In a highly symbolical moment indicating the realization across the world of blockchain’s potential to create more equitable and efficient trading relations, Vice Chancellor J. Travis Laster told the Council of Institutional Investors to “start a takeover.”
“I want you, the institutional stockholders of America, to take back the voting and stockholding infrastructure of the U.S. securities markets.” – said the Delaware judge.
After giving a scathing critique of the current stockholding infrastructure over which he presides in adjudicating cases, Laster stated that the blockchain allows for “a utopian vision of a share ownership system where there is only one type of owner: record owners.”
“This is a carpe diem moment.” – the judge said. “You can take the lead on distributed ledger technology, or you can let the intermediaries replace one intervening institution with another.”
In explaining the current system, Laster described what appears to be an outright mess and – far more worryingly – a Kafkaesque nightmare of catch 22s and bureaucratic labyrinths that might surpass even Dicken’s Bleak House. Firstly, no one even legally owns shares except for Cede & Co., the nominee of the Depository Trust Company, or “DTC.” Through a centralized database they add or subtract numbers on their computers so in selling 100 shares of Microsoft to a customer of Bank of America, what is actually happening is DTC debiting Chase’s account by 100 shares of Microsoft and crediting Bank of America’s account by 100 shares of Microsoft.
Of course, ordinary users have no contact with DTC which is owned by banks and brokers that in turn provide access to end users. We need therefore trust not only DTC that they are not making up their computer numbers as they please, but also banks. However, even if we assume no one is fiddling with these numbers, we have to deal with corporate law.
Since ancient times law has recognized legal ownership, that is who has the name on the official paper, and beneficial ownership, that is who actually owns the property. In stocks, the legal owner is DTC, but to vote, they require authorization from beneficial owners. This creates a complex labyrinth where sometime people get lost as authorizations change hands through so many intermediate parties, leading to mistakes that, in an example cited by the judge, cost one company $200 million.
Besides mistakes, there is no transparency as “under the current system, a beneficial holder cannot necessarily obtain end-to-end confirmation as to how its shares have been voted.” Quite amazingly, the judge, citing SEC, states:
“Because the ownership of individual shares held beneficially is not tracked in the U.S. clearance and settlement system . . . imbalances occur.” When those imbalances occur, “broker-dealers must decide which of their customers will be permitted to vote and how many shares each customer will be permitted to vote.”
That is, some guy somewhere decides what shareholders voted for without any accountability whatever leading the judge to call out manipulation by citing studies that have found “proposals sponsored by management are “overwhelmingly more likely to win . . . by a very small amount than to lose by a very small amount—to a degree that cannot occur by chance.”
The implications are, of course, clear, with the judge concluding in no uncertain terms that “systemic failures undermine the legitimacy of our corporate governance system.” If that was not sufficient for a complete overhaul of the current highly opaque and very inefficient stock trading system, the judge states:
Oliver Wyman and affiliates of Santander Bank estimate that there are $100 billion in annual post-trade and securities servicing fees. Issuers pay more than $200 million a year to communicate with stockholders alone, exclusive of printing and postage fees.
It is, therefore, a very expensive system, with Broadridge having monopoly power, controlling “over 98% of the U.S. market for proxy vote processing services.” However, in what is highly indicative of blockchain’s potential, the judge realizes there is a solution.
It is very unfortunate and highly arrogant of Slock.it to have named their project the DAO, for the concept is not descriptive of a start-up or any specific initiative, but of a powerful idea that now can be implemented in practice thanks to Ethereum’s smart contracts.
For the first time in the history of man, it is now possible to retain direct control over your company investments without requiring any trust or intermediary. Through smart contracts and coded rules, every single token holder can directly vote on corporate decisions in a provable, transparent, non-gameable manner as easy just one click methods provide no room for CEOs or boards to bypass the verdict of shareholders for funds do not move unless a quorum so rules.
Their will is set in stone so to speak, but we have not yet seen this in practice. Although there are a number of token ICOs, they appear to be just plain crowdsales with little, if any, interesting aspects. Ethereum’s smart contracts capabilities, however, allow for something very new. Token holders can retain full control over their funds. They can decide to release x amount. If they are satisfied with the end result, they can release more.
In effect, they become what the law considers them to be, actual owners of the company. Therefore, the current tension between the management class and shareholders changes, if not evaporates, as the management class is turned into employees to a great extent.
This is very new territory that has not previously been explored with its own challenges and considerations, much of which was raised before the DAO went under. However, a baby does not walk at all at first and once it tries it falls often, then it runs and builds this amazing civilization we have. One hopes, therefore, that the pioneering spirit rises once more to give us real life examples of actual use of DAO like smart contracts, rather than the current boring and plain crowdfundings disguised as token sales while providing no invention at the initial, fund-raising, stage.
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Last modified: March 4, 2021 4:51 PM