Delaware, home to most U.S. companies, moves to adapt regulation to blockchain

The state where most U.S. companies are incorporated on Monday launched an initiative to support the use of blockchain digital record-keeping in a legal and technical framework employing the digital format that promises faster and more efficient corporate reports and securities transactions.

While blockchain is designed to sidestep most centralized data centers by carrying its own encrypted data in unalterable blocks, it requires network protocols to validate participants and create standards. The initiative marks Delaware's stepped up effort to stay relevant as a growing number of industry consortia and government entities vying to position play that central role. 

Creating regulatory environment for blockchain

Delaware added a cautious note as it launched its effort, saying that it will work to build a "regulatory environment (that ) is welcoming and enabling by observing the industry as it develops further, rather than immediately enacting laws and regulations regarding licensing of blockchain companies, while working with the industry and consumer groups to determine best practices."

The legal home of 66 percent of Fortune 500 companies, Delaware announced the initiative at a technology conference in New York on Monday by promising to create a blockchain-friendly domicile. Delaware Governor Jack Markell said in a statement that the state will work on a plan for companies with the potential to "lower their transaction costs, speed up and automate manual processes, and reduce fraud." 

Delaware follows SEC in examining blockchain

The comments echoed SEC Chair Mary Jo White's view expressed at a tech conference last month that "Blockchain technology has the potential to modernize, simplify, or even potentially replace, current trading and clearing and settlement operations." White said SEC is monitoring the legal and regulatory implications of the technology now in its early stages. 

White noted that the SEC had recently reviewed a share offering by Overstock, an online retailer with a blockchain unit that late last month announced a blockchain securities offering. Overstock said it will trade and settle the share deal entirely on a distributed ledger. The company said in a statement March 31 that it will issue a million shares of preferred stock "to prove out this concept" of distributed ledger securities. 

The offer, made to its existing shareholders, will use Overstock's own alternative trading system and share registration that has already gone through the SEC oversight to offer the shares in a way that bypasses existing share transfer agents and registries. 

Delaware follows SEC in examining blockchain

Delaware has long attracted company incorporations with a legal and tax environment favorable to corporations, and in its recent history it has attracted a large share of both U.S. and international companies issuing U.S. shares. The Overstock share issue shows how companies might potentially bypass the state on their way to issuing stock. 

Delaware said it has enlisted the technology firm Symbiont for guidance, and the law firm of Pillsbury Winthrop Shaw Pittman LLP for help developing its legal framework. In unveiling its initiative, the state suggested that it will pay close attention to the legal implications of the "smart contract" feature of blockchain, which can be used to dynamically update digital records to reflect specific conditions such as expirations or other terms that might normally require separate legal notifications. 

While smart contracts are technically feasible, and offer a way for firms to issue and trade complicated securities with special provisions in a dynamically updated format, the legal issues remain largely unknown. The state said it plans to focus on the legal challenges, as well as the technical hurdles, to lay "the groundwork for a more modern, secure and transparent business environment for years to come." At the same time, it hopes to keep its position as the legal domicile for companies if and when their securities become digital, virtual, and decentralized.
 
Richard Satran is a financial journalist covering daily and emerging issues for Thomson Reuters Regulatory Intelligence.

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