Blockchain Technology Update for Corporate Board Members

Bitcoin continues to capture headlines. But the more compelling story for corporate directors is not bitcoin, but the technology that girds the cryptocurrency: blockchain technology and its many iterations, also referred to as distributed ledger technology. At its core, blockchain technology is a network of computers that are connected by complex algorithms.

Parties to a transaction on a blockchain see the same information at the same time. When the parties agree to the terms of a transaction, those terms are recorded on the blockchain. Once recorded, the terms becomes a permanent record that cannot be altered. Each party to the transaction has the same copy of a mutual ledger which provides an audit trail of who did what and when. Blockchain technology allows parties who normally would not trust each other to transact business directly, securely and efficiently, without the need for a trusted third party intermediary.

Business disputes often arise when memories fade and parties disagree as to the controlling terms of an agreement. With blockchain technology, the truth of what was agreed to is preserved.  And, because the information on the blockchain is distributed over all of the computers in the network, no single computer maintains all of the information. So, there is no single “honey pot” that can be attacked or otherwise compromised.

The immutability of the blockchain has been the impetus for many, many entrepreneurs to develop new, innovative blockchain-enabled applications across every sector, from banking and finance, to healthcare, to manufacturing. To wit, blockchain technology is now used to track the provenance of diamonds, digitize the rights of gold ore, organize a decentralized community of bike ownership, record ownership rights in land, intellectual property, and other items. The list goes on and on. Behemoth Internet companies such as Uber and Facebook are facing challenges from competitors seeking to provide the same or similar services using blockchain-enabled decentralized business models.

Many of these blockchain-enabled applications utilize digital coins (also referred to as tokens) that can be redeemed for specific services, such as access to a cloud storage platform, or exchanged for other tokens or digital currency. The tokens are generally purchased through ICOs or “Initial Coin Offerings.” Often the tokens are bought not so much for the specific service associated with the offering, but rather for their speculative value. Because so many coins have appreciated in value, there has been a torrent of ICOs and increasing demand for tokens. This phenomenon led SEC Chairman Jay Clayton this past December to issue a Public Statement on Cryptocurrencies and Initial Coin Offerings which urges caution on the part of investors and compliance on the part of issuers, but ultimately expresses optimism for blockchain technology and the opportunity that it presents for capital formation with new levels of transparency.

That the SEC favors blockchain technology augurs well for Delaware, the first state to publicly endorse blockchain technology, and commit to the use of the technology in state government. Last summer, the state amended its corporate law to expressly authorize corporations to maintain their stock ledger on a blockchain. The legislation was the first of its kind in the U.S. and around the world, and it paved the way for more shareholders of publicly traded companies to own shares of stock directly and not through a through a third party (as most do now). Such direct ownership would create innumerable benefits, including heightened efficiencies, reduced cost and fewer errors. But this is only the beginning. There is more work to be done in Delaware (and elsewhere) to lay the regulatory foundation for companies to incorporate and transact business on a blockchain.

Blockchain technology permeates our society with each passing day. As support for blockchain technology in the private and public sectors grows, it will become increasingly more important for directors of corporate boards to engage with this subject matter. The technology may be complicated, but the concepts are straightforward. The best way to begin is by asking questions. This is the perfect time to think outside the box (or should I say, “the block”?)!