On Aug. 1 private companies incorporated in Delaware might be able to start issuing and tracking shares of stock on a distributed ledger.

The new system, in which companies and shareholders could enjoy the benefits of electronic trading while retaining direct ownership of their shares, would be established thanks to an amendment currently making its way through Delaware's state legislature.

Delaware, which takes pride in being the "First State," has long been a home to American corporations, at least in terms of legal jurisdiction. Two-thirds of the Fortune 500 are incorporated there.

Testing ground
Delaware's move to promote the use of distributed-ledger technology in stock trading is "tremendously forward-thinking," says Marco Santori of the law firm Cooley, and it could have "reverberations nationally," says Andrea Tinianow, left, a state economic development official. They spoke on a panel moderated by IBM's Kathryn Harrison.

So the idea of distributed-ledger equities was destined to be realized first in Delaware, says Andrea Tinianow, director of corporate and international development at Global Delaware, the state's international marketing initiative.

"It was kismet," she said. "It was meant to happen."

The initiative has been underway for more than a year. To brainstorm the legal framework, she teamed up with Marco Santori, a partner and head of the blockchain technology practice at Cooley, a New York law firm. In May 2016 the governor of Delaware announced that his state was officially moving to make it possible for private and publicly traded stocks to live and trade on a blockchain.

"To Delaware's credit, they have been tremendously forward-thinking," said Santori, who spoke Tuesday alongside Tinianow at American Banker’s Blockchains + Digital Currencies conference in New York.

The smart-contracts startup Symbiont is Delaware's technology partner in the initiative — the "third leg of the stool," Tinianow said. The "smart securities" that Symbiont plans to deliver are intended to be impossible to counterfeit or copy, and they are meant to provide total transparency regarding who owns what — something occasionally lacking in today's capital markets.

If signed into law this summer, the amendment would also prevent any shareholders of a Delaware-based company from suing over an alleged breach of fiduciary duty simply because the company is using blockchain technology.

"When you have that kind of law in Delaware, it has reverberations nationally," Tinianow said.

The advantage of holding stocks on a blockchain could be tremendous.

While banks around the world have been experimenting with blockchain technology and building proofs of concept for the past two years, they "haven't really been achieving blockchain nirvana, have they?" Santori said

On Aug. 1, if things go according to plan, he suggested, that state of bliss will be within reach—at least as far as the trading and settlement of private-company stock is concerned.

"That is what we've been trying to achieve, this whole T+0 settlement time. This gets us there," Santori said. "That's game-changing stuff, and it's happening at the very base of the financial system."

As for bringing publicly traded stock to a distributed ledger, Santori said he and the state of Delaware are still in talks with the Securities and Exchange Commission about making it happen.

"There's a lot more machinery to move in public markets than there is in private markets," he said. "So that's going to be another adventure."