• Provide a transparant method for validating ownership of an asset
• Could solve many longstanding problems related to companies' inability to keep accurate and timely records
• For shareholders blockchains could offer lower cost of trading and higher transparancy of ownership records
• Insider trading, or manipulations such as backdating of stock compensations could become much more difficult if not impossible
• Improvement in corporate voting, due to the transparency of ownership

• A blockchain records data in a sequential archive. Idea first proposed by Haber and Stornetta (1991) for time stamping of intellectual property.
• The authenticity of each time stamp is assured using hash functions (a type of cryptography)
• The transformed entry is then combined with the raw data of the next entry and turned into another hash code
• It would then be combined with the next entry and turned into another hash code, and so on ad infinitum
• In this way an archive of records has been created, allowing for the documents to be authenticated
• Attempting to forge information retroactively, would cause changes into all subsequent entries, since even minor alteration to imput would cause significant changes in its output

Major component of the blockchain is publishing the sequence of records in a public form.

• Anyoune interested could verify the data
• Strategy, known as 'distributed ledger', introduced by Nakamoto
• Outsourcing the verification function, traditionally played by auditors and bank inspectors

The party with authority to encode new transactions into a blockchain, holds enormous power that potentially poses great risks to individual blockchain participants.

• The gatekeeper could restrict entry into the market, charge monopolistic fees, edit incoming data and so on.
• In Bitcoin the authority to update the blockchain is decetralized to all market participants in an ongoing competition.
• That process could also be done in-house, the so called permissioned blockchain

Characteristics of the decentalized blockchain of Bitcoin

• To create a new block, the operator of a 'node' must bundle together transaction data, hash code from previous block, time stamp and further information known as 'nonce'
• Nonce is a random number, when added the block it generates a certain numbers of leading zeros
• New block to the chain can be added only when a valid nonce have been found
• A valid nonce can be discovered only through trial-and-error, a computationally costly 'proof of work' (or so called 'mining')
• A balancing mechanism of maintaining equilibrium between the number of miners, the size of mining reward and the time required to create each new block
• Bitcoin endogenously adjusts the difficulty of finding a valid nonce
• This method makes retroactive editing of the blockchain prohibitively difficult, therefore it is also known as 'immutable' or 'indelible'

Permissioned blockchain

• the Bitcoin network was designed to transmit only bitcoins themselves and may not be suited to the special characteristics of other assets.
• Permissioned systems are overseen by a powerful gatekeeper or trusted third party
• A company could sponsor its own blockchain, and either do the mining itself, or establish incentives for miners from outside
• in a 'sidechain', a sponsor can operate a private, permissioned ledger but periodically connect some aggregation of its transactions to an open, distributed ledger.
• Potential benefits of sidechains–it can accomodate additional transaction volume
• Other platforms such as Ethereum incorporate many features of blockchains while adding additional functionality

Not everyone would be happy in such transparant system

• Activists, corporate raiders or managers might want to conceal their trades, for the same reasons small shareholders would like to observe them
• Possible to emege different types of blockchains with varying levels of anonymity, competing for companies with different preferencies
• A permissioned blockchain(as opposed to open one) could offer various limitations to information
• Nevertheless such system would create much more current and complete information

There is a debate as to how easy would be to identify the transactions on the blockchain

• Firms could emerge specializing in 'de-anonymizing' for a fee
• Even though many criminals use Bitcoin, the authorities have been able to identify and trace suspicious behaviour
• Yet, a share owner could use differnt wallets, or breaking transactions into small pieces in order to conceal his/her actions
• A special regulation might be necessary to be put in place

Blockchains offer the possibility to significant improvements in liquidity. Two ways of use of the blockchains:

• Main platform for share registration and exchange
• A limited use, only to streamline the post-trade clearing and settlement process

Advanteges of using blockchains:

• Stock trades in the U.S. generally require three business days for settlement to occur and ownership to move formally from seller to buyer, many people are involved in this process and obliously it is outdated
• On the blockchain a sale of stock could be settled much more quickly, and it would not require numerous middlemen
• It follows that the commissions and the bid-ask spread would be reduced
• Improvements in liquidity would increase the demand for stocks and have many significant effects on patterns of investment and ownership
• Last but not least, high-frequency trading could become even more common, it the cost of trading goes down

• Greater transparancy could be seen as costly by activists and raiders, and as a result they maybe more reluctant to invest in companies traded on the blockchains
• Building share positions secretly is a time-honored strategy of those investors, who wish to minimize their costs of acquisition by avoiding publicity

The impact on institutional shareholders and activists is likely to be complex

• The greater ease of entry could probably promote ownership, some studies suggest that greater liquidity lead to greater accomulation of shares by activists
• And because the blockchain thechnology would decrease the cost of selling, it is likely that the exit strategy would be emphasized as opposed to the voice

• Corporate managers obtain most of their incentives from stock compensation, either from stock options or restricted shares
• Many studies show that despite the constraints on managers, they find ways to exploit insider information and profit from that. Unofficially this is considered as a part of the compensation.
• Blockchain share trading would potentially allow outsiders to observe managers' trades in real time. Investors are keenly aware of the actions of the managers.

The effect on managers

• Real-time transparency of trading would expose managers to greater scrutiny by their boards and shareholders, probably causing them to trade less often out of concern of sending adverse signals to the market.
• Firms would likely have to increase the compensation to the managers, in order to offset the decrease of profits as a result of the loss of insider trading opportunities
• A blockchain registration system would also preclude managers' backdating of compensation instruments. Blockchains are add-only databases in which entries are time-stamped and cannot be rewritten once entered. Therefore, share transfers could not be backdated or otherwise changed retroactively, a reform that outside shareholders might view as value-improving even while managers saw it as costly.
• The transparancy offered by blockchains could as well illuminate the cross-holdings of the managers precluding some conflict of interests

• If blockchains improve the transparency of investor identities, then informed selling could become easier to differentiate
• The speed with which adverse news is incorporated into prices would increase. There are far more negative than positive liquidity shocks.
• The ability to observe whether the investor sells the other share at the same time would improve the precision of the market maker's inferences.
• Blockchains could therefore lead to more efficient markets, potentially reducing risk premiums, which means higher prices
• Outside investors would have greater incentives to invest in acquiring information about the firm
• The increased incentives of analysts and investors to gather private information about the companies would likely have positive effect on corporate governance by improving outside monitoring of managers

Some problems with corporate elections include inexact voter lists, incomplete distribution of ballots, and sometimes chaotic vote tabulation.

Accuracy of elections

• The imprecision of voter tabulation leads to high degree of inaccuracy in close corporate elections
• In contests closer than 55-45%, there is no verifiable answer 'who won'
• Blockchains would reduce ambiguity, reducing management's ability for manipulation
• The net effect would be more frequent elections of outside candidates representing shareholder activists or other groups, and more ferquent defeats for management

Empty voting

• It occurs when an investor uses borrowed shares or certain combinations of derivative securities to acquire voting rights temporarily, without economic exposure to the cash flow rights connected to the underlying shares
• Some empty voting schemes are not strictly legal but have succeeded due to the difficulties of observation and enforcement.
• Under blockchain share representation empty voting would become more difficult
• Stock loans used in empty voting would be immediately transparant, providing notice to sharehlders, management and regulators
• Some studies actually show that the empty voting has positive effect of dividing the voting right from cash flow entitelments

• Anyone could then gather company's information, and there would be no need for quarterly filings for example
• The cost would be that the proprierary information made available to outside parties
• Shareholders would increase the trust in company's data
• The need for costly auditors would be greatly reduced

Accountants and Financial Intermediaries

• Consumers of financial statement information would not need to rely on the judgment of auditors and the integrity of managers. The blockchain could impose own accounting.
• Potential savings could amount to $50 billion, i.e. the revenues of the accounting industry, or also representing the third party costs to to society for validation of the accuracy of firm's books.
• Each user could costlessly create their own financial statements from the blockchain's data, for whatever time period they wished.
• To survive the accounting firms would have to reinvent themselvs as interpreters of raw data. Given the large size of data and the complexity of many companies' records the demand for such services would possibly continue.

Earnings Management

• Real-time accounting on the blockchain would greatly reduce opportunities for firms to engage in accounting gimmicks to manipulate reported earnings.
• With irreversible, time-stamped transactions, managers could not use strategies such as backdating sales
• The need for reporting data and frequencies, such as quarterly reporting, could become much less important. The users would rely on its own custom financial statements.
• The executives could manage their companies differently, if earnings management becomes more difficult. E.g. managers would possibly not avoid positive NPV prjects in order to smooth earnings.
• If manipulation of quarterly earnings became much less important due to real-time accounting, perhaps this distortion in firms' investment policies would recede. However, thre could be an unintended consequences.

Related Party Transactions

• Real-time accounting on the blockchain could allow observers instantly to spot suspicious asset transfers and other transactions that imply conflicts of interests.
• Transparency would also reduce the ability of managers for tunneling
• Creditors could engage in real time surveillance against fraudulent behaviour in distressed firms
• Possibly could as well add more costs to the firms, since they have to explain a large amount of transactions

• Lawyers might see their business shrink dramatically in a world in which many contracts became self-enforcing.
• Smart contracts could streamline the execution of relatively straight-forward contracts such as options embedded in derivative securities and other contingent claims
• The willingness of a firm to enter into a smart contract could represent a pre-commitment not to behave opportunistically in the future, and it would protect a lender against basic fraud strategies by a debtor such as pledging the same collateral to two borrowers.
• Smart contracts could lead to lower cost of debt, since they would deter a longstanding agency costs such as risk shifting and stratigic default
• Debt contracts might have fewer covenants, and the role of credit rating agencies could greatly diminish in importance.

Governance of a blockchain amounts to having authority to update its code

An open blockchain is operated autonomously by computer software

• The software parameters of the blockchain are akin to the rules and regulations of a stock exchange.
• Just as in a stock exchange the blockchain code could favour someparticipants at the expense of others
• Ultimately blockchains must rely on a governance process in which the users agree upon a set of requirements for the underlying software code to be changed
• In the open system such as Bitcoin, a major problem is the so-called 51% attack, in which one participant of the mining power controls enough clout to force through changes for his own benefit
• Acquiring 51% capacity would be very costly, though not impossible
• One could also tempt other nodes with a prisoner's dilemma type strategy, offering them modest payments that they will rationally accept in exchange for uploading the new, inferior software
• Protecting against these types of governance attacks may emerge as a significant problem for open source blockchains

Permissioned vs open blockchain

• In a closed, permissioned blockchain, negotiating rules, including withdrawal rights, should be similar to the negotiation of a partnership agreement.
• In open blockchain governance could become more complicated

The example of the Ethereum platform–alternative technology based on the same idea of blockchains

• A successful hack occurred against the open blockchain of the Ethereum platform–approximately $50 mln worth were diverted from the organization known as TheDAO
• The response was a 'hard fork', i.e. erasing the the blockchain from the point of the hack

The event accomplished two things that were supposed to be impossible on a blockchain

• Rewriting the history of transactions
• Introducing human intervention to negate the consequences of a self-executing smart contract

A minority(15%) of the Ethereum miners saw this precedent as dangerous and opposed the hard fork, creating a schism in Ethereum platform