The Blockchain and Digital Assets- Critical to Delaware
Co-Director Center for Analysis of Delaware's Economy & Government Spending
May 19, 2021
DELAWARE IS SITTING ON A POT OF GOLD!
In Q1 2021, according to the Wall Street Journal, $2 billion of "digital asset" transactions happened on the Ethereum network, up from only $94 million the previous quarter.
These "digital asset" transactions were smart contracts - the sale and use of tokenized information using "blockchain technology." It is disruptive. It is growing very fast. It changes how business is done.
Delaware should be a leader in blockchain and digital assets with over one million incorporated entities, two-thirds of the S&P 500 companies, an enormous flow of UCC filings, the Court of Chancery, and is a central location-but we are not. We are losing millions of dollars in related fees.
The State Legislature should create a bi-partisan, joint committee to evaluate laws enacted in competitive states such as Wyoming and, with all deliberate speed, pass appropriate legislation to enable "digital asset" innovation in Delaware.
Meanwhile, the Governor should consider how best to leverage the vast amounts of corporate and commercial information in its possession to generate new revenue streams for the State.
THE BLOCKCHAIN AND DIGITAL ASSETS
Blockchain is a decentralized "ledger" recording every transaction that has ever occurred in the history of a specific blockchain network. The technology significantly advanced in 2015 with the creation of Ethereum. Ethereum was designed as a distributed ledger that would contain generalized scripting and application development (aka smart contracts) and pushed blockchain technology into the era of digital assets.
A smart contract, like any contract, establishes the terms of an agreement. But unlike a traditional contract, a smart contract's terms are executed as code running on a blockchain. Smart contracts allow developers to build apps that take advantage of blockchain security, reliability, and accessibility while offering sophisticated peer-to-peer functionality. Everything from loans to insurance to operational data can be converted into a digital token (e.g., a smart contract). The digital token then fulfills the functions of clearing and settlement intermediaries -- streamlining transactions and eliminating superfluous counter-party risk while also eliminating transaction settlement delays.
Today billions of dollars of transactions flow through blockchain servers. There are many private and public blockchains worldwide. Blockchain technology is now being used at financial institutions such as the Depository Trust and Clearing Corporation (DTCC) and investment houses such as Fidelity and Vanguard, among others. These organizations integrate third-party information from application programming interfaces (APIs) into their distributed ledger and other systems to streamline transactions and create new value in their organizations and for their clients. And it is in the area of digital assets that Delaware has a unique opportunity to expand an existing State revenue source - selling UCC data to industry. But we are falling behind.
WYOMING TAKES THE LEAD - Regulators, Congress, and dozens of other States weigh options
Despite its size, location, and history, Wyoming has a lot in common with Delaware. It has a small population, and its historic economic drivers - notably coal, oil, and gas - have poor future economic prospects. In a tremendously innovative step, the Wyoming state legislature passed a series of 13 laws that gives specific rights and legal status to decentralized autonomous organizations that operate using blockchain technology. It is the leader in this area.
Looking nationwide, according to the National Council of State Legislatures, bills dealing with blockchain are pending in 25 States during this legislative session. Sadly, this list of 25 does not include Delaware.
Furthermore, the Uniform Law Commission (ULC) has released a new draft of model legislative language, which, according to Caitlin Long, founder, and CEO of the Avanti Financial Group and major promoter of Wyoming's new laws, gives "individuals 'super-negotiability' rights that its previous models gave only to intermediaries (lawyers, bankers) and establishes the perfection of security interests by control." Simply put, the ULC is promoting the use of digital assets to supercharge the productivity and security of traditional UCC data.
Federally, the US House of Representatives just passed H.R. 1602: Eliminate Barriers to Innovation Act of 2021. The bipartisan bill creates a working group on digital assets and tasks the U.S. Securities and Exchange Commission (SEC) and U.S. Commodity Futures Trading Commission (CFTC), the two leading agencies that oversee digital asset markets in the United States, as well as key stakeholders, such as FinTech startups and industry groups, to identify and report on areas where U.S. rules are hampering blockchain and digital asset innovation.
In short, blockchain and digital asset opportunities are being considered across the Country.
DELAWARE HAD A GOOD START
In September 2016, Delaware Vice Chancellor J. Travis Laster presented the keynote address to the Council of Institutional Investors. He spoke of the existing "complexities" of handling stock transactions and detailed how the current "system disfavors stockholders, creates uncertainty as to outcomes and enables management to manipulate the outcome on close vote." Toward the end of his remarks, he stated, "[Blockchain] technologies can provide better accuracy, greater transparency, and superior efficiency for settling securities trades and voting in corporate elections ... and eliminate many of the problems I identified earlier today."
At the time of the Vice Chancellor's comments, Delaware recognized the revenue potential and began to take some steps by forming the Delaware Blockchain Initiative under Governor Markell. The State had a 3-pronged plan: 1) Beta test smart records at the Delaware Public Archives, 2) Roll out a "smart UCC" filings process (which contains significant revenue opportunities for the State), and 3) Develop distributed ledger shares capability - which would directly address the Vice Chancellor's pro-shareholder proposal. And in July 2017, Governor Carney signed SB 69, a groundbreaking piece of legislation that provides statutory authority for Delaware corporations to use blockchain technology to create and maintain corporate records.
But then, Delaware stalled. Other than some minor code updates from the Corporate Bar and a prototyping contract with IBM in 2018, the Carney Administration curiously has dropped further implementation of the blockchain initiative.
CONCLUSION
Delaware's economic growth has stopped, growing at less than one-half the rate that it did during the "malaise" of the 1970s.
To reestablish Delaware leadership in innovation, we recommend that:
- the Delaware Legislature form a joint, bipartisan committee to evaluate the Wyoming legislation and other forward-looking statutes with the purpose of passing similar legislation in Delaware by end of this session.
- At the same time, the Governor should investigate how to leverage the vast amounts of corporate and commercial information controlled by Delaware to generate new revenue streams for the State.
Billions of dollars of financial transactions are traveling over blockchain networks right now. Delaware is uniquely positioned to take advantage of this disruptive technology.
Our Court of Chancery has subject matter jurisdiction for technology disputes in the amount of $1 million; the State's Rapid Arbitration Act could provide an optimum venue for settling blockchain and digital asset disputes; and the State's large share of UCC data, which it already sells the old fashion way- sits underutilized.
Blockchain and digital assets are disruptive technologies that will boost Delaware's economy and provide Delaware's government with hundreds of millions of dollars in new revenue. But only if we act.