In the summer of 2015, a Delaware official approached the cryptocurrency lawyer Marco Santori with a simple question.
Andrea Tinianow, the state's director of corporate and international development, had learned that New York, where Santori practiced law, was cracking down on bitcoin startups. She wanted to know, "How do we drive them out of New York and bring them to Delaware?"
Santori told her that some of his clients at the law firm of Pillsbury Winthrop Shaw Pittman were interested in issuing shares of stock on a blockchain. There was no law preventing it, but his clients wanted to see it expressly allowed.
That conversation sparked an effort to amend Delaware state law so that companies incorporated there—among which are two-thirds of the Fortune 500—could rely on a distributed ledger to store and transfer securities records and to communicate with shareholders.
The success of that effort is now all but assured.
The Delaware state Senate passed a bill last Friday containing amendments to accomplish Santori and Tinianow's goal. Gov. John Carney Jr. has already expressed support for the bill, meaning that as of Aug. 1, Delaware corporations will have an all-new way to manage their equity.
Dry though it sounds, the shift could be revolutionary. It would restore to companies and individuals direct ownership of their securities, while speeding up stock trades and increasing the transparency and security of the whole system.
It would allow market participants and regulators to "understand with exact accuracy who owns what, and in real time," said Caitlin Long, the chairman and president of the smart-contracts startup Symbiont, Delaware's technology partner for the initiative.
What's more, Symbiont's technology could solve headaches for banks by replacing some of their paperwork with a transparent automated ledger.
If it can do all of that, it would also prove that blockchain technology is more than hype.
"This bill's passage is the first tremor in what will be a seismic shift in the landscape of corporate affairs," said Santori, now a partner and head of the blockchain technology practice at Cooley. "The earth is starting to move under Wall Street."
UCCs and beyond
The amendments will likely have an impact well beyond the capital markets. One area of particular interest to banks involves Uniform Commercial Code filings.
When a bank wants to make it known that it has a claim against the property of a debtor, it files a UCC-1 financing statement. The process is done on paper, and the filing has to be renewed manually after five years. Forgetting to renew releases the claim. By putting UCC filings on the Symbiont blockchain, says Long, the whole process of renewing or releasing such claims can be automated, reducing back-office costs and cutting down on mistakes and fraud.
Because of the demand, Long said, she expects that "smart UCCs" will debut before blockchain-based securities.
"We have banks lined up to start filing UCCs as soon as the [Delaware] Division of Corporations is prepared to accept them," she said.
In a March 2017 post on the Harvard Law School website, Long and Tinianow wrote that Symbiont's technology could be used not only for incorporation services and UCCs but for "land titles, personal property titles, birth/death certificates, professional licenses and many other new types of registries that the State may introduce."
Tinianow now says that she expects to see an entire ecosystem built atop Symbiont's distributed ledger. "The more diverse the groups on the distributed ledger are, the better," she said.
Understandably, given these applications, the initiative has drawn global interest.
"I get emails from lawyers all around the world," Tinianow said. "People are psyched. People are excited about this."
From brainstorm to beta test
Getting to this point required a joint legal and technical effort. Santori wrote the first drafts of the proposed amendments and submitted them to the Delaware Corporation Law Council, an arm of the state bar association, which for half a century has advised the legislature on proposals associated with corporate law. The Corporation Law Council had already been doing its homework for months, talking to experts in order to understand the potential of blockchain technology.
Santori proposed to create an entirely new class of security, "blockchain shares." But the Corporation Law Council "went, frankly, in an entirely different direction," said Matt O'Toole, the organization's chairman and a partner at the law firm Potter Anderson Corroon.
In order to sync the amendments with existing Delaware law and make blockchain-based securities an option for companies right out of the box, O'Toole and his peers decided to classify them simply as a new type of uncertificated shares—ones not represented by pieces of paper.
"My suggestion was much more blunt, and they chose a much better approach," Santori said.
On the technology front, Delaware partnered with Symbiont, which built its platform expressly "to be able to store legal documents on the ledger in a confidential and secure manner and without slowing down performance," Long said.
Other systems, she said, either strictly limit the amount of supplemental data that can be stored in a ledger entry or store such data outside the ledger itself. Bitcoin, for instance, allows a small amount of data to be appended to a bitcoin transaction, but not enough for a PDF file.
The Corporation Law Council wasn't convinced at first. Some of its members were concerned that the new technology might not be secure enough to protect sensitive financial information. But after speaking with experts, they concluded "that blockchain technology offers an enhanced level of security relative to what's out there currently," O'Toole said.
There are a number of other advantages to the new blockchain-based "smart securities." (While the Corporation Law Council chose for legal reasons not to create "blockchain shares" as a whole new type of security, the resulting securities will nevertheless be shares that live on a blockchain.) With shares of stock being held on Symbiont's distributed ledger—after being cryptographically authenticated by the Delaware Division of Corporations—securities trades could be settled the same day they were made.
Investors would own their shares directly and there would be no possibility of a company having more shares issued and outstanding than were actually authorized—a situation that happens occasionally today. (Legally speaking, every share of public-company stock in the United States today is directly owned by an entity called Cede & Co., a nominee of the Depository Trust Company. What individual shareholders own is more like an IOU than an actual security.)
While no shares have yet been issued on a blockchain, Delaware has already done a beta test of Symbiont's technology. In their Harvard Law School post, Long and Tinianow describe how the Delaware Public Archives has found that the startup's "smart records" technology can automate compliance "with laws pertaining to retention and destruction of archival documents, among other features."
"The state wanted to eat its own cooking," Santori said.
Long used nearly identical language to describe Symbiont's intention as "among the first" companies to issue blockchain-based shares after Aug. 1. "We will eat our own dog food," she said.
Not an overnight revolution
Delaware has not yet deployed Symbiont's technology for corporations. And while its blockchain will be a true decentralized ledger, Tinianow says she doesn't know yet who will run the various nodes. Some will likely be run by the state of Delaware, she says, while others are operated by the law firms and registered agents that help companies incorporate.
Even once the network is running, it won't revolutionize the corporate landscape overnight.
"Corporations are going to have to start using it, and that's not guaranteed," Santori said. "I think it's likely, but it's not a fait accompli."
One sticking point is that it will be much simpler for newly incorporated companies to issue shares on a blockchain than for existing businesses—especially large businesses with publicly traded stock—to make the transition.
"Technically, you can never demand back as a corporation certificates from your shareholders," Santori said. He and the Corporation Law Council are working on ways to help existing companies migrate to the new system, but it's a complex task. It is "not as simple as issuing them a letter canceling their shares and issuing them new stock," Santori said.
But it is worth fighting through the obstacles, insiders say. The amendments are designed to overhaul "the back-office plumbing of the financial markets that doesn't get a lot of light of day, but when it goes wrong it can actually cause a lot of problems," Long said.
As the Senate vote approached in late June, Tinianow was fielding calls from groups as far away as Germany that want to capitalize on the new legal framework.
Now that the bill needs only the stroke of the governor's pen to become law, it remains to be seen just how many banks and other companies will embrace its possibilities—and how big of an impact it will have on the private sector.
"I think it's going to be powerful," Tinianow said. "People are throwing around terms like 'transformative.' I sure hope so."