Research Highlights

Blockchains: Coming soon to your market?

These innovations have the potential to change corporate governance as much as any event since the 1933 and 1934 securities acts in the United States.

The financial industry is starting to explore blockchain technology as a possible method for trading and tracking corporate equities. This novel, cryptographic, distributed-ledger system, developed by bitcoin’s creator, enabled the digital currency’s phenomenal growth in the absence of third-party verification of transactions and ownership. A new paper by NYU Stern Professor David Yermack evaluates the potential implications of the blockchain for managers, institutional investors, small shareholders, auditors, and other parties involved in corporate governance.
 
In “Corporate Governance and Blockchains,” Professor Yermack explains that blockchains offer a new way of creating, exchanging, and tracking on a peer-to-peer basis the ownership of financial assets – whether equity issued by corporations or debt securities and financial derivatives. “These innovations have the potential to change corporate governance as much as any event since the 1933 and 1934 securities acts in the United States,” he asserts.
 
The potential benefits of blockchain technology are many. Blockchains could provide unprecedented transparency to allow investors to identify the ownership positions of both debt and equity investors, including the firms’ managers, and overcome corruption on the part of regulators, exchanges, and listed companies. Shareholders would benefit from lower trading costs and more transparent ownership records, plus the ability to observe transfers of shares in real time. Activists could acquire shares faster and more cheaply – while, to their disadvantage, lose the benefit of secrecy. Backdating of stock options by corporations would become more difficult, corporate voting more accurate. Any or all of these changes could dramatically affect the balance of power among directors, managers, and shareholders.
 
Adoption of the technology is on the horizon. In the US, the NASDAQ stock market launched a pilot project in May 2015 to evaluate the blockchain’s suitability for registering and transferring shares. In an interesting note, Professor Yermack observes that emerging markets may be among the blockchain’s early adopters, due to the convergence of three forces: the inadequacy of existing record-keeping systems, mistrust of corrupt and ineffective market regulators, and high penetration of information technology like smartphones.