On 1 March 2020, the regulations on the simple stock company (PSA) will come into force. They will make it possible to keep a register of shareholders of such companies using blockchain technology. For some, this is a minor technical regulation, while for others it is a truly revolutionary breakthrough in the legal system, enabling tokenisation of shares in Polish companies. How will it really be?
In the summer of 2018, we had the opportunity to participate in the analysis of the draft PSA regulations by the Coalition for Polish Innovation. The provision on the possibility of maintaining a PSA’s register of shareholders using a dispersed and decentralised database was unexpectedly included in the draft and immediately met with considerable interest. It was a complete novelty in the Polish legal system. The surprise was all the greater as, at the same time, we observed the first activities of regulators aimed at limiting uncontrolled development of blockchain technology.
The provision allowing a register of PSA shareholders to be maintained on blockchain is not as revolutionary as it seems. We are a long way from full tokenisation and decentralisation of PSAs. This is determined by other PSA provisions showing much more attachment to traditional legal institutions. Nevertheless, this provision opens up a lot of new possibilities and creates space for interesting legal experimentation with blockchain technology. It is worth taking advantage of this opportunity to create solutions that in the future will encourage regulators and lawmakers to open up the legal system more courageously to the technology of decentralised registers.
Advantages of the new regulation
Paradoxically, the biggest potential of the new regulation is not in the possibility of maintaining PSA share registers using blockchain. Using the distributed ledger technology to keep a register of shareholders does not in itself create any particular added value. It seems that the objective of reliable registration of shareholdings can be achieved using other available and proven technologies, often much cheaper and easier to implement. We see potential added value mainly in the possibility of introducing solutions facilitating trading in PSA shares, as well as organising PSA general meetings using blockchain.
As regards solutions facilitating trading in PSA shares, the new Art. 30036 §4 of the Polish Commercial Companies Code, which provides that the sale or encumbrance of shares must be made in document form under pain of nullity, is very important. Potentially, this provision enables the creation of solutions allowing for the disposal and encumbrance of shares using DLT.
We believe that the PSA regulations provide the ability to create digital tokens which when saved on blockchain can be used to transfer shares. The introduction of this solution would not be equivalent to “tokenising” PSA shares, i.e. assuming that a token is equivalent to a share. We propose to treat the token and address infrastructure on the blockchain (together with cryptographic solutions enabling the administration of entries on the address) only as a technical solution used to initiate legal events resulting in changes in entries in the register of shareholders.
Such a solution creates a potential possibility to automate part of the processes related to maintaining a register of shares, in particular, to automate subscriptions in relation to transfers of shares. It is necessary to note that PSA shares will not be admitted or introduced to organised trading. Therefore, we are talking about solutions with very limited application. Nevertheless, even such limited functionality would be a significant paradigm shift.
The PSA general meeting is another interesting space for the use of blockchain technologies. In accordance with the provisions, they can be held using electronic means of communication. Blockchain may be particularly attractive with respect to the exercise of voting rights at such meetings.
However, in order to fully understand the potential of tokenised assets, it is worthwhile to examine some solutions already operating in blockchain networks. In the context of PSA share tokenisation, it is worth noting three cases: MakerDAO; MolochDAO and MetaCartelDAO; and RealT and Uniswap.
MakerDAO
Simply put, MakerDAO is a financial service allowing users to take loans (expressed in DAI/SAI stablecoins, whose value is assumed to be stable 1:1 against the dollar) against crypto assets, in particular against ETH cryptocurrency. The service is managed by a DAO (decentralised autonomous organisation) through voting, in which the owners of other tokens (MKR tokens) can participate. The profit generated by the service is also distributed among MKR token owners (this is of course a simplification for purposes of illustration). So in practice the MKR token owners are in a sense MakerDAO “shareholders” and their shares are proportional to the number of tokens owned.
This mechanism works quite smoothly, and “shareholders” make fully remote and transparent decisions on service parameters (such as loan interest rates) up to several times a week. At the same time, MKR tokens (“shares”) are in continuous trading, with an average daily volume of about USD 5 million. It is easy to imagine an analogous structure based on a tokenised PSA, which in practice would be managed by means of a DAO. An additional advantage of such a solution would be a real connection with the physical world: MakerDAO carries out its development through a specially established foundation (Maker Foundation), which, however, is loosely linked to MakerDAO itself. If the DAO were linked (through the shareholders’ register, which is also the DAO shareholders’ register) to the PSA, such an organisation could set up an account in a physical bank, hire employees, sign contracts, etc. At the same time, it could retain most of the advantages of decentralised management. Moreover, MakerDAO’s shareholders are currently unable to exercise many of their rights, e.g. they cannot bequeath their shares in the DAO. Linking the DAO with the PSA would solve this problem, among others.
MolochDAO and MetaCartelDAO
The second example is MolochDAO and MetaCartelDAO. As described before, these are two decentralised organisations whose aim is to finance projects having a positive impact on the development of the Ethereum blockchain ecosystem. The DAO shareholders contribute a certain amount of capital, then the DAO votes to select the projects it wants to finance. All rules concerning e.g. joining the organisation, leaving it (with its capital, e.g. when decisions made by the organisation differ significantly from our expectations), financing of selected projects etc, are codified in a smart contract, making them transparent and unchangeable. Over the past year, both organisations have financed many good projects, encouraging new people and organisations to support their goals. At the same time, service costs are minimal and the efficiency of managing such an organisation is much higher than in the case of similar foundations.
RealT and Uniswap
The last example we would like to present is RealT, a company operating in Florida, offering investments in shares in real estate, tokenised on blockchain. Recently, the company announced its integration with the popular Uniswap decentralised exchange to provide liquidity for its flagship property, 9943 Marlowe St. in Detroit. This allows trading in shares on the decentralised exchange, which automatically connects buyers and sellers, operating exclusively on the basis of a smart contract in the Ethereum network. Of course, both sides of the transaction must be previously registered, verified RealT users who have passed the full KYC/AML process, among other steps—otherwise the smart contract will reject the transaction. Thanks to this integration, RealT was able to provide liquidity for its instruments without incurring associated high costs, using the existing and operating decentralised solutions of the Ethereum network.
By analogy, we can imagine trading in PSA shares through the integration of a smart contract servicing the register of shareholders (“tokenised shares”) with the Uniswap service. However, it should be noted that the classification of decentralised exchanges in the context of a ban on organised trading is unclear. Nevertheless, this example illustrates the opportunities offered by the existing and currently fast-developing ecosystem of decentralised finance.
Hidden potential
These are just a few selected potential applications related to the ability to tokenise shares on blockchain. These examples could still be multiplied (creating derivatives, using PSA shares as a pledge on a loan in MakerDAO, algorithmic decision-making in the PSA, etc), although we will understand the real potential only when we try to use the “tokenised” shares in practice. The most important feature of blockchain solutions (especially those based on public blockchains) is the possibility to use them as a component of new products and services (for example, the decentralised Uniswap exchange is often used as a component of other blockchain services to exchange tokens in a way that is transparent for the user).
These solutions did not even exist in practice two years ago, other than in the realm of speculation about their potential. We hope that thanks to the possibility of “tokenisation” of PSA shares in Poland in the coming years, we will observe the flowering of breakthrough innovative solutions.
Krzysztof Urbański, Krzysztof Wojdyło