Delaware Passes Landmark Blockchain Legislation For Stock Markets

Delaware legislators passed a historic bill that explicitly legalizes the right to track stocks on a blockchain, according to Coindesk. This new amendment is a part of a broader series of legal updates for capital markets, clarifying different types of corporate records on blockchain networks.

Coindesk reports that legal experts expect Delaware governor John Carney will sign the bill into law this month, which means it would actually be put into practice in August.

“It is absolutely unique, the first of its kind,” Mark Smith, CEO of the blockchain startup Symbiont, told International Business Times about the Delaware bill. “This goes to the heart of how incorporation takes place. How those shares are registered, managed, tracked and the information about them is moved.”

Read: Chicago Looks to Become Fintech Mecca As Lawmakers Show They Actually Understand Blockchain

When a business becomes a corporation, with public shares plus all the bells and whistles that entails, there’s still a confusing paperwork trail specifying who owns what and how much it’s worth. This can lead to multimillion-dollar lawsuits, like the case of Dole Foods in 2015. A blockchain system would change the entire process: Providing a shared registry, streamlining capital-table management and shareholder communications. Basically, blockchain’s transparency would allow both companies and shareholders to retain direct ownership of their shares.

Determining ownership and tallying proxy votes are both a big deal in the world of stocks and securities, making up a hefty chunk of Delaware legal proceedings. “It’s typically decided within a 1 to 3 percent range. You need that kind of accuracy to decide those cases,” Smith said of proxy battles, like the type that recently damaged the value of Buffalo Wild Wings shares.

“Typically, you can only get as close to about, roughly the final 7 percent to know who owns what. There’s a 7 percent gap of you just don’t know for sure,” Smith said. “And if these things are decided in that 1 to 3 percent, it’s almost impossible to decide them [lawsuits] correctly in our current structure. Now with this new law, if everybody opts into the new structure for recordkeeping, you can know with 100 percent certainty."

Delaware is codifying new permissions based on an idea that already has pretty reputable precedents. Wired reported in 2016 that Overstock was the first publically traded company to issue stocks over the bitcoin blockchain. NASDAQ has been beefing up its blockchain stock options since 2015, although it is still not widely available to the public.

Even if it takes a while to implement, a column published by The National Law Review argued Delaware’s legislation could lead to “more accurate and auditable ledgers, easily implemented restrictions on transfer, and swift voting.” Local laws in the tiny state of Delaware, with less than a million people, could have a global impact because business-friendly regulations have turned Delaware into a corporate hub.

According to Bloomberg BNA, more than half of Fortune 500 companies -- plus 85 percent of U.S. initial public offerings -- are incorporated in Delaware. As such, these companies are subject to Delaware’s laws. Smith called Delaware the “genesis point where equity starts.”

So Delaware’s new blockchain legislation could have far-reaching ripple effects. “It will change how companies go public,” Smith said. “It will dramatically change how those shares are transferred, with something we historically call a clearing settlement process.”

Stock trading usually happens on the exchange, then goes through a clearing and vetting process that takes a few days, including payments and transferring the ownership of securities. There’s a lot of back and forth. Blockchain could simplify it all by consolidating records and letting people work while the transactions are still in process.

“What this will allow for in the future, is to retain your property rights as a private company, go public while still maintaining those shares on a blockchain, allow those shares to be traded in the current, centralized market structure,” Smith explained. “But then allow for clearing and settlement to occur back on the blockchain.”

Much like the Illinois Blockchain Initiative, Delaware is collaborating with blockchain innovators in the private sector to create new laws and digital infrastructure plans. Symbiont is one of these tech industry partners, collaborating with the Global Delaware’s blockchain initiative lead by Andrea Tinianow. On a broader scale, Delaware is exploring opportunities for smart contracts to manage public records and business ledgers.

Read: Here’s What The Blockchain Future Of Capital Markets Might Look Like

The Delaware Blockchain Initiative already launched a beta testing program for the Delaware Public Archives. Next, the team is setting their sights on notoriously tricky legal documents, tackling stock regulation with bills like this. “This was done 100 percent in a public-private partnership,” Smith said of the new bill. “We brought this idea to Delaware...they expanded on that idea.”

Although this bill sparked a lot of excitement in legal and financial circles, it may be a while until these seeds bear fruit. State budget cuts, totalling $51 million according to the Washington Post, could slow down the legislative pipeline. It remains to be seen if blockchain stock platforms will create a new channel for crystal clear property rights in 2017.