Effort could change back-office functions for many companies incorporated in state
By Paul Vigna - May 1, 2016 7:36 p.m. ET - (Wall Street Journal)
Delaware, the state that incorporates the most public companies, is exploring the use of blockchain technology to move more of its paperwork to cheaper systems.
The effort, while still in its early stages, could change some of the most basic back-office functions for private and public companies alike.
Delaware Gov. Jack Markell is scheduled to discuss details of the Delaware Blockchain Initiative at an industry conference in New York on Monday.
“This is something we’re very interested in,” Gov. Markell said in an interview. “We think the benefits could really be tremendous.”
Blockchain is best known as the open technology that processes bitcoin transactions by recording them all on a public ledger. Advocates tout blockchain’s security and low cost, qualities that are enticing some companies and governments to explore how it might be used to process other types of transactions.
In recent years, some corporate executives have questioned their allegiance to Delaware, citing a wave of shareholder litigation.
In blockchain, Gov. Markell recognized a technology that could give the state a competitive advantage. Other states, like North Dakota, have fostered a business-friendly environment, and some companies, like Dole Food Co. in 2015, have complained about a lack of support from Delaware. Meanwhile other locales, like Zug, Switzerland, are making concerted efforts to attract high-tech and fintech businesses.
Mr. Markell’s office has already begun working with the state’s powerful bar association to determine how best to incorporate the technology into state law and will start a pilot program to move state archival records onto the open-ledger technology known as blockchain.
Blockchain is best known for underpinning the virtual currency bitcoin. While still largely unproved outside of bitcoin, banks, technology companies and governments in the U.S. and Europe have begun to invest time and capital exploring it.
Delaware is the nation’s second-smallest state, and has one of the smallest populations, but it is an outsize player in the incorporation business, perhaps its best-known industry. More than 1 million companies are incorporated there, including half of all publicly traded companies in the U.S. and roughly 65% of the Fortune 500.
The project involves an open ledger maintained across a network of computers, giving users instant access to the transaction history as opposed to heavily fortified servers that protect data and can have more trouble communicating with one other.
Before blockchain moves forward in the state, a committee of lawyers under Delaware’s bar association has to determine if and how to roll it out.
“We’re at the beginning of the process,” said Matthew O’Toole, a partner at the law firm Potter Anderson & Corroon, and chairman of the committee.
State officials are likely to move slowly to tinker with a system that many corporations have used for decades. While switching from old technology to a new, more open blockchain technology might save costs and build efficiency, it could raise security concerns, and the amount of savings has yet to be quantified.
The system should initially benefit private companies that incorporate in the state, officials say. With many companies staying private longer, it is harder to keep track of all the equity issued and the different shareholder rights after multiple financing rounds, say state officials.
The blockchain system will be faster and cheaper than the existing process, since it automates a number of processes, including share registry, capital-table management and shareholder communications, said Mark Smith, chief executive of Symbiont, the New York startup working with Delaware on its blockchain initiative. It could also improve compliance with various restrictions on share transfers.
The biggest challenge is for state government officials to wrap their heads around an unfamiliar technology and make sure it is implemented in a way that provides the promised benefits without any unexpected pitfalls, said Rick Geisenberger, Delaware’s chief deputy secretary of state.
“We’ll start with low-risk things,” he said, “and over time move into things that are more complicated.”