• CFRED CUHK Law

New Models of ‘Intelligent Investing’ for the Post-Crisis Economy

Mark Fenwick - Kyushu University;

Erik P.M. Vermeulen - Tilburg University

-- The blockchain was one of the top tech trends in 2017-18. Conferences. Workshops. Seminars. Blockchain was hot and attracted attention from businesses, capital markets, governments, and researchers. There wasn’t a problem that blockchain and its related technologies couldn’t solve.

By 2019, the hype had slowed down, but the interest never disappeared.

Many of the early blockchain initiatives hoped to trigger radical change. The idea was to challenge or disrupt existing centralized institutions and systems. This was ideological and political — a “blockchain revolution,” if you like.

Take the first decentralized autonomous organization (The DAO) that launched in 2016. This was a blockchain based effort to organize a new style company — a “software-run” corporation without managers, without a CEO or directors. While this project had the noble goal of introducing more radical forms of democracy and equality into corporate systems, it now – in retrospect – looks overly naïve to believe that decentralized technology could overcome two hundred years of economic history and change the world.

But things may be different now. Solutions that leverage blockchain technology in more modest, yet practical ways, have the potential to become useful #aftercorona. We already see an increase in blockchain projects that are designed to provide more transparency and trust in healthcare and drug supply chains. Existing blockchain projects are being rebranded to help distinguish between reliable information and fake COVID-19 news. Blockchain-enabled technologies are being introduced to securely store virus data and keep track of patients (while respecting their privacy).

Moreover, blockchain and smart contacts can be instrumental in the development of vibrant and sustainable markets for private company investments.

This idea of introducing blockchain technology to stimulate investments in private companies isn’t new. Distributed ledgers that hold a full record of the ownership and transaction history of the securities build trust in the private market and help streamline the investment process.

In our new paper, "New Models of ‘Intelligent Investing’ for the Post-Crisis Economy," we argue that introducing a blockchain-based trading and settlement infrastructure makes sense in the underdeveloped markets for private company shares. These markets aren’t captured by the centralized, server-based clearing and settlement platforms (which are the status quo in the established public and open markets).

The use of smart contracts (computer protocols) can further automate the investments and trade of private company shares without the need for intermediaries, thereby significantly reducing time, costs, and error. The problem with current approaches is that they focus on programming existing compliance rules into smart contract protocols, ensuring that only accredited investors can invest in private companies.

But in a post-coronavirus world, we will need to change the conversation and re-risk the economy. Blockchain technology and smart contracts have the potential to optimize investment rules and regulations regarding private company investing.

When we program the possibility of “intelligent risk-taking” by everybody (both accredited and traditionally non-credited investors) into the computer protocols for private company investments, we not only disintermediate the investment and trading process, but also create more liquidity in the market (making the risk-taking more intelligent in aggregate).

Smart contract protocols might then contain requirements regarding the obligation to follow an investment course (only “sophisticated” investors are allowed to buy into a private company). We can also think of other investment restrictions. For instance, non-accredited, but sophisticated individual investors can only invest in certain sectors (dependent on their expertise), Or investments are restricted to certain types of company or locations).

The economic fallout of the pandemic forces us to re-risk the economy. And, blockchain technology has the potential to play an essential role in building the new economic order. It may not be the revolution envisaged by the blockchain evangelists of 2017-18, but it could still prove enormously significant in the post-virus reconstruction.

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