Equity Markets on a Blockchain: Delaware’s Potential Impact
Equity Markets on a Blockchain: Delaware’s Potential Impact by Noelle Acheson – Coin Desk
Last week, Delaware passed amendments to state legislation that, once signed into law by the end of July, will give corporations registered in the state the right to issue and trade shares on a blockchain platform.
While this may on the surface sound like a small modification, it is a big deal. Companies and exchangesaround the world have been investigating how distributed ledgers could help with issuance, execution and settlement (some have even issued shares on a blockchain). However, they have been doing so under a cloud of regulatory uncertainty, unsure of whether the stakeholders – including the relevant governing bodies – would allow the innovations to take hold.
For the first time, businesses will be able to experiment with new processes knowing they have the protection of the law.
This is likely to pave the way for the entire life cycle of a share – the issuance, custodianship, trading, shareholder communication and redemption – to be enacted on a blockchain. The result could be a reframing of the global securities network, one of the cornerstones of our modern capitalist economy.
The equity infrastructure used in most markets today evolved around paper-based issuance, and essentially has the same conceptual backbone as in the 17th century. Processes are complex, involving several steps, each with fees. Centralized clearing creates systemic risk by presenting a single point of failure, and since in most jurisdictions legal ownership rests with the transfer agents, true ownership can be obfuscated – in turn, this can violate rules that limit shareholdings.
Furthermore, a paper-based system – even a digitized one – is vulnerable to fraud, and centralized databases can suffer security breaches.
Settle for less
With a blockchain system, investors and issuers can interact directly with each other, in theory cutting out brokers, custodians and clearing houses, thus reducing transaction costs. Settlement can happen within hours instead of days, releasing funds and lowering carrying fees.
Legal ownership would be restored to investors and companies, and would be more transparent. Dividends and stock splits could be automated, reducing cost and error.
Also, a distributed ledger platform would remove the single point of failure risk, help make proxy voting more transparent and accurate and make it easier to manage cap tables as well as collateralisation.