Delaware’s Blockchain Initiative to Revolutionize the Stock Trade

Blockchain  •  Regulatory Action  •  SEC  •  State Law

With the near unanimous passing of a bill that will explicitly recognize the right to trade stocks using a blockchain, Delaware is making a strong case for it being the blockchain-friendliest state.

The Delaware Senate Bill 69, which won a majority vote in the Senate with 20 to 0 in favor of the bill and 40 to 1 in the House of Representatives in favor of the bill, will be expected to be signed into law by end of July, with an effective date of 1st August. The bill includes a series of amendments to the Delaware General Corporation Law, specifically to Sections 219, 224, and 232, that legally recognize any number of records being stored on networks of electronic databases – e.g., blockchain – for the creation and maintenance of corporate records, including the corporation’s stock ledger.

Once effective, the bill will allow private companies incorporated in Delaware to start issuing and tracking shares of stock on a distributed ledger. As of now, only private-company stocks are within reach of the bill. However, the state of Delaware is still in talks with the Securities and Exchange Commission about also bringing the publicly traded stock to a distributed ledger. Nevertheless, by allowing potential large-scale issuance of stock on blockchain, the bill paves the way for new opportunities and could catalyze violent disruptions of traditional models of finance.

Delaware’s efforts of creating blockchain-based securities did not happen overnight. In 2015, Andrea Tinianow, the state’s director of corporate and international development, learned that New York was cracking down on bitcoin startups. Sensing the opportunity, she wondered, “How can we drive them out of New York and bring them to Delaware?” Thus, the blockchain initiative was born. The program is meant to encourage blockchain businesses by clarifying the existing legal framework and providing regulatory certainty to innovative companies. It was formerly introduced in May of last year when the governor declared that the state was officially moving to make the trade of privately and publicly traded stock possible on a blockchain.

Delaware, in collaboration with the smart-contracts startup Symbiont, is using“smart securities” in an effort  to deliver numerous efficiencies on the blockchain. The “smart securities,” which are supposedly impossible to counterfeit or copy, will allow a closed or open group of participants to securely share and distribute ledger statuses instantly. This will increase transparency as the history of all instruments will be viewable in real time and are cryptographically verifiable. Moreover, the technology will effectively cut out intermediaries as a blockchain system will enable verification done by the participants confirming transactions through the peer to peer network. Further, the peer confirmation of trades also means settlement can be almost instantaneous, enabling T+0 settlement times. This type of speed makes shares a far more liquid investment – almost like having cash on hand.

Even though liberalists and technology enthusiasts celebrate the passing of the bill as a major victory, heralding the potential disruption of the US stock exchange, its application is narrow.

The absence of regulatory consensus on blockchain technology makes it clear that the precautionary approach permeating financial regulations still pose a hazardous roadblock for the future of blockchain. Looking abroad at countries like India, where the government is set to regulate cryptocurrency in accordance with this year’s surge in digital payments, or Switzerland, charmingly dubbed “crypto valley” due to its pro-innovation approach to supervision and regulation, only highlights the need to get the government on board. Despite this month’s step embracing emerging technologies in the financial sector, the United States is unlikely to be the winner in the race to blockchain, unless financial regulatory bodies were to adopt a more permissive approach.

 

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