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Delaware Drives Blockchain Innovation

Delaware’s governor and legislators have pioneered new regulations to allow the use of blockchain technology in finance and corporate record keeping. The state, whose capitol is shown here, is the national leader in corporate legal registration, and wants to stay that way. Courtesy of Shutterstock.

Startups and tech giants alike are driving innovation at a more aggressive pace than ever; but one truism that bears repeating is that governments can play a crucial role in the adoption of new technologies. They can offer guidance to product developers, provide regulatory support to companies that deploy the technology, offer financial incentives, and collaborate with innovative firms looking for their first partners. For example, many nations around the world are looking to promote the adoption of electric vehicles. To do so, they are taking a variety of approaches, including mandating ambitious fuel-efficiency standards, facilitating infrastructure development, and subsidizing consumer purchases with tax breaks and other financial incentives.

On the other hand, governments can take antagonistic approaches to certain companies and innovations that can be very difficult to overcome. One only needs to look at the challenges being faced by Uber or Airbnb around the world to get a sense of how just how high state-made barriers to entry can be.

This varied dynamic between government and industry is affecting the development of many key technology sectors, including social media, cloud computing, drones, robotics, and AI.  However, it is likely no industry is seeing government influence its trajectory more than in the industry of distributed ledger technology, or “blockchain” for short.

We like to think of blockchains as the ultimate Rorschach test—people seem to be able to see anything they want when they look at this technology. For blockchain’s earliest and most enthusiastic advocates, it is an innovation that will disintermediate the entire global financial system and disrupt every industry on the planet.  On the other hand, many government officials and others around the world look at this burgeoning industry askance, fearful that “anonymous cryptocurrencies” will be utilized for nefarious purposes, for instance, by terrorist groups or by traffickers to help distribute illicit goods.

The hyperbolic claims on both sides put governments in a challenging situation.  On one hand, the technology clearly has significant potential. Many legislative bodies want to be seen as innovation-friendly, and give new technologies like blockchain room to develop. On the other hand, many are unsurprisingly fearful that should blockchain technology become widely used, it could weaken government’s ability to track financial systems, keep citizens safe, and uphold their sovereign duties to constituents.

Fortunately, there is another approach, and it is one that Delaware is pursuing apace. It involves identifying specific use cases that are tailor-made for blockchain technology, working to align with the right partners, and ensuring that all relevant laws are updated to allow the technology the freedom to develop.  The vehicle to accomplish this is called the Delaware Blockchain Initiative (DBI). It was launched in 2015 by former governor John Markell, and is now being continued by the administration of Governor John Carney.

The DBI was conceived in the aftermath of the New York Department of Financial Services (NYDFS) release of the BitLicense. That initiative, which provided a strict regulatory framework for activities related to virtual currency, engendered significant resentment in the blockchain community, and led many leading startups and companies to move abroad. Delaware’s mission was to facilitate the adoption of blockchain technology in Delaware. The DBI aimed to keep the most promising blockchain startups in the United States. Most importantly, Delaware’s leaders saw this as a key opportunity for the state to double down on its mission to provide first-in-class services to the many innovative businesses it considers its clients.

Why does all this matter to Delaware? The state is already the corporate home to the most innovative tech companies and two-thirds of the Fortune 500 companies. But it must constantly innovate in its legal and regulatory regime to maintain that leadership position. Companies go to Delaware for the unmatched services it provides, such as a highly efficient court system; a stable set of laws, quick dispute resolution procedures, top-notch lawyers, and informed judges.

It is important for the state to continue looking for ways to stay ahead of the curve and offer the best possible legal infrastructure for companies looking to register and conduct business in Delaware. Blockchain will be a key component to achieving that goal and delivering transformative value to its constituents.

However, to get to this goal the foundation must first be built. There is no better place to do this than Delaware, home to DuPont, the first modern corporation. To lay the groundwork, the state partnered with distributed ledger and smart contract provider Symbiont, which has built the blockchain “stack” that Delaware will use.  Additionally, the DBI is collaborating with legal minds in Delaware and throughout the country to understand the legal and regulatory needs of their clients. The DBI also chose to align with research and consulting firm Spitzberg Partners to explore and consider future areas of applicability for the technology.

In July, Delaware passed amendments to corporate state law that explicitly allow companies to issue shares and maintain business records, including its stock ledger, on multiple databases. This historic act is the first of its kind anywhere in the world. Governor Carney signed the bill into law this month, and it will be effective on August 1st. When the state integrates with Symbiont’s technology, it will add speed, security, and transparency to the management of securities and provide companies and individuals with a platform for direct ownership of their shares, which will challenge the business models of intermediary organizations like The Depository Trust Company, forcing them to revisit their value propositions to customers.  This can be a game changer for capital markets.

In Delaware, we have no illusions that the pathway to mainstream adoption and use of blockchain in the financial industry will be smooth or linear. However, the technology’s immutability, distributed nature, its ability to provide a single source of truth, and its advantages from a transparency and security point of view make it an extremely powerful tool for Delaware. We are proud to have taken this move. It will be very exciting to observe how the industry develops moving forward, and how Delaware continues to change how we think about government as an innovator.

Andrea Tinianow is director of corporate and international development for the State of Delaware. Steve Ehrlich is an Associate at Spitzberg Partners, a corporate advisory firm.

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