Representation of Corporate Capital Stock via Cryptographically Secured Blockchain Tokens: Motivations and Potential Implementations by Gabriel J. Shapiro, Esq.
This article analyzes the potential motivations for representing corporate capital stock via cryptographically secured blockchain tokens and explores potential legal/technological implementations of systems that could do so. Tokenization of corporate capital stock is situated within a broader discourse regarding “tokenization of assets,” which refers to using blockchain tokens as a means of representing ownership interests in assets. It is argued that digitization of ownership interests is beneficial but can be achieved without blockchain technology; however, blockchain technologies are uniquely suited to enhance the individual asset sovereignty of stockholders. The article summarizes, at a high-level, some of the history and evolution of securities instruments, explores how that history has led to the current market dynamics for publicly held and privately held corporate capital stock in the United States, and diagnoses the resulting risks and inefficiencies. Various methods of representing capital stock on blockchains are explored, including those reflected in recent amendments to the corporate law statutes of Delaware and Wyoming. It is argued that, among these alternatives, a “tokenized stock certificate” approach whereby blockchain tokens are imbued with the legal status and functional dynamics of old-fashioned paper stock certificates would be best suited to leveraging blockchain technology’s potential to enhance stockholders’ sovereignty over their ownership interests in their stock.
OVERVIEW OF THE ARTICLE
First, I will provide a brief introduction to the concept of asset tokenization on blockchains and the potential benefits that are generally seen as being offered by such tokenization. I will situate the problem of tokenizing corporate capital stock as a sub-problem of tokenizing securities or rights/interests in assets more generally. I will argue that there are already numerous ways of representing rights/interests in assets, including electronically; therefore, for “tokenization” to be revolutionary, there must be something unique about the blockchain medium that is fundamentally different from what has been offered previously. To explore that, I will analyze the “unique selling point” (USP) of blockchain technology and argue that the USP of blockchain technology is that it furthers the values of individual asset sovereignty by creating the technological predicates necessary for ordinary persons to hold, manage and transact with assets in an environment that is trust-minimized while also being secure.
I will then provide a typology that divides securities instruments into their traditional dichotomies—bearer vs. registered and, among registered instruments, certificated vs. book-entry—and allude to the history and policy reasons leading to the dominance of registered instruments in contemporary finance. I will argue that the benefits of tokenization in light of individual asset sovereignty values exist along a spectrum, at one end of which are the (maximal) benefits of tokenizing assets (or interests in assets) via “bearer tokens” that can almost always trade freely on a peer-to-peer basis on any ledger without becoming detached from the assets they represent, and at the other end of which are the (de minimis) benefits of tokenizing assets (or interests in assets) via “book-entry tokens” that can only trade via an intermediary or a canonical ledger set up by a ‘consortium’ or a limited number of permissioned nodes that collectively function as a new (albeit distributed) intermediary. Therefore, the more an asset is (legally and practically) susceptible of being represented via bearer instruments or quasi-bearer instruments, the more reasonable it is to think that tokenizing that asset can open new markets or increase market activity by facilitating peer-to-peer transfers on open networks. Alternatively, the closer an asset is to being one that (legally and/or practically) needs to be tracked via a canonical ledger tied to real-world identities, the more there will be pressure to tokenize that asset only in a “walled garden” type of distributed ledger that does not go as far as possible in embodying the true open vision of blockchain technology as a means to enhance private ownership rights and peer-to-peer market transactional freedom.
Next, I will turn more specifically to the issues around tokenizing corporate capital as a sub-type of securities. I will review the distinguishing features of corporate capital stock as compared to other types of securities. We will explore how the ‘pre-blockchain’ status quo for contemporary stock markets divides those markets into markets for publicly traded stock and markets for privately held stock, each of which suffers from different problems that can be addressed using blockchain technology. The public stock market suffers from costs and risks arising from a high degree of reliance of securities intermediaries. On the other hand, the private stock market suffers from lack of automation, poor administration and lack of liquidity/price discovery.
Having established areas for improvement in contemporary stock markets, the article makes a high-level case for how blockchain technology might help with some or all of the relevant issues. The article cites the work of Vice Chancellor J. Travis Laster of the Court of Chancery of the State of Delaware to illustrate the manner in which blockchain technology can eliminate the difference between record stock ownership and beneficial stock ownership that lies at the root of most public stock market issues. The article builds on this work by detailing at greater length how blockchain technology can be helpful in the private stock markets as well.
The article next explores two potential methods of implementing a blockchain technology stock system. The first approach involves a corporation opting to treat its stock as uncertificated shares and uses permissioned distributed ledger technology to make a particular blockchain or set of blockchains the canonical statutory stock ledger for a corporation (the “PDLT approach”). The second approach involves a corporation opting to treat its stock as certificated shares, where the stock certificates are blockchain tokens, and is better suited to operate on unpermissioned peer-to-peer blockchain technology networks such as Ethereum (the “tokenized certificate approach” or “TCA”). I will summarize how, in recent years, amendments have been made to the corporation statutes of Delaware and Wyoming to facilitate a new, blockchain-permissive framework for capital stock tracking and transfers, but that such amendments have primarily been oriented toward allowing implementation of the PDLT approach. I will argue that the TCA solves most of the same problems with public stock markets as does the PDLT approach, while also creating greater asset sovereignty for stockholders by allowing them to trade their stock in reliable ways on any open blockchain, without necessarily worrying whether whatever blockchain the corporation deems “canonical” has been updated—just like is possible with paper stock certificates.
In the conclusion, I will note some of the questions that remain unanswered (or unasked!) and issues that remain unresolved in my article, will suggest topics for additional research and development and will provide a call to action for those who may be interested in lobbying the governments of Delaware, Wyoming or other states or nations to adopt legislative amendments that would facilitate the tokenization of corporate capital stock.
Tokenization of Assets—What Is It And Why Does It Matter?
Source/More: Tokenizing Corporate Capital Stock – {Zero_Law}
