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September 14, 2017
The Honorable John Carney
State of Delaware
Mr. Jeffrey W. Bullock
Secretary of State
State of Delaware
Mr. Kristopher Knight
Deputy Secretary of State and Director of Corporations
State of Delaware
Re: Recommendations to the State of Delaware’s Division of Corporate Services Blockchain Initiative
Dear Governor Carney, Secretary Bullock and Director Knight:
Blockchain Consulting LLC would like to thank Secretary Bullock and Director Knight for their generosity and time in attending the Delaware Fireside Chat we hosted in New York City earlier this month. As a follow-up to this discussion, we are pleased to offer the following more specific recommendations to the State of Delaware that would further enhance the Global Delaware blockchain initiative, both by expanding the suite of services available through the State of Delaware via blockchain technology and by improving the scope of existing services, while simultaneously reducing the burden on both the State of Delaware and corporate users. Our recommendations are derived primarily from the numerous conversations we have had with our clientele, who are greatly encouraged by the efforts of Delaware in advancing its premier corporate services platform using blockchain technology.
Blockchain technology offers a number of advantages over existing methods of providing and accessing corporate services for the State of Delaware (and others), including reduced all-in costs for users via automation of administrative workflows, enhanced security, improved privacy, greater auditability and easily-sourced analytics. For a variety of reasons, including the long-term, business-friendly view that the Delaware legislature and the Secretary of State’s office have taken in nurturing the Delaware General Corporation Law, the State of Delaware has long been the domicile of choice for sophisticated corporate entities. The State of Delaware can help ensure that it remains the choice for corporate domicile for decades to come by proactively implementing this transformative technology.
We recognize that the State of Delaware has already created a blockchain initiative, has expressed an interest in developing a comprehensive suite of corporate blockchain services, has engaged with a leading blockchain development company (Symbiont), and most recently passed legislation modifying the Delaware General Corporate Law to provide specific statutory authority for Delaware corporations to utilize blockchain technology to create and maintain corporate records. One purpose of this open letter is to express to the stewards of this initiative that the business community has taken notice, and a meaningful segment of the stakeholders in Delaware’s corporate ecosystem is eagerly anticipating the many new utilities blockchain technology that is integrated into the Division of Corporations would make feasible. Now that Delaware has the enabling legislation, we encourage swift implementation of that technology by the State. We understand that the Division of Corporations is working with Symbiont to make available various solutions, some of which are outlined in this letter. But we also are cognizant that some efforts—such as the effort to put legacy Uniform Commercial Code filings onto a blockchain ledger—could be finished even without enabling legislation.
Even in the short-term, the State of Delaware could use blockchain technology in several ways that would be qualitatively transformative for entities ranging from small businesses and partnerships to the largest corporations with complex ownership structures and multiple operating subsidiaries. While some ambiguity in the details of how blockchain-enabled corporate services would unfold in the market, we strongly believe that the best course of action would be for the relevant parties in Delaware to begin implementing blockchain technology as soon as possible; from our experience with other early adopters of this technology, it is clear that a wide range of stakeholders would quickly take notice and start deploying solutions once they are available. This point in the evolution of blockchain technology has often—and fairly—been compared to the early days of the internet and it is, in our view, important for states like Delaware that have shown an understanding of the technology’s potential to lead its development and encourage adoption. Just as happened with the ubiquity of the internet, some incumbent market participants in various sectors need to adapt to new ways of doing business. Understandably, these incumbents may resist the inevitable change that blockchain technology will bring—change that may redistribute wealth and market position. But Delaware and its many stakeholders cannot be held captive to old ways of doing business: denial of this paradigm shift risks much more than prudently and sustainably embracing change. This change will happen and will continue to happen, and for reasons described further below, the ultimate beneficiary of these changes—the shareholder—will sooner rather than later demand that change be implemented. We encourage the State of Delaware to follow through on its early promises to embrace this new technology and the change that comes with it by integrating with Symbiont’s blockchain.
Some of the core blockchain-based services that we feel are important for the State of Delaware to implement are outlined below.
Implement a blockchain-based ledger for corporate formation and ownership. The ability to directly issue corporate shares to investors on the blockchain has already been demonstrated (e.g., by Overstock.com). Providing an easily accessible blockchain-based system with the Delaware imprimatur would be transformative to the global capital markets and eliminate many of the issues associated with the traditional intermediated system of securities entitlements.
Utilizing blockchain technology in the corporate formation process yields many benefits. The creation of a system in the State of Delaware allowing for the issuance of “digitized” or “tokenized” corporate securities (whether traditional shares of equity, membership interests, partnership interests, or other traditional indicia of corporate ownership) on the Division of Corporations’ blockchain ledger would provide greater transparency of ownership and include the intrinsic ability to make trade execution and settlement more efficient (we understand, of course, that trade execution and settlement are not provided at the state level, but providing an enabling platform that makes those services easily available to corporations is a compelling reason for founders to choose the State of Delaware over alternative domiciles). Regulators and tax authorities could be provided access to such information on a real-time basis.
The benefits of enabling direct ownership by shareholders, eliminating the need for the convoluted system of “securities entitlements,” are perhaps impossible to overstate. Direct corporate ownership returns value to shareholders that has traditionally been siphoned off by various intermediaries in the system. In other words, direct ownership increases the value of a company to its shareholders, which in turn should drive more investment into businesses in the United States. It is our belief that once shareholders recognize this fundamental benefit of direct ownership, they will begin voting with their dollars by investing in companies with shares issued on a blockchain ledger. With all that Delaware has to offer in terms of its nimble General Corporation Law, its enlightened judiciary, and forward-thinking legislature, Delaware should not miss the opportunity to lead this charge.
There are undoubtedly other uses that such a blockchain ledger would enable—some that we can envision, such as a “tracking token” whereby companies could monetize certain hard-to-value lines of business, and others that will develop over time. Wall Street and the leading law firms are focused on blockchain technology already and are developing applications, both simple and esoteric, for this space; all that they need is a blockchain implementation with which they can work. As forward-thinking jurisdictions around the world are beginning to realize, the time to make the transition to this new technology is now.
Implement a blockchain-based ledger for corporate documentation. This could include not just the traditional certificate of incorporation for corporations, but also operating agreements, capitalization tables, minutes, and other schedules and annexes that are traditionally kept at the entity (and not the state) level. Board records and communications could similarly be maintained on this ledger, albeit on a permissioned basis to ensure confidentiality. There are myriad other use-cases in the world of corporate documentation and communication for such a registry. Each use-case would benefit from many of the innovative features that blockchain provides—perhaps most importantly, an “immutable” audit trail of the evolution of a company from its inception (including, for example, all amendments to various corporate documents), all in one central location.
A blockchain-based ledger for corporate documentation has the potential to greatly reduce the burden on corporate recordkeepers such as corporate secretaries who often have many different internal responsibilities, especially in small businesses. In addition, a blockchain-based ledger could decrease reliance on “institutional memory” among company employees and enable efficient onboarding of successors, who would have an auditable and accessible record of key corporate information. It would also eliminate the potential for such key records to be lost or misplaced. Finally, it would be easier, faster and less expensive for the State of Delaware to onboard, verify and maintain such information than is possible utilizing current systems.
Enable corporate voting via the blockchain. One of the most promising use-cases for the blockchain involves shareholder voting. Many of the problems with current corporate voting systems are well-documented: mistakes associated with the counting process; mistakes associated with ballot design; and problems with access to voting locations. Boards of directors are already looking to provide shareholders with an orderly voice—a reasonable process whereby shareholders are able to be involved in the strategic direction of a company, as opposed to seeking their reaction on an issue-by-issue basis. Additionally, proxy voting—a system which is traditionally managed by third-party businesses with no vested interest in the outcome of any particular vote—is notoriously inefficient and error-prone. Providing an end-to-end verifiable voting system via the blockchain—an inherently fault-tolerant and immutable ledger—could eliminate the need for proxy voting altogether, fundamentally altering the ability of shareholders to participate in the governance of their companies.
Enable the use of “smart contracts.” In our view, smart contracts stored on the blockchain are the pinnacle of qualitatively different value-added services that could be enabled by the Delaware Division of Corporations’ full implementation of blockchain technology. Smart contracts are essentially pre-programmed computer code that can automate many different actions that currently need to be carried out manually. Delaware is home to some of the world’s leading legal experts in resolving disputes relating to complex business transactions. Imagine if that wealth of knowledge were funneled into developing a smart contract platform that could power essential corporate functions, from vendor contracts to employment contracts, from tax returns to esoteric securitization agreements. The State of Delaware already has established blockchain-friendly legislation, such as the Delaware Rapid Arbitration Act, which enables the quick resolution of disputes on the blockchain. A robust smart contract platform—coupled with the enabling legislation and legal framework—would create innumerable opportunities for value-added services, both from the State of Delaware and from third-party service providers. For example, a system could enable entities to locate an asset in real-time, authenticate its provenance, establish its condition, and prove ownership. Such a system would reduce fraud, eliminate paperwork-based delays, increase trust (perhaps reducing payment delays) and enable entities to quickly identify problems with their inventory or supply chain. In addition, smart contracts could enable automated franchise tax payments, automated annual report filing, and potentially integration with other states for the automatic registration (and renewal) of companies for foreign qualification in those states. States could charge a premium for companies availing themselves of this value-added feature.
We hope that the State of Delaware finds the ideas outlined herein useful as it looks to implement blockchain technology in its provision of corporate services. We are always willing to share our experiences as the State of Delaware evaluates its services and examines ways to enhance its position as the corporate capital of the world. Please let us know if we can be of any help.
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Blockchain Consulting LLC is a group of financial services professionals bridging the gap between technology and real-world use cases for distributed ledgers. Our professionals have decades of experience across a variety of disciplines, and we work across the blockchain ecosystem—from financial services to real estate to crowdfunding to initial coin offerings and beyond.