Exploring the Delaware Blockchain Initiative
April 24, 2017
On April 4th, the Mack Institute for Innovation Management and the Penn Wharton Public Policy Initiative hosted a talk on the Delaware Blockchain Initiative, a joint venture between the State of Delaware and Symbiont—a blockchain technology provider—to develop a suite of programs promoting the use of distributed ledger and smart contract technologies by Delaware-incorporated businesses.
More than 1 million companies are incorporated in Delaware, including half of all publicly traded companies in the US and 65 percent of the Fortune 500. The Initiative will update foundational corporate recordkeeping processes such as share issuances and transfers to eliminate errors, reduce transaction costs, and promote innovation.
Faculty Affiliate Kevin Werbach introduced Caitlin Long, President and Chairman of Symbiont, and Andrea Tinianow, Director of Global Delaware to discuss not only the innovative power of the blockchain for business operations but also its significant implications for financial regulation. Long began her career in law before working on Wall Street for 20 years, most recently at Morgan Stanley, before deciding to pursue her role in a startup. Tinianow began working with corporate development on behalf of the state of Delware before starting Global Delaware. Werbach noted that Delwaware has been “incredibly forward looking in being one of the first states engaged in applying blockchain technology in their business.”
“What is a blockchain and how does it relate to bitcoin?” Long asked the audience before simply explaining the system. Satoshi Nakamoto, an individual or group of individuals online, released a white paper putting together technologies that always existed in a new combination, but there is nothing new about Bitcoin. This combination was a “flourishing streamlined thing,” that thrived based on the distributed leger. The concept of a GoogleDoc is similar to the concept of a blockchain: multiple parties can work on a leger or registry, can see changes are being made to it, and can see who made these changes in real time. A Bitcoin is a token that tracks balances, whereas the blockchain holds the information and tracking data. Cryptography is used to secure bitcoin in the highest standard of encryption available today. This technology revamps document retention on a large scale, and is a platform for multiple parties to look at data and prove that the data is valid.
“A lot of people think blockchain technology could be big or bigger than the Internet,” began Tinianow, before going into more detail on how she began working with Global Delaware. Starting as a Delaware lawyer, Tinianow worked as the Vice President of Business Development for a global corporate services provider before being recruited by the Markell administration. There, she started a new division for the State of Delaware to attract foreign direct investment and develop new strategies to drive revenue to these corporations. “The Blockchain Initiative is really a product of our work in Global Delaware and we started that a little more than two years ago,” she said.
Long grew up in Wyoming, and came East to go to law school with Professor Werbach before working on Wall Street for 22 years at Salomon Brothers, Credit Suisse, and Morgan Stanley. She found bitcoin in 2012 and didn’t see the application to the mainstream financial industry until she met a company called Ripple in January 2014, a “Bitcoin 2.0” application that found a way to apply the payment technology. Since May 2014, Long had approached her corporate clients with bitcoin and blockchain and gained positive responses. Even the current CEO of Disney asked her to speak at a corporate treasurers’ event on emerging topics in financial technology. “These big companies have around 2,000 bank accounts around the world – can you imagine the reconciliation they have to do?” she asked the audience, illustrating the massive impact that blockchain has on freeing up working capital and reducing operational risk in the securities industry.
Long met the co-founder of Symbiont, Mark Smith, in June of 2014, but wasn’t ready to leave her day job until she “realized that so much change was going to be coming from this technology and there is going to be a tremendous impact to the financial sector.”
Tinianow added her own story of discovering blockchain, noting that her job is to create economic opportunities for the state of Delaware. “When I started working with Global Delaware, I would talk to lawyers all around the world. What I would ask is ‘what is a problem that your company is trying to solve that the State of Delaware can help with?’” One of these lawyers came back and said that his clients want to issue shares on a blockchain, and asked if Delaware could amend its laws to permit that. “This was the beginning of what became the Delaware Blockchain Initiative,” she said.
Working with her counterparts in the Delaware State Government, Tinianow asked if Delaware should be the home of digital currency. A set of set of amendments making it very clear that you can use blockchain and telling companies how business friendly Delaware is was unnecessary, since the laws already existed allowing this technology to be legally used. Eventually, Tinianow and colleagues wrote a document asserting that Delaware embraces blockchain and is business friendly, then had the governor announce the state’s support of the technology formally. Meanwhile, the state had been introduced to Symbiont as the governor sought to use the technology in his own administration. Now, the Delaware Blockchain Initiative has several components: the regulatory underlining, a piece with the public archives group, a corporate shares project and UCC project underway, and very many initiatives still in development.
Long jumped in, adding that “Delaware is the state where the foundational infrastructure of finance happens in the US, which is a strong statement but it’s true.” She continued, “when Delaware is doing something different, they will have a big impact on the entire corporate industry and Wall Street.” When a company is typically incorporated, share issuance happens as a second step. Long argues that this delay complicates transactions, because an incorporated company inherently means that there are shares outstanding. Delaware is working towards digital incorporation, where incorporating on a blockchain means that the issuance of shares and incorporation happen at the same time, with effects that ripple across Wall Street.
In federal securities law, it is hard to keep up with paper issuance. Even with technology, SEC transactions take 3 days to settle since they must travel through many different institutions. How much of the plumbing of the financial services industry is in paper form is “appalling and very shocking” said Long. “It’s about time for disruptive technologies.” Technology is going to massively simplify and streamline transactions processing and eliminate the “t+3” institutional problem.
Adoption of blockchain will be slow, but eventually “there will be a lot of people moving into the industry very quickly,” Tinianow asserted, “other states are going to come on more and more, in a matter of years rather than decades.” “Across the vast industry, there is so much that has to get done to adopt it,” Long finished before thanking the Mack Institute for Innovation Management and the Penn Wharton Public Policy Initiative for hosting the event.