Delaware - Distributed Ledger or Blockchain Transactions in the Delaware General Corporation Law (DGCL)
If you haven't already heard of the Delaware Blockchain Initiative, you soon will. A proposed amendment to the Delaware General Corporation Law (DGCL) could revolutionize the way corporate finance is handled in Delaware and, as Delaware is the state of incorporation for more than three-quarters of the Fortune 500, the country at large.
What is a Blockchain?
A blockchain, in its use in finance, is essentially a decentralized and distributed ledger. In systems where physical pieces of currency aren't being handed back and forth like gold doubloons, the most pressing problem is keeping track of transactions. As digital currency is, at base, an electronic file that can be replicated without limit, the issue of double-spending becomes a concern. Double-spending occurs when one unit of currency is both spent and retained by the spender. With physical currency, this is not a significant problem – if there are 100 pennies in a system and, at the end of the day after all trading has completed, everyone counts their pennies, there will only be 100 pennies distributed amongst the traders. Individual traders may feel that they should have more pennies than they do, and indeed some thievery may have occurred between them, but the system itself will not be fooled. Thus digital currency must first tackle the problem of ensuring an accurate accounting of not only individual participant holdings, but the amount of currency in the system as a whole.
A blockchain can be most accurately described as a distributed or decentralized ledger. Digital currency that utilize blockchain systems take advantage of the same technologies as peer-to-peer file sharing systems. A peer-to-peer file sharing system has no centralized server that houses all of the data that is being shared. Instead, the data on the individual users' systems is shared with all of the other users of the system. For file sharing, this makes it difficult for law enforcement to crack down on copyright infringement. For digital currency, this ensures that there is no one source of data that, first, needs to be maintained by some oversight entity and, second, can be compromised.
When a transaction occurs, a transmission is made from the sending and receiving parties' currency system of choice, to the rest of the nodes, or users, on the system. It essentially transmits a message stating "Party A has paid Party B X amount." Individual nodes then confirm that this data is accurate – at base, that Party A has the funds to transfer to Party B and confirms the new amounts held by each party. Once confirmed, groups of these transactions are bundled together in to "blockchains" and distributed to the nodes of the system. In essence, imagine a blockchain as a notebook in which transactions are continually scrawled. When a notebook is filled, millions of copies of it are instantly made and distributed to all of the users of the currency. This ensures that, if someone tampers with a transaction in their notebook, the tampering comes out the next time the notebook is compared with all of the copied notebooks – the next time there is a transaction.
In addition to this distribution system, the innovation inherent in many digital currencies that use a blockchain system is that the units of currency exist only in the blockchains. In other words, whereas in a traditional ledger you would be writing down Party X gave $10 to Party Y and, after that writing, there would exist both the ledger and the $10 in Party Y's pocket, in most digital currency systems there is no currency that exists separate from the blockchain. Rather than opening your wallet to retrieve $10 to hand over to a seller for an item, with these digital currency systems you merely indicate to the distributed and decentralized ledger, the blockchain, that the 10 units that were attributed to you are now attributed to the seller.
How Can Blockchain Technology Impact Business?
In addition to the obvious potential for a shift in the way currency is handled, two exciting potential avenues for blockchain technology are distributed ledger shares and smart contracts.
Distributed ledger shares operate in much the same way that blockchain currency does. All participants in a particular market for shares share a single, decentralized database. Trades can be executed instantly and at any time, as there is no third party oversight. The added security and operational efficiency can substantially reduce transaction costs and, as a result, change the entire face of investment.
Smart contracts are contracts that can autonomously update, delete or otherwise be interfaced with when a specific condition is met, like an expiration or payout date. In essence, they are digital transaction protocols that can automatically execute the terms of a contract. The thought is that common contractual obligations can be handled automatically, without the need for human intervention, and thus substantially lower transaction costs. If an ordinary contract defines the rules of the road and outlines the penalties of violating them, a smart contract does the same but also automatically enforces the rules and reduces the likelihood of needing to pay penalties. Enforcement is decentralized through a blockchain in the same way that digital currency is: it is February 31, millions of people agree that it is February 31, and millions of people agree that our contract states you will pay me $50 on February 31; so on February 31, $50 is taken from your account and transferred to mine.
What is the Delaware Blockchain Initiative?
The Delaware Blockchain Initiative (DBI) is an attempt by the state to become more friendly to blockchain businesses and adapt its regulatory state to emerging technology. Then-Governor Markell launched the DBI in May of 2016, aiming to create a regulatory and legal environment for the development of blockchain technology and embrace its ability to reduce transaction costs. The Governor highlighted four facets of the state intiative.
First, to ensure that Delaware's regulatory environment is welcoming and enabling by observing the industry as it develops. The key here will be to walk the line between codifying an evolving and nascent industry at a point in time where it hasn't fully developed and failing to support an emerging technology. Best practices will need to be determined with the fully input of the community, industry, and consumer groups.
Second, to ensure that an appropriate legal infrastructure is in place for the oversight of a distributed ledger share system. Too much interference and innovation is stifled, too little interference and investors and companies are hesitant to get involved as they feel unprotected.
Third, an Ombudsperson, Andrea Tinianow, was named as the State Director of Corporate and International Development. A member of the Global Delaware Concierge Team, Ms. Tinianow is tasked with working with investors, entrepreneurs and executives to help ensure the DBI is a success.
Fourth, the Governor committed the state government to using blockchain technology, and announced that the Public Archives project would be the first entity on board. The Delaware Public Archives will use blockchain technology to archive and encrypt government archives. This will help not only ensure their security, but double as a backup and disaster recovery system.
Blockchain technology is promising, there is no doubt. All indications appear to be that it is gaining increased acceptance and adoption, and the important of Delaware throwing its weight behind the technology cannot be overstated. However, blockchain technology and the digital currency systems that use it are not without their detractors and black eyes. Bitcoin, the most famous digital currency, is viewed by many as the currency of the black market. Technology advances quickly, and it remains to be seen if blockchain technology can overcome its stigmas and gain widespread adoption before the next revolution in payment and ledger systems is developed. In either case, however, it appears Delaware is situating itself to be ready to cash in.