By: Shaun Cristol
Staff-Editor for the Delaware Journal of Corporate Law
In 2016, former Delaware Governor Jack Markell “announced [a] plan to look into blockchain technology while delivering a keynote address at Consensus 2016, a New York technology conference on blockchain innovation.”[1] In doing so, Governor Markell “[put] the state at the forefront of government efforts to take advantage of distributed ledger technology.”[2] Calling it the “Delaware Blockchain Initiative”, Governor Markell was making significant inroads to “embrac[ing] blockchain and smart contract technology to help public and private enterprises lower transactional costs, automate and speed up transactions[,] and reduce fraud.”[3] With due prudence, Governor Markell appointed forward-thinking attorney Andrea Tinianow, commonly known as the “Blockchain Czarina”,[4] as the initiative’s ombudswoman.[5]
With Tinianow at the helm, Delaware was amply poised to cross an auspicious frontier by enabling the application of distributed ledger (the “blockchain”) and smart contract technologies to facilitate a major simplification in Delaware corporations’ record-keeping methodologies.[6] Sounds like a good idea, right? After all, “[i]n a sense, a corporation is just its records”[7] so allowing companies to employ blockchain technology to efficiently create permanent, immutable, and transparent records seems to fit hand in glove with any reasonable fiduciary or government agency.
Soon thereafter, in July 2017, then-Governor John Carney signed into law amendments (the “Delaware Blockchain Amendments” or the “Amendments”) to Delaware’s General Corporation Law (the “DGCL”) permitting companies to use blockchain technology to issue and track shares.[8] The Amendments that Tinianow set in motion “eliminated the requirement of a central authority to maintain [ . . . ] stock ledger[s], and with it certain risks or human error related to the issuance and transfer of shares.”[9] “Given that Delaware is one of the nation’s prime corporate situs, this amendment [was] a significant step toward widespread use of blockchain for corporate records.”[10]
As written, the Amendments permitted Delaware corporations to issue shares on a blockchain and utilize smart contract functionality to maintain their stock ledgers.[11] The Amendments did not, [emphasis added] however, “provide blanket authority for shares of stock of a Delaware corporation to be tokenized.”[12] This distinction is of significant importance because “[t]okenized shares do not eliminate many of the types of errors that are symptomatic of a system that relies on third-party intermediaries to manage and control shareholder databases.”[13]
Delaware’s General Corporation Law has long been heralded as the most popular in the United States.[14] Indeed, Delaware “carries the distinction of having the most well-developed body of corporate law in the country.[15] That is why the initiative was so important—because “the state is home to 66% of Fortune 500 companies, 85% of U.S. initial public offerings, and numerous venture backed companies worldwide.”[16] Moreover, to say the quiet part out loud, a proliferation in the adoption and utilization of blockchain and smart contract technologies would have been a financial boon to Delaware’s economy because the state’s corporate attorneys would have been among the country’s first “to learn about blockchain technology to advise their clients on the logistics, benefits, and risks of corporate record keeping through blockchain.”[17] Instructions: mix one part preeminent corporate legal professionals, one part novel field of corporate law, one part behemoth situs of incorporation, stir gently and voila! As always, best enjoyed with proper and timely service.
I believe (and I am certain that my belief is shared by many) that a concerted second foray into the world of blockchain is inevitable and offers several principal advantages for Delaware. “First, the technology would keep its [ . . . ] incorporation franchise competitive in the wake of increased threats from other states vying to offer similar services to businesses.”[18] Second, “applying the technology to Delaware’s filing system for secured corporate loans could bring in hundreds of millions of dollars in new revenue to the state.”[19] However, time is of the essence and Delaware must act with haste before it is leapfrogged by other states that are already encouraging, embracing, and implementing laws and regulations that are attracting the entrepreneurial talent of the future. In 2018, Wyoming undertook substantial efforts to become the first state to enact blockchain-friendly legislation, ostensibly cementing its position as the leading U.S. jurisdiction for blockchain.[20] Further, by 2022, Wyoming had become “the first and only state to have enacted legislation providing a comprehensive framework supportive of blockchain innovation[,]”[21] thus extending its innovative lead into the digital frontier.
Although Wyoming’s progress is laudable and attractive to new blockchain companies, I question whether in practical terms it is well-suited to adjudicate the complex corporate legal disputes that are sure to come. Innovation is all well and good so long as the legal framework upon which it is built can provide reliable and just resolutions to disputes. By no means am I suggesting that Wyoming’s judiciary is incapable of rising to this challenge. I believe it is.
I am, however, suggesting that if Delaware chooses to compete in this space, its comprehensive body of corporate law and experienced judiciary present a more stable and resilient foundation for growth. “From the earliest days of the corporation law, the Delaware courts have repeatedly declared that directors, officers and controlling stockholders are subject to the highest fiduciary standards in their relations to the corporation and all its stockholders.”[22] Stalwart adherence to these fiduciary standards is the bedrock premise that undergirds the DGCL—standards that impose the “fiduciary duties of care and loyalty (which include the subsidiary duties of good faith, oversight and disclosure).[23] It seems obvious that these time-tested standards are an ideal match with innovative technologies that provide the greatest likelihood of accurate and transparent disclosure of certain business records. In 2016, the timing of the Delaware Blockchain Initiative may have been just a touch too soon. It’s almost as if it began to paddle too early and outswum the wave itself. Fortunately, another wave is imminent so let’s get moving!
About the Author
Shaun Cristol is a 3L at Widener University Delaware Law School and a Staff Editor for the Delaware Journal of Corporate Law, Vol. 49. Mr. Cristol participated in the Fall 2022 Fred DiBona Intrascholastic Moot Court Competition and Widener University Delaware Law School’s Fall 2023 Superior Authorship Competition. His extracurricular legal studies include blockchain, cryptocurrency, and the application of Fourth Amendment doctrines in the digital age. Mr. Cristol is a multipotentialite and an aspiring polymath.
[1] Lester Coleman, Delaware Governor Announces Plan to Embrace Blockchain Tech, CCN (Oct. 6, 2020, 6:28 PM), https://www.ccn.com/delaware-governor-announces-plan-to-embrace-blockchain-in-public-and-private-ventures/.
[2] Andrew Bruce, Governments Are Testing the State-Backed Blockchain Water, Data Gumbo (Apr. 20, 2022, 1:45 PM), https://blog.datagumbo.com/en/gumbonet-blog/governments-are-testing-the-state-backed-blockchain-water.
[3] Id.
[4] The Blockchain Czarina Advises and Collaborates at the Nexus of Law, Business, and Technology, Andrea Tinianow, https://andreatinianow.com/ (last visited Mar. 14, 2024).
[5] Lindsay Podraza, Gov. Markell Unveils Delaware Blockchain Initiative, Technical.ly, (May 2, 2016, 12:53 PM), https://technical.ly/civic-news/gov-markell-unveils-delaware-blockchain-initiative/.
[6] Andrea Tinianow & Caitlin Long, Delaware Blockchain Initiative: Transforming the Foundational Infrastructure Of Corporate Finance, Harv. L. Sch. F. on Corp. Governance, (Mar. 16, 2017), https://corpgov.law.harvard.edu/2017/03/16/delaware-blockchain-initiative-transforming-the-foundational-infrastructure-of-corporate-finance/.
[7] N. Oberheiden et al., The Law of Tomorrow 147 (2022).
[8] Delaware Passes Law Permitting Companies to Use Blockchain Technology to Issue and Track Shares, Allen & Overy (Sept. 26, 2017), https://www.allenovery.com/en-gb/global/news-and-insights/publications/delaware-passes-law-permitting-companies-to-use-blockchain-technology-to-issue-and-track-shares.
[9] Andrea Tinianow, Tokenized Securities Are Not Secured By Delaware Blockchain Amendments, Forbes (July 4, 2018, 12:35 PM), https://www.forbes.com/sites/andreatinianow/2018/07/04/tokenized-securities-are-not-secured-by-delaware-blockchain-amendments/?sh=487581103e79.
[10] Oberheiden, supra note 7, at 147.
[11] Tinianow, supra note 9.
[12] Id.
[13] Id.
[14] S. Samuel Arsht, A History Of Delaware Corporation Law, 1 Del. J. Corp. L. 1, 1 (1976).
[15] How Delaware’s Blockchain Trial Could Change Wall Street, Knowledge at Wharton (Apr. 13, 2017), https://knowledge.wharton.upenn.edu/article/delawares-blockchain-trial-change-wall-street/.
[16] Coleman, supra note 1.
[17] Oberheiden, supra note 7, at 147.
[18] Karl Baker, Delaware Eases Off Early Blockchain Zeal After Concerns Over Disruption to Business, Del. Online (Feb. 1, 2018, 10:00 PM), https://www.delawareonline.com/story/news/2018/02/02/delaware-eases-off-early-blockchain-zeal-after-concerns-over-disruption-business/1082536001/.
[19] Id.
[20] Robert V. Cornish, Wyoming Cements Position as Leading U.S. Jurisdiction for Blockchain with Sweeping New Legislation, The Nat’l L. Rev. (Feb. 27, 2019), https://www.natlawreview.com/article/wyoming-cements-position-leading-us-jurisdiction-blockchain-sweeping-new-legislation.
[21] Bruce, supra note 2.
[22] Arsht, supra note 14, at 8-9.
[23] Marc S. Gerber et. al, Directors’ Fiduciary Duties: Back to Delaware Law Basics, Skadden (Feb. 19, 2020), https://www.skadden.com/insights/publications/2020/02/directors-fiduciary-duties.