Feature Legal and IP News

IBM lands controversial Delaware corporate filing blockchain

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On June 18th the State of Delaware awarded IBM a contract to build a Proof of Concept (PoC). The eighteen-month contract also includes blockchain consulting. According to Delaware Online, the contract figure was $738,000 for a corporate filling blockchain, though this information doesn’t appear in the public documents.

The State legally awarded a contract to IBM without a competitive bidding process because of an existing federal consulting contract. This isn’t the controversial part of the article.

The story is relevant because the debate that happened in this case is likely to repeat elsewhere across different industries.

The business need

When shareholders are unable to attend corporate meetings, proxy voting is common. But it’s a cumbersome, error-prone, and expensive process involving intermediaries. To date, at least four blockchain proxy systems have been trialed.

In future with a blockchain, perhaps you won’t need to provide proxy votes, because you could potentially vote directly. After all, a blockchain provides a single source of truth about who owns stock.

It’s worth appreciating the complexity of stock ownership in the US. The ultimate owner is the ‘beneficial owner’, and often a broker holds stock on their behalf. But the broker will generally use a custodian bank, who is the ‘record holder’, and it is the record holder’s name that appears on a share ledger. With a blockchain the beneficial owner would be the name that appears on the share ledger.

Then there’s the timing of stock transfers that can take up to three days to clear. With a blockchain that could be near real-time so all parties can simultaneously see the current ownership status.

In the last few months, there’s been a slew of companies starting to focus on security tokens. One use case is if Delaware were to permit the issuance of tokenized corporate securities on their share ledger.

Lawyers Jenner & Block wrote a good article about the legal and business need to progress the Delaware Blockchain Initiative.

Delaware Blockchain Initiative

Delaware is a popular home for corporations, including 66% of Fortune 500 companies and 85% of US IPOs.

In May 2016 Governor Jack Markell announced The Delaware Blockchain Initiative. The program aims to enable the regulatory and legal environment for the development of blockchain technology and to welcome blockchain companies to the state.

In August 2017 Delaware introduce a law legalizing the use of blockchain for issuing securities and maintaining corporate records.

As part of the 2016 announcement, the State announced its own blockchain project in conjunction with startup Symbiont. The project was for the Delaware Public Archives to store state archival records on a distributed ledger.

The Delaware Business Times reported that the relationship ended in the Spring of 2017. Deputy Secretary of State Kris Knight, who now heads up the Delaware Blockchain Initiative, said the two parties disagreed over the direction of the partnership.

“Symbiont felt that if they were not involved in a larger piece of the puzzle,” he said, “then they didn’t feel useful in doing that smaller piece.”

Given Symbiont’s focus on the financial sector, their real interest was likely getting involved with Delaware’s corporate filing. Perhaps that was initially discussed, but for a while, Delaware got cold feet.

Meeting in New York

In September 2017 there was a Delaware Fireside Chat in New York City about the topic. The meeting of sixty or so people included bankers, attorneys, and technologists.

Chuck Thompson who attended gave his take on the meeting in the International Business Times: “The discussion was lively and clearly there’s an appetite for Delaware advancing the initiative based on the audience participation.”

“On Delaware’s part, we detected no small measure of caution about moving forward, with references to concern regarding the interests of Delaware’s citizens and constituency.”

“No doubt, any agents of disruption will be met with legacy naysayers who enjoy the status quo…but at what cost?”

He was concerned that there was a clear indication that progress would slow, so he penned an Open Letter to Delaware. Another group wrote an article for Forbes.

The current project

The current project’s scope is to put two things on the blockchain: the stock ledger and Uniform Commercial Code (UCC) filings. UCC’s include leases and secured transactions.

This January the Delaware Secretary of State’s office kickstarted the project by conducting meetings with 15 state and business leaders. In February they held workshops to explore these two applications plus corporate records. The outcome was to start with UCC and then move on to stock ledgers which might have the most significant impact.

Kristopher Knight, deputy secretary of state in Delaware, told iTreasurer: “UCCs can get off the ground relatively quickly. Stock ledgers will take more time to identify the tools and reports, and then expand the scope to a bigger audience.”

The plan was for work to start on initial PoCs this past April. After that, there would be two to three months for full PoCs and then 4-11 months for production pilots.

Conclusion

Delaware’s won’t be the world’s first corporate filing project. Three months ago startup Proxeus and IBM ran a pilot for a rapid Swiss company formation on a blockchain.

And the State of Delaware also won’t be the last organization to grapple with concerns over vested interest’s worries about the threat of new technologies.