Corporate entities have long been employed by enterprises seeking to limit their liability, protect their assets and minimize tax burdens. These legal structures have evolved over time, emerging as one of the most common vehicles for conducting business domestically and worldwide.
Today, with the rise of blockchain technology, the future of corporate entity formation appears to be poised for disruption. Most notably, instead of these businesses being formed by government statutes, ecosystems of individuals would work, collaborate and generate revenues via decentralized autonomous organizations (known as the DAO ). As a result, centrally governed organizations that have traditionally been used could lose their appeal.
Adding fuel to this movement is a company known as Otonomos , touted as the world's first blockchain-chartered company. It provides business owners with a mechanism for forming offshore corporations in places like Singapore, Hong Kong, the U.K. and the Cayman Islands - entities that allow these businesses to hold shares in the same way that one would own bitcoins in a digital wallet. Moreover, through Otonomos, businesses can transfer equity peer-to-peer to attract co-founders, pay collaborators, generate new private investors and garner crowdfunding.
Then there is BitGo , the digital bitcoin wallet that has built a major following of users that find appeal in its security features. It is currently branding a feature that assists businesses with integrating digital currencies into their existing financial systems securely and at scale.
In an exclusive interview with The Distributed Ledger , Steven J. Ehrlich, associate at the New York-based Spitzberg Partners LLC , weighed in on the transformative changes taking place in the corporate entity space amid blockchain's emergence. His comments come as Spitzberg was assisting with a project called Global Delaware , the international business development arm for the State of Delaware. The goal of the project is to assist new business startups and established companies form Delaware-based business entities that benefit from the state's tax favorability, asset protection and a friendly regulatory climate.
How could the blockchain and the DAO disrupt the traditional world of corporate entities such as LLCs and corporations?
That depends on how you define the word "disrupt." Right now, the most applicable use cases for blockchain technology in the world of corporate governance are tied to records management, accounting and the sale and issuance of securities for traditional corporations. None of these areas are strangers to fraud and inefficiencies and if through the use of a blockchains these processes can be streamlined and made increasingly secure, employees, board members, investors and any other concerned party will be able to have a much more accurate and up-to-date picture of a company's financial health at any given point in time. However, I do not necessarily think that this will qualify as a "disruption."
How do you believe that disruption might occur?
I think we get closer to the term "disruption" once we start thinking about ways that blockchains can impact the proxy voting system commonly used by corporations. The system remains highly opaque, with many people not even aware of their voting rights. Putting proxy voting onto a blockchain can broaden and distribute the voting base for a particular corporation. This can have the effect of creating an engaged shareholder base that is more incentivized to not only hold corporate leadership accountable, but can also serve as a valuable resource to drive business development initiatives.
Could this new approach to proxy voting also lead to discussions surrounding the DAO or DAOs in general?
Absolutely. Because this setup dictates a decentralized governance structure, token holders must have rights that go far beyond what proxy voters have today. Should we find ourselves in a situation where this scenario plays out, it would represent a fundamental shift in basic tenets of corporate governance today.
How do you believe this intersection between blockchains and corporate entities might change the landscape in terms of offshore and international businesses?
As viable use cases develop and the blockchain becomes more mature, there is definitely the possibility for the technology to become more of a standard. If this happens, it could cause people to look askance at companies seeking to offshore, wondering if there is something besides the favorable regulatory climate that is appealing to them. However, I think at this point it is pretty far off and this should not be the central goal of developers in the space. Additionally, there are already many different forms of blockchains with multiple levels of privacy and accessibility. I would imagine that jurisdictions that place an emphasis on discretion would pick a solution built with that in mind.
Do you believe that we'll see U.S. states such as Delaware, Nevada and Wyoming, which are known for their legal protections, embrace blockchains for corporate entities?
I expect them to embrace the technology to the extent that they see it as central to their competitiveness as a destination for incorporation. Delaware in particular expects to amend its state business entity laws by the end of the summer to allow for the issuance and maintenance of smart securities on their proprietary blockchain. This would be a significant step forward that is unmatched anywhere in the world. Additionally, earlier this year, senators in Wyoming unanimously backed a proposal that will ban local authorities from taxing blockchain use. It will also allow for smart contracts and blockchain signatures to become acceptable records under state laws, which are necessary precursors for more robust implementations.
What is your view of a company likeOtonomosthat promotes blockchain-centric entities?
Companies like Otonomos are entering the space at a very interesting time and they have the advantage of building out one universal platform that incorporates features like virtual boardrooms, shareholder wallets, cap tables, key documentation, etc. on one platform. This could be a very interesting proposition for new startups, especially companies that are seeking funding via the initial coin offering (ICO) route. However, I think they will face challenges trying to get established firms, especially large ones, to transfer onto their platforms given the stakes.
How do you see this emerging corporate entity space eventually playing out, especially in terms of regulators?
DAOs will need to pay taxes just like other corporations, as they'll still rely on government services. Similar to Apple, which relies on the U.S. Navy to keep the seas free for them to ship their products around the world, decentralized entities will rely on roads, bridges, law enforcement, etc. to conduct their business.
But how would this actually work?
Without getting into the intricacies of corporate tax law, whatever the codes may be within a certain jurisdiction, my expectation would be for them to be programmed into the corporate code via smart contracts that are automatically executed. There would also have to be appropriate viewing permissions built into the DAO so that the regulator or tax collector would be able to verify that the smart contracts are programmed and executing properly without revealing corporate secrets.
In closing, what sort of emerging trends do you believe we'll see in the next 12 to 18 months relative to the blockchain and corporate structures?
Over the next 12 to 18 months I expect to see a primary focus to be on proxy voting, supplemented by progress pertaining to the maintenance of corporate records, regulatory compliance and the selling of corporate shares. Hopefully, we will see adoption begin to emerge on the corporate side, supplemented by increased demand for the shares of companies that are issued on a blockchain, or for a company that utilizes blockchain technology to make its decision-making and accounting more transparent.
Regarding DAOs, I am anxious to see how companies that raise money via ICOs govern themselves as they build their products and go to market. An important way to try and avoid the regulatory glare of the SEC is to make tokens consumptive and give them utility. This may end up being a middle ground between today's current system and a utopia filled with truly decentralized organizations, but it is a necessary and worthwhile step.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.