By Ken Mammarella
Special to Delaware Business Times
American Banker called Delaware Senate Bill 69 “tremendously forward-thinking.” Fortune went for “profound,” the National Law Review “historic.”
A key state official said it will “unlock value.”
They’re all talking about legislation that became law on Aug. 1, authorizing the use of blockchain, a newfangled, complex, transparent and potentially cheap way to store data.
The first focus is on shareholder records — a massive interest for the million-plus companies incorporated in the state. “The promise of blockchain is greater efficiency in terms of cost and time and potentially enhanced security and transparency that doesn’t exist,” said Matt O’Toole, a partner at Potter, Anderson & Corroon, chairman of the Delaware Bar Association corporate law section at the 2016 debut of Delaware’s blockchain initiative.
Blockchain “allows multiple unrelated participants to review the same data at the same time and trust it’s valid,” said Caitlin Long, chairman and president of Symbiont, Delaware’s exclusive provider of blockchain services. “It’s like Google Docs, but without a central administrator.”
Symbiont, a New York firm, wants to be the first private firm to use blockchain to replace spreadsheets stored in the cloud for its shareholder records, according to Long. Overstock.com, an online retailer that has invested in Symbiont, wants to be the first publicly traded company to do so.
But before either can happen, the U.S. Securities and Exchange Commission and stock exchanges need to allow blockchain. “Nobody’s further along than Delaware,” Long explained. The state needs to set up its blockchain bureaucracy and fees as well, she added.
“The value of blockchain is so great, monetarily and socially for the economy,” said Andrea Tinianow, director of Global Delaware, a state agency. That’s her formal title. Her nickname is “blockchain czarina,” which she said reflects how she’s “passionate, direct and forceful” in getting things done, including all the pieces needed to enable blockchain usage and its resulting benefits.
In a Harvard Law School Forum essay, Tinianow and Long wrote that blockchains combine distributed ledgers and smart contracts. The former are these databases, with their “immutable audit trail”; the latter automated programs, often compared to online bill payments that consumers set up.
Their essay identified three milestones: beta testing at the Delaware Public Archives, “smart” Uniform Commercial Code filings that will help manage credit risk and distributed ledger shares.
They cited the case of Dole Food, where blockchain would have prevented investors from filing claims to 49.2 million shares, when only 36.8 million shares were outstanding. Most of the difference involved unsettled trades. The rest uncovered short sales in a rush before a buyout. Chancery Court Vice Chancellor J. Travis Laster touted blockchain in both his 2017 ruling and a 2016 keynote address to the Council of Institutional Investors.
Overstock CEO Patrick Byrne is motivated to push for blockchains because in 2005 his firm suffered naked short selling. Delaware’s new law “eliminates naked short selling completely as well as other forms of mischief,” Byrne told Bloomberg, because it offers a modern alternative to an opaque setup where shares are owned “in street name” or by “beneficial owners.”
Other companies are interested. “We have had constructive conversations with the Delaware secretary of state regarding the possibility of integrating blockchain-related technology,” said Ian McConnel, director of government affairs for CSC, the Delaware firm that provides business, legal, tax and digital brand services to more than 90 percent of the Fortune 500.
Delaware’s Division of Corporations and Symbiont are working beyond shareholder records to automate filing annual reports and franchise taxes.
Companies would benefit with more accurate capitalization tables, unified record-keeping and consistency between corporate and securities law, according to Long.
The state would benefit by maintaining its leadership of the incorporation business — and the resulting fees and taxes that form a huge part of the state budget, Long and Tinianow wrote.
Some downsides have been pointed out. Some investors would not want their holdings revealed, the National Law Review noted. And some of those savings come from not employing people.
That said, “the cost savings could be huge: $100 billion is spent on annual post-trade and securities servicing fees,” Bloomberg reported.