In recent months we’ve witnessed an explosion of legal and regulatory developments involving blockchain and distributed ledger technology. Such diverse authorities as the Commodity Futures Trading Commission (CFTC), the U.S. Department of State and the Cook County (Illinois) Recorder of Deeds have studied the technology and its potential applications inside the boundaries of their respective jurisdictional bailiwicks.
Given that the virtual currency bitcoin represented blockchain’s first use, it is not surprising that federal financial regulatory agencies were the first to encounter the technology in the markets they regulate. Blockchain’s strengths include transparency, cryptographically enabled security, resiliency, immutability, auditability and near-instantaneous transfers. When coupled with smart contracts, blockchain enables both trade execution and recordation to take place almost instantly, making it naturally suited to payments, clearing and settlement functions.
As SEC Commissioner Kara Stein has recognized: “It could be used to overhaul areas like securities clearing and settlements, payment processing by banks, and cumbersome loan transactions … One can imagine a world in which securities lending, repo and margin financing are all traceable through blockchain’s open and transparent approach.”
The removal of intermediaries means that instead of T+2 settlement, securities trades would be settled almost instantly, i.e. T+0 – not coincidentally, the name given by Overstock.com to its proprietary blockchain platform t0 (t zero, referring to the settlement time). This was the platform upon which the first Securities and Exchange Commission-registered sale of securities issued via blockchain (in December 2016).
Recognizing the technology’s potential, the SEC has sought public comment about the impact of distributed ledgers on a shortened securities settlement cycle and on transfer agents in rulemakings initiated in 2015 and 2016, respectively. Given that registered transfer agents are required by Rule 17Ad-10 to, among other things, (1) create and maintain current and accurate security-holder records; (2) promptly and accurately record all transfers, purchases, redemptions and issuances of securities; and (3) resolve record inaccuracies and overissuances, the SEC has recognized that blockchain is potentially applicable to its activities.
Delaware’s recent amendment to the Delaware General Corporation Law expressly permits companies incorporated in the state to maintain the required stock ledger containing the identities of shareholders entitled to vote at meetings – and other corporate records, including transfers of stock – on “distributed electronic networks or databases” (i.e. distributed ledgers). This will undoubtedly make it easier for Delaware-incorporated companies to issue, track and transfer shares using blockchain.
The fact that records derived from those held in such distributed electronic databases are, pursuant to amended DGCL § 224, admissible as evidence improves their auditability. Thus, Delaware’s move to modernize corporate law at the state level could push the SEC to act with respect to blockchain in nationwide securities markets. The benefits seem obvious: Recording shares on a blockchain could eliminate the practice of shares being registered to “street name” brokerage firms rather than the names of their actual beneficial owners, which could improve shareholder voting among Delaware corporations, and it could also end the practice of naked short selling.
However, in financial markets, blockchain’s potential goes beyond just improving efficiency compared to legacy systems. It could also combat systemic risk. Putting an entire market onto a shared blockchain would enhance regulators’ visibility into what takes place within it, and illuminate all parties’ risk exposures in real time, perhaps even giving them a seat at the table through a dedicated regulator node on the blockchain. This could allow them to participate in consensus and validation processes – something that CFTC [Commodity Futures Trading Commission] Chairman J. Christopher Giancarlo believes might have changed history had the capability been available in 2008:
What a difference it would have made if regulators had access then to the real-time ledgers of all regulated trading participants, rather than trying to assemble piecemeal data to re-create complex, individual trading portfolios. I believe that, if regulators in 2008 could have viewed a real-time distributed ledger (or a series of aggregated ledgers across asset classes) and, perhaps, been able to utilize modern cognitive computing capabilities, they may have been able to recognize anomalies in market-wide trading activity and diverging counterparty exposures indicating heightened risk of bank failure. Such transparency would not, by itself, have saved Lehman Brothers from bankruptcy, but it certainly would have allowed for far prompter, better-informed, and more calibrated regulatory intervention instead of the disorganized response that unfortunately ensued.
Systemic risk is further reduced by the removal of the need for a central authority. There is no single point of failure, as there is if a clearinghouse, exchange or trading platform holds the only authenticated set of records on its central server. This danger was clearly illustrated by the recent Equifax data breach, which put millions of Americans at risk of identity theft after the system’s gatekeeper was compromised. The distributed nature of data storage gives the shared ledger far more resilience than it would have if it were just stored by a single central party, because it can be reconstructed as long as any single participant maintains a copy. But it cannot be modified unless 51 percent (or whatever other majority is specified by its consensus protocols) of the blockchain’s members agree that the change is valid, making hacking very difficult.
Yet, at its most basic, blockchain is simply a way of digitizing a chain of title or custody. And because of that, its potential use ranges far outside the financial sector. The Recorder of Deeds in Cook County, Illinois, tested a pilot program for using blockchain to track real estate conveyances. Illinois is also exploring a proposed framework to issue birth certificates for citizens using a blockchain that could become the foundation for a government-issued secure digital identity. It would be the first of its kind in the U.S. Nevada’s Senate Bill 398, recently signed by the governor, gives legal recognition to blockchain-based electronic records, signatures and contracts, and it bans local authorities from imposing taxes, requiring any person or entity to obtain a certificate, license or permit, or imposing any other requirements in connection with the use of blockchains.
Earlier this year, the U.S. Department of Health and Human Services hosted a “Blockchain in Healthcare Code-A-Thon” designed to explore blockchain’s potential to store medical records and manage patients’ digital identities. And the U.S. Department of State is holding a public workshop dedicated to discussing blockchain’s potential uses in development and diplomacy, building on a previous initiative, the Federal Blockchain Forum, that it hosted in July in collaboration with the General Services Administration’s Emerging Citizen Technology program. The GSA maintains a database for federal agencies and U.S. businesses interested in implementing blockchain solutions within government, which so far has received more than 200 submissions.
As these uses in different contexts demonstrate, blockchain is “asset agnostic,” and its characteristics make it suitable for a wide range of potential applications. We believe that the explosion of attention paid to it in recent months is unlikely to slow down, If anything, as investment in research and development and adapting the technology to concrete uses progresses, and as new uses continue to be identified, we believe interest in blockchain will only increase.
Market participants should endeavor to keep up to date with what is happening in their industries and their markets, because at this point, one thing is very clear. Blockchain technology is here to stay.
David Felsenthal is a partner in the New York office of Clifford Chance whose practice focuses on financial transactions. He’s worked on a wide range of derivatives and other trading transactions and has also been extensively involved in structured securities, including credit-linked and equity-linked notes. In addition, he has advised on the regulation of financial institutions and transactions. He can be reached at David.Felsenthal@CliffordChance.com.
Jesse Overall is an associate in the New York office of Clifford Chance. He works on a variety of transactional and regulatory areas, primarily within the capital markets group. He can be reached at Jesse.Overall@CliffordChance.com.
 Note: This article does not discuss issuing cryptocurrency or tokens using blockchain, which is a separate topic in its own right and the subject of significant regulatory attention. Instead, our focus is on discussing the blockchain technology on which such tokens or cryptocurrency are based.
 On the mechanics of distributed ledger systems and their potential applications to payments, clearing and settlement, see Federal Reserve Board of Governors, Distributed Ledger Technology in Payments, Clearing and Settlement, dated December 5, 2016, (“Federal Reserve DLT Report”), available online at <https://www.federalreserve.gov/econresdata/feds/2016/files/2016095pap.pdf>.
 SEC Commissioner Kara M. Stein, Surfing the Wave: Technology, Innovation, and Competition, Remarks at the Harvard Law School Fidelity Guest Lecture Series, November 9, 2015, available online at <https://www.sec.gov/news/speech/surfing-wave-technology-innovation-and-competition-remarks-harvard-law-schools-fidelity>.
 T0 Press release, “T0 Platform Successfully Employed in the World’s First Public Issuance of a Blockchain Equity”, December 22, 2016, available online at <https://tzero.com/news> (“Equity transactions generally settle three days after trade date, or T+3. By contrast, trades executed through the t0 (t-zero) platform, settle on trade date, or T+0, a fact that gives rise to t0’s name. Same day settlement has long been the aim of both investors and securities exchanges.”)
 Amendment to Securities Transaction Settlement Cycle, Exchange Act Release No. 34-78962, 81 Fed. Reg. 69240, at 69263-4 (proposed October 5, 2016).
 Transfer Agent Regulations, Exchange Act Release No. 34-76743, 80 Fed.Reg. 81948, at 81986 (proposed December 31, 2015).
 Securities and Exchange Commission Notices, Submission for OMB Review; Comment Request, 81 Fed. Reg. 44365, 2016 WL 3618513 (July 7, 2016).
 See Andrea Tinianow and Caitlin Long, Delaware Blockchain Initiative: Transforming Foundational Infrastructure of Corporate Finance, Harvard Law School Forum on Corporate Governance and Financial Regulation blog post dated March 16, 2017, available online at <https://corpgov.law.harvard.edu/2017/03/16/delaware-blockchain-initiative-transforming-the-foundational-infrastructure-of-corporate-finance/>
 See, e.g., Matthew Leising, Annie Massa, and Jef Feeley, Fixing the Stock Market’s ‘Clogged Toilet’ Starts in Delaware, BLOOMBERG MARKETS, September 12, 2017, available online at <https://www.bloomberg.com/news/articles/2017-09-12/fixing-the-stock-market-s-clogged-toilet-starts-in-delaware>
 See generally Financial Industry Regulatory Authority, Distributed Ledger Technology: Implications of Blockchain for the Securities Industry, January 2017, available online at <http://www.finra.org/sites/default/files/FINRA_Blockchain_Report.pdf>
 11:FS Fintech Insider Podcast Episode 255, interview with CFTC Chairman J. Christopher Giancarlo, dated May 26, 2017, available online at <https://11fs.com/podcasts/ep255-interview-christopher-giancarlo-acting-chairman-cftc/>, starting at 00:17:43.
 CFTC Chairman J. Christopher Giancarlo, Blockchain: A Regulatory Use Case, Keynote Address before the Markit Group, 2016 Annual Customer Conference New York, May 10, 2016, available online at <http://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-15>
 See John Mirkovic, Deputy Recorder of Deeds, Blockchain Pilot Program: Final Report, Cook County (IL) Recorder of Deeds, May 30, 2017, available online at <http://cookrecorder.com/wp-content/uploads/2016/11/Final-Report-CCRD-Blockchain-Pilot-Program-for-web.pdf>.
 See Illinois Blockchain Initiative, Illinois Partners with Evernym to Launch Birth Registration Pilot, blog post dated August 31, 2017, available online at <https://illinoisblockchain.tech/illinois-partners-with-evernym-to-launch-birth-registration-pilot-f2668664f67c>.
 See Richard Kastelein, U.S. Department of Health and Human Services to Kick Off Blockchain in Healthcare Code-A-Thon, BLOCKCHAIN NEWS (February 13, 2017), available online at <http://www.the-blockchain.com/2017/02/13/u-s-department-of-health-and-human-services-to-kick-off-blockchain-in-heathcare-code-a-thon/>.
 Event website accessible online at the following location (last accessed September 13, 2017): <https://www.eventbrite.com/e/blockchainstate-distributed-ledger-technologies-for-diplomacy-and-development-tickets-37669091266>“
 U.S. Federal Blockchain Forum, Digital Government Division, U.S. General Services Administration, accessible online at < https://www.digitalgov.gov/event/in-person-u-s-federal-blockchain-forum/>, last accessed September 13, 2017.
 Blockchain, Government IT Initiatives: Emerging Citizen Technology, U.S. General Services Administration, accessible online at <https://www.gsa.gov/technology/government-it-initiatives/emerging-citizen-technology/blockchain>, last accessed September 13, 2017.
 See Federal Reserve DLT Report, supra n.5, at 17.
Published October 27, 2017.