 1185&context=ckjip.
6. 15 U.S.C. Code § 7001. 27. Lizarrage-Tirado, 789 F.3d at 1110.
28. Id.
7. 15 U.S.C. §7006(5).
29. Guo, at 447-448.
8. 17 U.S.C. §7001(e).
30. “SegWit Coins are not Bitcoins,” presentation by Dr. Peter
9. Uniform Electronic Transactions Act (1999), section 2(8) Rizun, The Future of Bitcoin conference, June 30, 2017
(emphasis added). (Arnhem, Netherlands).Video available at https://www.youtube.
10. 9 CRR-NY 540.4(b). com/watch?v=VoFb3mcxluY.

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Reprinted from The Computer & Internet Lawyer, November 2017, Volume 34, Number 11,
pages 1–8, with permission from Wolters Kluwer, New York, NY,
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