“Now go, write it before them in a table, and note it in a book, that it may be for the time to come for ever and ever. . . .” (Isaiah 30:8)

Blockchain applications have promiscuously appeared this and last year. Modifications of the blockchain concept for real-time settlement of financial transactions have been advertised in roll-outs of new enterprises such as Digital Asset Holdings. (See http://www.nytimes.com/2015/12/29/business/dealbook/cash-call-for-a-new-technology.html?mwrsm=Email)

As will be seen, the new blockchain receipts are claimed to be algorithm-produced, permanent, and cost-efficient because they eliminate the middlemen or back-room processors and verifiers of the transaction. On the other hand, there is the trechant criticism of bloomberg.com blogger Matt Levine that such a receipt is less useful than a notation on an Excel spreadsheet. Whether the Digital Asset business model is more beneficial than Excel is the core of Digital Asset’s future viability.

The Blockchain & the Evolution of the Blockchain-Based Business Model

The concept of the blockchain is central to an understanding of the business model. The Digital Asset website is a model of clarity in discussing the blockchain’s use in its commercial activities. “A blockchain is just one type of distributed ledger, not all distributed ledgers necessarily employ blocks or chain transactions.”

A blockchain contains two key elements: “1) a shared, replicated ledger, and 2) a distributed database synchronizing mechanism known as a ‘consensus algorithm’.” Each “transaction must reference a balance received from a previous transaction and must be cryptographically signed by the provable owner of the balance. The linked transactions form an exact chain of title over time.”

The “consensus algorithm is a set of operations by which a distributed system reaches agreement. In most distributed consensus systems, some entity must propose a ‘commitment’ of a new transaction.” Thus, the bitcoin blockchain requires independent operators to expend computer resources to show “proof of work,” “in order to win the right to commit transactions[.]” Other forms of distributed ledgers besides the bitcoin “permissionless” system are “permissioned” or private networks and traditional databases.

One key component of the Digital Asset plan (and its competitors) is the fact that the patentability of blockchain-based receipt systems, in particular the “consensus algorithm,” is in doubt.   (http://www.law.com/sites/jamesching/2015 /10/03/supreme-courts-alice-corporation-opinion-hookahs-patenting-of-blockchain-proprietary-systems/) Therefore, the key to a commercial receipting system’s profitability does not lie in proprietary software systems but rather on the admissibility of the receipt in future litigation.  If the receipt is not evidence of a transaction for litigation purposes, it is virtually useless.

Lizarraga-Tirado and the Hearsay Aspect of Computer-Generated Information

What could go wrong? A problem other than the patentability of ledgerless blockchain systems has appeared in U.S. v. Lizarraga-Tirado, 789 F.3d 1107 (9th Cir.2015). What if the product of the blockchain verification, a receipt for a transaction, is inadmissible hearsay? After all, a receipt must be introducible in litigation in order to be of any value as a verifier of a transaction. Because a receipt obviously is asserting the existence of the transaction, it must qualify as a business record or it is inadmissible hearsay under the Federal Rules of Evidence.

In Lizarraga-Tirado, the defendant was charged with illegal reentry into the U.S. under 8 U.S.C. section 1326 because he was a previously removed alien who “entered and was found in the United States.” A Google Earth satellite view of the scene of the defendant’s apprehension within the U.S., marked with an tack for the exact arrest point, was introduced by the prosecution.

Google Earth is a computer program that allows users to pull up a bird’s eye view of any place in the world. A user can type GPS coordinates into Google Earth, which automatically produces a digital tack at the appropriate spot on the map, labeled with the coordinates. A user can also manually add a marker by clicking any spot on the map, which results in an tack that can be labeled by the user.

Defendant claimed that both the satellite image on its own and the digitally added tack, with GPS coordinates, were impermissible hearsay. However, the former was not hearsay at all. The image itself is a photograph which merely depicts a scene as it existed at a particular time. “Because a satellite image, like a photograph, makes no assertion, it isn’t hearsay.”

The tack and coordinates, by contrast, are labeled markers added to a satellite image and make assertions. “[L]labeled markers on a satellite image assert that the labeled item exists at the location of the marker.”

The GPS tack was computer-generated, appearing automatically when the coordinates were typed in.

“A tack placed by the Google Earth program and automatically labeled with GPS coordinates isn’t hearsay [because] the relevant assertion isn’t made by a person; it’s made by the Google Earth program. Though a person types in the GPS coordinates, he has no role in figuring out where the tack will be placed. The real work is done by the computer program itself. The program analyzes the GPS coordinates and, without any human intervention, places a labeled tack on the satellite image. Because the program makes the relevant assertion—that the tack is accurately placed at the labeled GPS coordinates—there’s no statement as defined by the hearsay rule.”

A machine might malfunction, but the alleged incorrect result is governed by the rules of authentication, not hearsay.

“Authentication requires the proponent of evidence to show that the evidence ‘is what the proponent claims it is.’ Fed. R. Evid. 901(a). A proponent must show that a machine is reliable and correctly calibrated, and that the data put into the machine (here, the GPS coordinates) is accurate. . . . A specific subsection of the authentication rule allows for authentication of ‘a process or system’ with evidence ‘describing [the] process or system and showing that it produces an accurate result.’ Fed. R. Evid. 901(b)(9) . . . “

Thus, Google Earth could be authenticated by testimony from a Google Earth programmer or a witness who frequently works with and relies on the program.

Also, judicial notice could be made of the program’s reliability. Although the court does not provide an extended discussion of this point, under Rule 201(b) of the Federal Rules of Evidence, judicial notice may be taken of any fact which:

“(1) is generally known within the trial court’s territorial jurisdiction; or (2) can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned.”

As a practical matter, the same body of evidence will be used either to authenticate data under Rule 901 or to judicially notice the information under Rule 201. Thus, in Lizarraga-Tirado, the information about Google Earth, clearly based on seemingly unimpeachable sources, including the site, formed the corpus of the authentication. The identical internet search would yield information which “can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned” under Rule 201(b)(2). In either case, reliance would be placed on the testimony of “a Google Earth programmer or a witness who frequently works with and relies on the program.”

How would the blockchain receipt about a bitcoin transaction fare under Lizarraga-Tirado? As noted on the Digital Asset site, the core concept of this receipt is that the transaction references a balance received from a previous transaction and must be cryptographically signed by the provable owner of the balance.

Digital Asset properly characterizes this process as creating a distributed ledger within a permissionless, or public, non-proprietary system based on an algorithm, “a set of operations by which a distributed system reaches agreement.” The linked transactions produce an exact chain of title over time.

Lizarraga-Tirado postulates that computer-produced information can either be hearsay, in that it makes an assertion, or non-hearsay which may or may not be authenticated or be the subject of judicial notice. As a blockchain receipt is more like a contention than like a map, there is a potential hearsay barrier to the introduction of any result from a distributed ledger, permisionless or not and proprietary or not.

Blockchain Results as Business Records

Under Rule 803(6), the receipt is admissible as a business record if it is the record of a regularly conducted activity memoralizing an act, event, condition, opinion, or diagnosis. It is admissible if:

“(A) the record was made at or near the time by — or from information transmitted by — someone with knowledge; (B) the record was kept in the course of a regularly conducted activity of a business, organization, occupation, or calling, whether or not for profit; (C) making the record was a regular practice of that activity; (D) all these conditions are shown by the testimony of the custodian or another qualified witness . . . ; and (E) the opponent does not show that the source of information or the method or circumstances of preparation indicate a lack of trustworthiness.”

In general, then, in Lizarraga-Tirado the same information used to authenticate or judicially notice Google Earth would be necessary to validate the bitcoin blockchain or any of its derivatives, the who, what, when and why of the software. Any litigator would introduce identical evidence for authentication, judicial notice, or qualification of a receipt as a business record through “a . . . programmer or a witness who frequently works with and relies on the [blockchain] program.”

The Advisory Committee Notes on this business record exception begin with the thought that the exception was created to end-run the common-law requirement of “producing as witnesses, or accounting for the nonproduction of, all participants in the process of gathering, transmitting, and recording information which the common law had evolved as a burdensome and crippling aspect of using records of this type.” Thus, a custodian or another qualified witness” may testify as to the record and its keeping.

The rationale for the exception is the “unusual reliability of business records” because of the “systematic checking, by regularity and continuity which produce habits of precision, by actual experience of business in relying upon them, or by a duty to make an accurate record as part of a continuing job or occupation.” In contrast with other exception statutes which utilized “regular course of business,” and in conjunction with a definition of “business” far broader than its ordinarily accepted meaning, Rule 803 adopted the phrase “the course of a regularly conducted activity” to de-emphasize a tendency towards routineness and repetitiveness and an insistence that other types of records be squeezed into the fact patterns which give rise to traditional business records.

If “[a]ll participants, including the observer or participant furnishing the information to be recorded, were acting routinely, under a duty of accuracy, with employer reliance on the result, accuracy is assured. [I]f the supplier of the information does not act in the regular course, an essential link is broken; the assurance of accuracy does not extend to the information itself, and the fact that it may be recorded with scrupulous accuracy is of no avail.” On the other hand, the Rule eliminates prior rulings that accuracy is enhanced “by requiring [the reporter’s] involvement as a participant in matters reported.”

Thus, the key factual issue in accepting blockchain receipts under the exception is the reliability of the algorithm underlying it. The key legal question is whether the process for producing the receipt must be proprietary in order to accurate and reliable for business purposes.

To use an analogy, in order to qualify an Excel notation of a transaction, must the proponent of the evidence prove the accuracy and reliability of a third-party program? As a practical matter, a certain temerity on the part of the opponent to introduction of the evidence is required to object to the trustworthiness of Excel and specifically to question that reliability simply because the proponent is a licensee and not the creator of the program. However, objecting to these factors in the case of a blockchain-derived system might earn more sympathy from an overworked judge. Therefore, the issue is still not settled.

It must be emphasized that the intent of the drafters of the business record exception is to include more, not fewer, records under the exception through the ever-widening definition of “records.” The term is imported from revised Rule 34(a)(1)(a) of the Rules of Civil Procedure. Within the context of Rule 34, the definition was meant to clarify a category of tangibles for discovery. However, through the Advisory Committee reference in Rule 803, it also validates the blockchain receipt.

The form which the “record” may assume under Rule 34(a)(1)(A) is described broadly as a “memorandum, report, record, or data compilation, in any form.” The expression “data compilation” is used as broadly descriptive of any means of storing information other than the conventional words and figures in written or documentary form.

The 2006 Committee Notes on this Rule made a broad reading of “record” mandatory.

“Rule 34(a)(1) is expansive and includes any type of information that is stored electronically. . . . Rule 34(a)(1) is intended to be broad enough to cover all current types of computer-based information, and flexible enough to encompass future changes and developments. . . . References elsewhere in the rules to “electronically stored information” should be understood to invoke this expansive approach.”

The metaphor of an entry in an accounting ledger is apt. Surely, given the expansive approaches in Rule 803 and Rule 34, a blockchain receipt is more like an Excel entry and therefore is likely to have proprietary value as evidence.