The company and blockchain technology

Kelvin F.K. Low, Edmund Schuster, Wai Yee Wan

Abstract
Blockchain and distributed ledger technology (DLT) has generated much
excitement over the past decade, with proclamations that it would disrupt
everything from elections to finance. Unsurprisingly, the much-maligned
corporate form is also considered ripe for disruption. While certainly imperfect,
and currently serviced by creaking legal infrastructure premised upon direct
shareholdings, are its problems ones of centralization/intermediation? What
exactly are the limits of DLT? In this chapter, we propose to expose the
ignorance behind the hype that the venerable corporation will either be
revitalized by DLT or replaced by Decentralised Autonomous Organisations
(DAOs). We will demonstrate that proponents of DLT disruption either
overestimate the potential of the technology by taking at face value its claims
of security without unpacking what said security entails (and what it does not)
or lack awareness of the history of and market demand for intermediation as
well as the complexities of modern corporations.

Keywords: blockchain, DLT, disintermediation, accounting, DAO

I. Introduction

Given the excitement over the blockchain and distributed ledger technology (DLT), it is
unsurprising that proponents have suggested that they will revolutionise corporate governance
and management and perhaps even disrupt, or even render redundant altogether, the corporate
form. It is perhaps useful to first distinguish blockchains from distributed ledgers. 1
Blockchains, as the name suggests, are a species of distributed ledger technology that record
transactions in blocks rather than individually and then chain these blocks together with a
cryptographic hash so as to make alterations to transactions contained in earlier blocks easily
detectable by checking against the hash of a later block. Non-blockchain DLTs either rely on
other cryptographic protocols to secure the ledger or else simply rely on good old-fashioned
trust in the ledger’s registrar(s).

1
Kelvin F.K. Low & Eliza Mik, Pause the Blockchain Legal Revolution, 69 INT'L & COMP. L.Q. 135, 138
(2020).

Electronic copy available at: https://ssrn.com/abstract=4258114

Blockchains themselves, must also be segregated into permissionless and permissioned
varieties. In their permissionless form, anybody can participate in the record-keeping process
by downloading the relevant code and running it on a compliant computer. As anyone can
participate in altering the ledger, permissionless blockchains rely on particular types of
consensus algorithms to prevent abuse, the most famous and commonplace being the proof of
work (PoW) consensus algorithm underlying the Bitcoin blockchain. Proof of work leverages
game theory to disincentivize participants from fraudulently altering the blockchain ledger as
it is costly to win the opportunity to amend the ledger (as participants called miners have to
compete to solve complex cryptographic puzzles) and the Bitcoin consensus protocol regards
the longest blockchain as the most authoritative. Game theory is applied in a simplistic way,
contrary to actual game theory scholarship, 2 treating participants as homo economicus,
deigning to banish bad behaviour through “tokenomics”. PoW is “wasteful by design”3 and
thus sometimes criticised as proof of waste:4 the Bitcoin blockchain has a carbon footprint
equivalent to a medium sized country5 but processes only 4.6 transactions per second.

The openly acknowledged 51% attack vulnerability has also since transitioned from
“theoretical possibility to worrisome reality”6 for significant blockchains such as Ethereum
Classic, which has been subjected to at least four known 51% attacks. Whilst the very largest
permissionless blockchains such as Bitcoin (and Ethereum while it relied on PoW) have thus
far remained unaffected,7 it is notable that Ethereum Classic was ranked among the top 20
cryptoasset blockchains by “market capitalisation”8 in a field of literally tens of thousands of
blockchains at the time it was successfully targeted.

2
ARIEL RUBINSTEIN, Afterword, in THEORY OF GAMES AND ECONOMIC BEHAVIOR: 60TH ANNIVERSARY
COMMEMORATIVE EDITION 633 (John von Neumann & Oskar Morgenstern, 2007)
3
Edmund Schuster, Cloud Crypto Land, 84 MOD. L. REV. 974, 980 (2021).
4
Kelvin F.K. Low, Confronting Cryptomania: Can Equity Tame the Blockchain?, 14 J. EQUITY 240, 247
(2020).
5
At the time of writing, this would be Norway; see Bitcoin Energy Consumption Index, DIGICONOMIST,
https://digiconomist.net/bitcoin-energy-consumption (last visited Oct. 24, 2022). For an analysis, see e.g. Andrew
L. Goodkind, Benjamin A. Jones & Robert P. Berrens, Cryptodamages: Monetary value estimates of the air
pollution and human health impacts of cryptocurrency mining, 59 ENERGY RES. & SOC. SCI. 101281 (2020).
Mining for cryptocurrencies has also been shown to create negative spill-over effects for local energy markets;
see Matteo Benetton, Giovanni Compiani & Adair Morse, When Cryptomining Comes to Town: High Electricity-
Use Spillovers to the Local Economy (2021), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3779720.
6
Low, supra note 4, at 249-50.
7
But see Eric Budish, The Economic Limits of Bitcoin and the Blockchain (NBER Working Paper 24717,
2018), https://www.nber.org/papers/w24717, for a discussion of economic limits for reliable PoW security.
8
The term “market capitalisation” (current market price times circulating supply) is widely used for
cryptoassets, even though it is a particularly fraught metric given the market’s illiquidity and rampant
manipulation: Josh Zumbrum, Why Crypto’s Market Cap Never Booms, or Busts, as Much as You Think, WALL
ST. J., Aug. 5, 2022, https://www.wsj.com/articles/why-cryptos-market-cap-never-booms-or-busts-as-much-as-
you-think-11659691802.

Electronic copy available at: https://ssrn.com/abstract=4258114

Alternative consensus protocols for permissionless blockchains exist. The most notable such
alternative is Proof of Stake (PoS), the protocol recently9 adopted by Ethereum (the second
biggest 10 cryptocurrency) after years of delays. 11 While PoS addresses the environmental
concerns, it is in principle still subject to similar 51% attacks,12 a vulnerability that is ultimately
impossible to eliminate entirely and mitigating it results in traps for the unwary.13

Much of the interest in blockchains and DLT from the corporate sector lie in permissioned
varieties of the same. Unlike their permissionless brethren, most permissioned DLTs do not
depend on game theory to keep their registrars honest, relying instead on “good old-fashioned
trust.”14 This means, however, that such DLTs often do not possess the immutability of their
permissionless cousins, which are in any event not truly immutable since “blockchain
immutability is not an absolute concept but rather more 60 blocks/shades of grey”.15

Absent the check provided by PoW or PoS, there is little point in organising a permissioned
DLT by way of chained blocks since any authorised registrar will be able to change the entire
ledger, hashes and all, so many of these will not technically be blockchains except perhaps by
misnomer. Some permissioned DLTs such as Hyperledger Fabric and Hyperledger Sawtooth
preserve both the blockchain structure and its immutability but leverage other non-PoW
consensus protocols, specifically Apache Kafka and proof of elapsed time (PoET) respectively.
However, the former achieves consensus through a backend centralised server whereas the
latter, like PoW, has a tendency to fork at least temporarily. 16 The mutability of most
permissioned DLTs is not necessarily a tragedy since immutability should not be regarded as
censorship resistance (as enthusiasts suggest) but rather change resistance. Change is neither
inherently bad nor good. When a mistake is corrected, change is rectification (good), not
censorship (bad). A blockchain, however, is insensitive to context and hence blockchain
immutability is unavoidably indiscriminate, preventing all change.17 Thus DLTs must either
accord some user(s) superuser privileges to rectify transfers that are legally void or voidable,
in which case it is not immutable or, if immutable, it will inevitably diverge from the legal

9
Joshua Oliver, Ethereum “Merge” concludes in key moment for crypto market, FINANCIAL TIMES, Sep. 15,
2022, https://www.ft.com/content/4d3c85ee-c812-47b2-a973-acaf1c141a50.
10
Again, by market capitalisation.
11
Ethereum had been trying to transition to proof of stake since 2014: David Gerard, It’s a $69 Million
JPEG, but Is It Art?, FOREIGN POL’Y, Mar. 19, 2021, https://foreignpolicy.com/2021/03/19/nft-beeple-69-million-
art-crypto-nonfungible-token/.
12
Instead of an attacker having to control 51% of the network hash rate, the attacker would have to control
51% of staked cryptoassets, which is not as difficult as it sounds because cryptoasset holdings are often highly
concentrated.
13
Liam Frost, How to Stop Your Ethereum 2.0 Validator From Getting Slashed, DECRYPT, Dec. 3, 2020,
https://decrypt.co/50270/how-to-stop-your-ethereum-2-0-validator-from-getting-slashed.
14
Low & Mik, supra note 1, at 140.
15
Id., at 144.
16
Low & Mik, supra note 1, at 144, 163.
17
Id., at 150, Schuster, supra note 3, at 988-90.

Electronic copy available at: https://ssrn.com/abstract=4258114

reality.18 In short, a choice must be made as to being either pointless or useless, though some
cryptomaniacs ponder the possibility of an absolutely authoritative immutable DLT – mistakes,
frauds, hacks and all – or what we consider the heartless option.19

Sans immutability, the point of DLT may legitimately be questioned. Many proponents of
permissioned DLTs suggest that distributed ledgers are more secure than centralised ones. A
centralised ledger supposedly presents a single point of failure whereas a distributed ledger is
more robust. Within the legal literature, it is commonly assumed that in order to compromise
a DLT, every single copy of the ledger must be compromised 20 but this is wrong. 21 Many
permissioned DLTs make use of the practical Byzantine Fault Tolerance (pBFT) consensus
algorithm. So named because it purports to solve the “Byzantine Generals Problem” 22
introduced by Lamport, Shostak and Pease in 1982 in which malfunctioning nodes within a
distributed system were metaphorically represented by traitorous Byzantine generals, the pBFT
algorithm was introduced by Castro and Liskov in 1999, 23 almost ten years before Satoshi
Nakamoto’s White Paper 24 introduced the Bitcoin payment system. pBFT tolerates the
compromise of less than one-third of the network’s nodes so that the increased cost to a registrar
far outstrips the increased cost to a hacker determined to compromise the records. Any
superuser privilege(s) will also necessarily reintroduce a single (or more) point of failure(s).
Furthermore, the vaunted improved security ignores the possibility of offline backups, which
will permit registrars to reconstruct compromised records. 25 It is of course also possible to
backup DLTs offline but this will either be extremely costly (entailing the back up of all nodes)
or else compromise the egalitarian ideals of decentralisation, since some nodes (those that are
chosen for backups) will be more equal than others. A less common consensus algorithm
employed in permissioned DLTs is that of crash fault tolerance (CFT) but CFT, as its name
suggests, only provides resilience against node crashes (i.e. completely stops working) without
providing any tolerance towards malicious or otherwise faulty nodes26 so that it is even less
secure than pBFT from malicious actors.

18
Id., at 990-92.
19
Kelvin F.K. Low, Bitcoin users should not overlook cryptocurrency's fundamental flaw, NIKKEI ASIA, Jun.
14, 2022, https://asia.nikkei.com/Opinion/Bitcoin-users-should-not-overlook-cryptocurrency-s-fundamental-
flaw.
20
See, e.g., Dirk A Zetsche, Ross P Buckley & Douglas W Arner, The Distributed Liability of Distributed
Ledgers: Legal Risks of Blockchain, 2018 U. ILL. L. REV. 1361, 1371-1372 (2018).
21
Low, supra note 4, at 255-257.
22
Leslie Lamport, Robert Shostak & Marshall Pease, The Byzantine Generals Problem, 4 A.C.M.
TRANSACTIONS ON PROGRAMMING LANGUAGES & SYS. 382 (1982).
23
Miguel Castro & Barbara Liskov, Practical Byzantine Fault Tolerance and Proactive Recovery, 20
A.C.M. TRANSACTIONS ON COMPUTER SYS. 398 (2002).
24
Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System (Oct. 31, 2008),
https://bitcoin.org/bitcoin.pdf.
25
Robert Scammell, Fujifilm refuses to pay ransomware demand, restores network from backups, VERDICT
(Jun. 7, 2021), https://www.verdict.co.uk/fujifilm-ransom-demand/ (last visited Oct. 19, 2022).
26
Hyperledger Fabric’s Kafka consensus protocol is also only CFT but not BFT.

Electronic copy available at: https://ssrn.com/abstract=4258114

A key selling point of many DLT projects is their ability to interface with so-called smart
contracts or more accurately, “self-executing ledger-modification instructions”.27 These smart
contracts either automate the process of contracting or more commonly, its performance, or
both. Automation is however not dependent on the use of DLT, with automation in finance
predating DLT by a good many decades: the first automated clearing service in the world was
created by the Dutch Postcheque- en Girodienst in April 1965.28 The expression smart contract
itself was coined by Szabo in 1997,29 more than a decade before Nakamoto envisaged the
blockchain. What the blockchain contributed to smart contracts was immutability, but
obviously only if the smart contract was embedded onto an immutable blockchain. Already not
obviously desirable, immutability may be even less so in the smart contracts space given the
ubiquity of coding errors.30 Since many proposals for the use of DLT technology in this context
are of the permissioned mutable variety, it is not obvious what DLT contributes to automation
beyond a trendy catchphrase.

Departing cloud crypto land allows us to rationally evaluate the potential impact of DLTs on
company law as we know it. Our chapter is, apart from this introduction and a conclusion,
divided into two parts. Part II, subdivided into two sub-parts, explores the potential impact of
the blockchain on the internal governance of the company. Sub-part A considers proposals to
replace centralised share registers with DLT equivalents; and sub-part B considers the use of
DLT to manage a company’s data. Part III considers the potential of so-called Decentralised
Autonomous Organisations (DAOs), which some have suggested can supplant the supposedly
aging corporate form. Throughout, we seek to identify hyperbole and misunderstanding.

II. Blockchain and Internal Governance

A. DLT Shareholding: the Promise and the Hype

Before considering the scope for the application of DLT, it is important to understand how
today’s intermediated securities holding structures evolved. As Morton explains,31 the growth
of intermediation began in the middle of the twentieth century for a number of reasons: (i)
securities markets grew massively in size and volume; (ii) cross-border investment increased;
(iii) the number and range of those investing in securities increased very substantially; (iv)

27
Low & Mik, supra note 1, at 165.
28
DIRK DE WIT, THE SHAPING OF AUTOMATION: A HISTORICAL ANALYSIS OF THE INTERACTION BETWEEN
TECHNOLOGY AND ORGANISATION, 1950-1985, 208 (1994).
29
Nick Szabo, Smart Contracts: Formalizing and Securing Relationships on Public Networks, 2 FIRST
MONDAY (1997), https://doi.org/10.5210/fm.v2i9.548.
30
Low & Mik, supra note 1, at 172-73.
31
GUY MORTON, Historical Introduction: The Growth of Intermediation and Development of Legal Analysis
of Intermediated Securities, in INTERMEDIATION AND BEYOND 23, 24-27 (Louise Gullifer & Jennifer Payne eds.,
2019).

Electronic copy available at: https://ssrn.com/abstract=4258114

incentives towards collective and packaged investment; (v) the volume and speed of settlement
in securities markets increased substantially; (vi) securities finance activity increased
substantially; and (vii) securities custody and administration services became increasingly
professionalised and widely available. Intermediation tends to take one of two forms:
immobilisation and dematerialisation. Using shares to distinguish the two, in the former, share
certificates still exist but these are immobilised and held by a central securities depository
(CSD), with actual trades taking place only in the books of these CSDs, their intermediaries,
or further intermediaries down the chain. In the US, the CSD used for publicly traded shares is
the Depository Trust & Clearing Corporation (DTC), which will have physical possession of a
global share certificate and does the clearance of trades through the debit and credit of the
accounts opened with the DTC.32 Where shares are dematerialised, then there are no share
certificates at all, even though there will often be a requirement to keep a share register of the
uncertificated shares. The UK’s CREST system, operated by Euroclear (UK and Ireland) (EUI)
as CSD, is such a system. Although a CSD will often be the holder of the issued securities, this
is not always the case.33 In the UK’s CREST system, for example, EUI is not the holder of the
securities. Instead, the holder of the securities or CREST member is normally a financial
institution or rarely an individual holding a CREST-sponsored account.34

However, in spite of these market developments, much of our legal infrastructure still assumes
the classical pattern of direct holding, resulting in various problems for the persons identified
in the literature as the ultimate account holders (UAHs).35 Especially from a corporate liability
perspective, UAHs lack important rights available to direct holders of securities. For instance,
indirect shareholders do not have the right to requisition a meeting36 or access shareholder
oppression or unfair prejudice rights,37 and indirect bondholders are unable to sue on their
bonds. 38 Less directly, intermediation also presents obstacles to UAHs exercising their
stewardship functions. For instance, an indirect shareholder who wishes to exercise his votes
will have to instruct his intermediary, who would also be receiving the instructions from other

32
Alternatively, investors in the US can also be registered as holders of the shares through DTC’s Direct
Registration System (DRS), which is a dematerialized form of holding securities. However, it is not mandatory
for issuers or investors to use the DRS. See US SECURITIES AND EXCHANGE COMMISSION, Holding Your
Securities: Get the Facts (2003), https://www.sec.gov/reportspubs/investor-
publications/investorpubsholdsechtm.html (last visited Oct. 24, 2022).
33
CHRISTOPHER TWEMLOW, Why are Securities Held in Intermediated Form?, in INTERMEDIATION AND
BEYOND, 85, 90-92 (Gullifer & Payne, eds., 2019).
34
Law Commission, Intermediated Securities: who owns your shares? A scoping paper (2020), https://s3-
eu-west-2.amazonaws.com/lawcom-prod-storage-11jsxou24uy7q/uploads/2020/11/Law-Commission-
Intermediated-Securities-Scoping-Paper.pdf (last visited Oct. 24, 2022).
35
C.f. LOUISE GULLIFER & JENNIFER PAYNE, Introduction in INTERMEDIATION AND BEYOND 1, 7 (Gullifer
& Payne, eds., 2019).
36
Eckerle v. Wickeder, EWHC 68 (Ch) (2013).
37
See e.g. Companies Act 2006, c 46 (UK), § 994.
38
See e.g. RICHARD SALTER, Enforcing Debt Securities, in INTERMEDIATION AND BEYOND 129-154 (Gullifer
& Payne, eds., 2019).

Electronic copy available at: https://ssrn.com/abstract=4258114

UAHs.39 Many things can go wrong: for instance, the intermediary may not receive the voting
instructions in a timely manner, particularly if there are several further layers through which
the shares are held and time is often of the essence in the exercise of voting rights at contested
shareholder meetings. This problem appears to be more pronounced in the US40 than in the
UK.41 A further problem, linked to the complexity of the intermediate holdings, is that the
direct holder of the securities, often a CSD, may make mistakes as to those voting instructions,
resulting in the shares being over-voted or votes being improperly disregarded.42 Where bonds
are held in an intermediated fashion, the existence of a single direct bondholder is extremely
troublesome for bondholder schemes of arrangement since the majority in number
requirements set out in section 899 of the Companies Act 2006 cannot be met.43

Where securities are dematerialised, as opposed to immobilised, it is often possible for an

investor to choose to hold the securities directly rather than indirectly through an intermediary.
This is certainly possible under the CREST system,44 and also under the Direct Registration
System established by DTC. 45 However, despite this possibility and the increasingly well-
known problems with intermediation, direct holding seems to be increasingly unpopular.
According to Twemlow,46 the number of individuals directly holding in the CREST system has
dropped from over 50,000 in 2003 to approximately 5,400 in 2018. By April 2018, the total
value of personal member holdings in the CREST system is a mere approximately £1.3 billion,
or approximately 0.025% of the value of corporate holdings of approximately £5.2 trillion.
Why isn’t direct holding more popular? Twemlow highlights a number of practical
consequences for an investor who wishes to hold directly:
end investors would need individually to instigate all actins (such as individual
buy, sell and tax payment, as well as monitoring for and reaction to each
corporate action process (such as selecting dividend currency or bonus issue
uptake)). Access to trading venues (to obtain best price), clearing (to remove
counterparty risk) and settlement venues (CSDs) would be significantly
constrained due to the restrictions such infrastructure may have on access in

39
Eva Micheler, Custody Chains and Asset Values: Why Crypto-securities and Worth Contemplating, 74
CAMBRIDGE L.J. 505 (2015).
40
George S Geis, Traceable Shares and Corporate Law, 113 Nw. U. L. Rev. 227 (2018).
41
Law Commission, Intermediated securities: Summary of responses to call for evidence (2021), at 57,
https://s3-eu-west-2.amazonaws.com/lawcom-prod-storage-11jsxou24uy7q/uploads/2020/11/Law-Commission-
Intermediated-Securities-Summary.pdf (last visited Jan. 25, 2022).
42
Marcel Kahan & Edward Rock, The Hanging Chads of Corporate Voting, 96 GEO. L.J. 1227, 1243 (2008).
43
JENNIFER PAYNE, Intermediation and Bondholder Schemes of Arrangement in INTERMEDIATION AND
BEYOND 175-186 (Louise Gullifer & Jennifer Payne, eds., 2019).
44
LOUISE GULLIFER, Ownership of Securities: The Problem Caused by Intermediation in INTERMEDIATED
SECURITIES: LEGAL PROBLEMS AND PRACTICAL ISSUES 1, 3 (Louise Gullifer & Jennifer Payne, eds., 2010);
MORTON, supra note 31and accompanying text.
45
Supra note 32and accompanying text.
46
TWEMLOW, supra note 33, at 86-87.

Electronic copy available at: https://ssrn.com/abstract=4258114

 order to meet financial stability and risk management considerations, in the
interests of society.
In the US, likewise, holding through brokers remain routine.47 Quite simply put, the benefits
of intermediation are perceived by most market participants to far outweigh its drawbacks.
Contrary to the misconceptions of many DLT enthusiasts, especially those with a purely
technical background, intermediaries do not merely offer a parking ground for the holding of
securities. They are servicing a demand, offering a suite of services to their clients. For
instance, intermediaries may also offer the services of lending securities in the accounts to other
borrowers and thus obtain a return for their clients. They also facilitate the cross-border holding
of securities, given the restrictions on the dealing of securities by foreign investors. Some
professional investors deliberately choose to outsource the management of shares such as the
exercise of voting rights or other corporate actions to third party intermediaries.

Much of the legal literature predicting an impending DLT revolution assume that DLTs will
disintermediate intermediaries leading to the easy identification of UAHs as these will now
hold their securities directly on the DLT.48 Much of these are thin on technical explanations of
how DLTs work. As the London Stock Exchange Group rightly observed in its response to the
Law Commission’s call for evidence in its Intermediated Securities project, and as we have
also striven to show, 49 “the term ‘DLT’ is currently used to described various types of
technology, and that there are differences between ‘consensus models, functional
specifications, performance and implications as regards transparency of data and network
governance’. 50 These different implementations each have their strengths and drawbacks,
which often balance off against one another. For example, a DLT is either public or private
with the inevitable consequence that a private DLT is less transparent than a public one. It is
not obvious that all shareholders would be attracted to direct holding in a public DLT where
anyone “would be able to view the arrangement of ownership at any time and identify changes
instantly as they occurred.”51 It seems more likely that any DLT implemented will be a private,
limiting even read access to authorised users. This will allow hostile bidders who are building

47
C.f. Christopher E. Austin, Paul M. Tiger & Max A. Wade, Additional Lessons from the CBS-NAI Dispute:
The Limitations of “Street Name” Ownership in Effectively Exercising Stockholder Rights, HARVARD LAW
SCHOOL FORUM ON CORPORATE GOVERNANCE (Oct. 17, 2018),
https://corpgov.law.harvard.edu/2018/10/17/additional-lessons-from-the-cbs-nai-dispute-the-limitations-of-
street-name-ownership-in-effectively-exercising-stockholder-rights/ (last visited Oct. 19, 2022).
48
Christoph van der Elst & Anne Lafarre, Blockchain and Smart Contracting for the Shareholder
Community, EUR. BUS. ORG. L. REV. 111 (2019); Geis, supra note 40; Federico Panisi, Ross P. Buckley & Douglas
W. Arner, Blockchain and Public Companies: A Revolution in Share Ownership Transparency, Proxy-Voting and
Corporate Governance? 2 STAN. J. BLOCKCHAIN L. & POL’Y 189 (2019); SARAH GREEN AND FERDISHA SNAGG,
Intermediated Securities and Distributed Ledger Technology in INTERMEDIATION AND BEYOND 337-358 (Louise
Gullifer & Jennifer Payne eds., 2019).
49
Law Commission, supra note 41.
50
Id., at 57.
51
David Yermack, Corporate Governance and Blockchains 21 REV. FIN. 7, at 17 (2017). See also Elisabeta
Pana & Vikas Gangal, Blockchain Bond Issuance 23 J. APPLIED BUS. & ECON. 217 (2021).

Electronic copy available at: https://ssrn.com/abstract=4258114

their positions and who hold less than the relevant disclosure threshold to hide their positions
except against certain parties such as regulators. Lest this be thought to be some panacea to
enforcement of disclosure, it must be recalled that DLTs do not prevent intermediation so that
a rogue can still rely on intermediaries to camouflage his holdings if they exceed the disclosure
threshold, in which case regulators are left to rely on existing tools of enforcement. In some
instances, a balance cannot actually be achieved between competing traits. Thus, a DLT can
either be immutable or subject to law but not both: 52 an immutable DLT that is rectifiable is
an oxymoron. One cannot hypothesise a legal revolution on the basis of a fictional DLT with
all of the strengths and none of the weaknesses of all known DLTs.

It is simple enough to dismiss the disintermediation fantasy by examining the recent history of
endogenous cryptoassets such as Bitcoin. “Considering that crypto-assets are native to
decentralised blockchains, the proliferation of crypto-asset exchanges suggests that there is a
commercial demand for intermediation that blockchains will not eliminate”. 53 A leading
commentator has revealed that “market practice highlights that most bitcoin transactions (up
to 99 per cent, according to one authoritative source) occur ‘off-chain’ between customers at
the same exchange.”54 This is because on-chain transfers are costly in terms of transaction fees
and slow, as the general advice is to wait for 6 blocks of confirmation before treating the
transaction as final for Bitcoin, effectively an hour.55 Despite the supposed interest in Bitcoin
from institutional investors, few institutional investors invest directly, preferring to gain
exposure through Bitcoin exchange traded funds (ETFs).56 This is because direct holdings of
cryptoasset require an investor to navigate the treacherous path “between the Scylla of fraud
and the Charybdis of loss”:57 the latter dictates that multiple copies be kept as the loss of the
only copy of a private key is disastrous whereas the former implores against multiplicity since
each additional copy is an additional point of failure. Any DLT that commits to immutability
will likely see similar commercial pressures towards intermediation peculiar to the cryptoasset
markets arise quite apart from the existing commercial pressures in the securities market that
led to intermediation.

Glaringly absent in prophecies proclaiming the coming DLT revolution are explanations of
how DLTs will in and of themselves replicate the services currently provided by existing

52
Low & Mik, supra note 1, Schuster, supra note 3, Low, supra note 4.
53
Low & Mik, supra note 1 at 161.
54
Matteo Solinas, Bitcoiners in Wonderland: lessons from the Cheshire Cat, LLOYD’S MARIT. & COMM. L.
Q. 433, 434 (2019).
55
Kelvin F.K. Low, Trusts of Cryptoassets, 34 TRUST L. INT’L 191, 204 (2020).
56
Rachel McIntosh, Are Institutional Investors Buying Bitcoin? BTC’s Institutional Growth, COINMOTION
(July, 27 2021), https://coinmotion.com/are-institutional-investors-buying-bitcoin-btcs-institutional-growth/ (last
visited Oct. 24, 2022).
57
Low, supra note 4, at 209.

Electronic copy available at: https://ssrn.com/abstract=4258114

intermediaries.58 Any investor who wishes to invest in securities, some of which are centrally
recorded and some of which are recorded on DLTs, will likely choose intermediation if only
for convenience alone. Likewise, assuming all securities worldwide are recorded on DLTs,
intermediation will again likely be preferred for the same reason unless all CSDs choose to use
a single DLT, which seems highly unlikely given the phenomenon of blockchain balkanisation
we see today. Although there is talk of blockchain interoperability, 59 this is extremely
challenging, especially if one is ideologically committed to decentralisation. If one is not so
committed, then we are merely in the realm of software compatibility60 and there is no reason
why we should not explore interoperability of centralised ledgers. Furthermore, arguably the
greatest challenge of interoperability is backward compatibility61 – many end users, including
business end users, cling to legacy systems62 – else one sacrifices inclusion for interoperability.
Bridges between blockchains introduce another point of failure63 and interoperable immutable
blockchains pose peculiar risks to end users.64

Even assuming that these services can somehow be replicated by a particular as yet non-
existent DLT, it is not obvious that the cost savings from disintermediation will be passed on
to the end investor. As a Bank of England Staff Working Paper warned, on the assumption that
such a DLT is technically possible, “the economic surplus obtained by technological
improvements and by dis-intermediating traditional post-trade processing risks either being
offset by deadweight loss or being entirely consumed by the new network provider(s)”.65 In
this respect, it should be noted that cryptoasset intermediaries currently enjoy fatter margins
than their non-cryptoasset counterparts.66

58
Cf. TWEMLOW, supra note 33, at 105-106.
59
See, e.g., Rafael Belchior, André Vasconcelos, Sérgio Guerreiro & Miguel Correia, A Survey on
Blockchain Interoperability: Past, Present, and Future Trends, 54 A.C.M. COMPUTING SURV. 168 (2022).
60
C.f. Peter Wagner, Interoperability, 28 ACM COMPUTING SURV. 285 (1996).
61
C.f. Polkadot’s interoperable blockchains, dubbed parachains, which offer forward compatibility. See
Gavin Wood, XCM Part II: Versioning and Compatibility, POLKADOT BLOG, Sep. 16, 2021,
https://polkadot.network/blog/xcm-part-two-versioning-and-compatibility/ (last visited Oct.25, 2022).
62
Ravi Khadka, Belfrit V. Batlajery, Amir M. Saeidi, Slinger Jansen & Jurriaan Hage, How Do Professionals
Perceive Legacy Systems and Software Modernization?, PROCEEDINGS 36TH INT’L CONF. SOFTWARE ENGINEERING
36 (2014).
63
Andrew Thurman, Blockchain Bridge Wormhole Suffers Possible Exploit Worth Over $326M, COINDESK
(Feb. 3, 2022), https://www.coindesk.com/tech/2022/02/02/blockchain-bridge-wormhole-suffers-possible-
exploit-worth-over-250m/.
64
Zhiyuan Sun, Vitalik Buterin gives thumbs down to cross-chain applications, COINTELEGRAPH (Jan. 7,
2022), https://cointelegraph.com/news/vitalik-buterin-gives-thumbs-down-to-cross-chain-applications.
65
Evangelos Benos, Rodney Garratt & Pedro Gurrola-Perez, The Economics of Distributed Ledger
Technology for Securities Settlement (Bank of England Staff Working Paper No. 670, 2017), at 28,
https://www.bankofengland.co.uk/working-paper/2017/the-economics-of-distributed-ledger-technology-for-
securities-settlement.
66
Eva Szalay, Crypto exchanges are booming, for now, FINANCIAL TIMES (Aug. 24, 2021),
https://www.ft.com/content/d09adf75-9ee9-4c47-9595-69c02113febe (last visited Oct. 24, 2022).

Electronic copy available at: https://ssrn.com/abstract=4258114

One of the oft-heralded benefits of DLT is its potential to remove the distinctions between
trading, clearing and settlement. It is often assumed that today’s settlement cycles (‘T+2’ for
many stock exchanges) are limited by technology when in truth it is a policy choice. In the UK,
“[i]mmediate same day settlement is available today, while liquid equity trades have a two day
period between trading and settlement.”67 The US Depository Trust & Clearing Corporation
(‘DTCC’) notes that that National Securities Clearing Corporation (‘NSCC’) and DTC “can
support T+1 and even same-day (T+0) settlement today, using existing technology.” 68The T+2
settlement cycle is a market convention so that shortening the cycle is an exercise in industry
coordination rather than technological upgrade. Cryptomaniac dreams of real time gross
settlement, in which counterparty risks are eliminated, are quite simply unrealistic and come
with significant downsides. “Immediate settlement at the point of trade comes with additional
risks and costs (such as additional liquidity costs and loss of netting and other efficiencies) and
may make compliance checks difficult.”69 If the DLT is immutable, immediate settlement will
leave no time for inevitable mistakes, whether stemming from bugs or fat fingers, to be
discovered and rectified. If the DLT is rectifiable, rectification will necessarily impact trades
executed by smart contracts that had operated on the unrectified state of the ledger.

Some legal scholars have speculated that DLTs will resolve the collective action problem
where shareholding is widely diffused. Although large institutional shareholders are well
advised and they would have access to engage with the management, retail shareholders often
have difficulties engaging management directly due to their individually small stakes. As
Daniels observes, “retail investors cumulatively represent significant blocks of shares, but an
individual retail investor has few incentives to incur the time and effort costs of voting.”70 The
unfortunate reality is that retail investors have limited attention and are almost exclusively
concerned with achieving high returns. 71 Similar traits can be found in the cryptoasset
community, which is made up of mostly retail investors. A 2020 survey by CoinGecko of yield
farmers, shorthand for a strategy by which cryptoasset owners temporarily place their
cryptoassets at the disposal of some startup’s application for profit (i.e. a loan), demonstrated
that although 79% of yield farmers claimed to understand the associated risks and rewards of
their investments even though 40% of them admitted they did not know how to read smart

67
TWEMLOW, supra note 33, at 107.
68
DTCC, Advancing Together: Leading the Industry to Accelerated Settlement (Feb. 2021), 5,
https://www.dtcc.com/-/media/Files/PDFs/White-Paper/DTCC-Accelerated-Settle-WP-2021.pdf.
69
TWEMLOW, supra note 33, at 107. See also DTCC, “Building the Settlement System of the Future” at 5
(Sep. 2021), https://www.dtcc.com/-/media/Files/Downloads/WhitePapers/DTCCs-Project-ION-Platform-
Moves-to-Development-Phase-Following-Successful-Pilot-with-Industry.pdf.
70
Alexander Daniels, Blockchain & Shareholder Voting: A Hard Fork for 21st Century Corporate
Governance 21 U. PA. J. BUS. L. 405, 439-440 (2018).
71
C.f. Turan G. Bali, David Hirshleifer, Lin Peng & Yi Tang, Attention, Social Interaction, and Investor
Attraction to Lottery Stocks (NBER Working Paper 29543, 2021), https://www.nber.org/papers/w29543.

Electronic copy available at: https://ssrn.com/abstract=4258114

contracts.72 Accordingly, it is difficult to understand how a DLT will magically cure retail
investors of their overconfidence and apathy. Van der Elst and Lafarre argue that a
permissioned DLT can set rules on voting or be used as a common platform for the investors
to ask questions at the general meetings and these questions be transparently shown to the
investors. 73 But if the investors do not even show up or are otherwise uninformed and so
unaware of what questions to ask, it is hardly obvious how DLT will incentivise them to do so.
Andhov74 has argued that DLTs can be used to solve the coordination problem because of its
transparency, allowing shareholders to coordinate among themselves in dealings with the board
of directors, particularly ahead of major contested shareholder decisions but this suggestion
both ignores the greater problem of shareholder apathy and makes the dubious assumption that
any DLT implemented will be fully public. In a private DLT, it is not obvious that the identity
of shareholders will necessarily be made available to other shareholders nor is it in the interests
of the company to do so. The shambolic track record of DAO voting75 suggests that many of
these postulations are more wishful thinking than realistic.

Even large institutional investors are reluctant to coordinate among themselves due to
regulatory concerns that they may be acting in concert. In the UK, concerns arise over whether
the shareholders may be held to be acting in concert under the City Code on Takeovers and
Mergers and be required to make a mandatory bid for the company, though the UK Panel of
Takeovers and Mergers has clarified that most kinds of engagement are not likely to be so
regarded.76 In the US, even after the various regulatory changes and case law, concerns remain
over the risks of violating section 13D of US Securities and Exchange Act of 1934 if
shareholders who consult together may be regarded as a acting as a group, with public
disclosure and economic consequences. 77 If the objective is facilitating shareholder
stewardship, particularly among retail shareholders, the solution has to lie in removing or
simplifying the impediments for them to exercise their votes, such as by regulating the ability
of intermediaries to limit their liability in their terms and conditions.

72
See Yield Farming Survey: 25 August 2020 – 4 September 2020, COINGECKO (2020), slide 12,
https://assets.coingecko.com/reports/Surveys/2020-Yield-Farming-Survey.pdf (last visited Oct. 24, 2022).
73
van der Elst & Lafarre, supra note 48.
74
Alexandra Andhov, Corporations on Blockchain: Opportunities & Challenges 53 CORNELL INT'L L.J. 1
(2020).
75
See, e.g. the multiple flip-flopping votes by the Tribe DAO on whether or not to compensate victims of
the Rari Capital hack: Liam J Kelly, Tribe DAO Votes to Repay Rari Capital Hack Victims—Again, DECRYPT
(Sep. 20, 2022), https://decrypt.co/110102/tribe-dao-votes-repay-rari-capital-hack-victims-again (last visited Oct.
25, 2022), or the outright oppressive vote by the Juno Network DAO to expropriate a supposed whale: Liam J
Kelly, How The Juno Network DAO Voted to Revoke a Whale's Tokens, DECRYPT (Mar. 20, 2022),
https://decrypt.co/95435/juno-network-dao-proposal-16-voted-to-revoke-tokens-from-whale (last visited Oct. 25,
2022),
76
UK PANEL ON TAKEOVERS AND MERGERS, Practice Statement No. 26: Shareholder Activism (Sep. 9.
2019), https://www.thetakeoverpanel.org.uk/wp-content/uploads/2008/11/ps26.pdf (last visited Oct. 24, 2022).
77
17 C.F.R. § 240.13d-5; Joseph A McCahery, Zacharias Sautner & Laura T Starks, Behind the Scenes: The
Corporate Governance Preferences of Institutional Investors, 71 J. FIN. 2905 (2016).

Electronic copy available at: https://ssrn.com/abstract=4258114

Our current structure of intermediated holding of securities did not arise by design but was
shaped by the invisible hand of the market. It has given rise to numerous problems in part
because the underlying laws assume direct holding and in part because the participants have
favoured particular advantages over others. Latterly, it seems obvious that if an investor
deliberately chooses to outsource the its voting rights to an intermediary, it should not be able
to exercise said voting rights. One cannot have one’s cake and eat it and no amount of
distribution ought to change the outcome. As to the former, some of these can be circumvented
by clever interpretation by the courts. Thus, although s 90A of the Financial Services and
Markets Act 2000 (FSMA) read with paragraph 8(3) of Schedule 10A provides that only
persons with an “interest in securities” have a claim against an issuer for misleading statements
or dishonest omissions, appearing to suggest that only direct holders could sue, in SL Claimants
v Tesco Plc,78 the English High Court refused to strike out the claims of UAHs holding through
intermediaries, suggesting that an equitable proprietary right would suffice as an “interest in
securities”. Such creativity is not always possible so that the rule of privity prevented a UAH
who held a bearer bond through intermediaries from having any recourse against its issuer79
and section 90 of the FSMA does not apply to private placements. Some issues are easily
resolved, such as the stumbling block posed by section 899 of the Companies Act to bondholder
schemes of arrangement: the majority in number requirement can simply be removed.80 Others,
such as whether to extend section 90 of the FSMA to private placements is less obvious. At
any rate, it is clear that our legal plumbing requires updating to reflect the market reality of
intermediation, whether to address obvious problems or resolve uncertainty. It is less clear that
disintermediation is necessary or even desirable.

B. DLT Data Management: When Naïveté Meets Reality

DLTs have also been described as having the potential to revolutionise the way data is used in
business organisations. For instance, it has been suggested that blockchain technology could
be used by companies in their financial accounting – utilising blockchain-based ledgers to
account for a company’s assets, liabilities and transactions.81

For instance, in a 2018 report, the Institute of Chartered Accountants in England and Wales
(ICAEW) described blockchain as “fundamentally an accounting technology” and highlighted
how blockchains “allow for a greater degree of transparency than traditional ledgers.”82 At the

78
EWHC 2858 (Ch) (2019).
79
Secure Capital SA v. Credit Suisse AG, EWCA Civ 1486 (2017).
80
PAYNE, supra note43, at 175.
81
Yermack, supra note 51 at 24-26.
82
ICAEW, Blockchain and the future of accountancy (2018), https://www.icaew.com/-
/media/corporate/files/technical/technology/thought-leadership/blockchain-and-the-future-of-accountancy.ashx.

Electronic copy available at: https://ssrn.com/abstract=4258114

core of proposals to utilise DLTs in the realm of corporate accounting is the idea is to create
an accounting information system that holds data in a secure and “self-verifying” way. 83
Similarly, a combination of blockchain ledgers, smart contracts and “Internet of Things” (IoT)
devices has also been suggested as a way to improve the security and transparency of corporate
supply chains,84 which supposedly also supports global efforts to improve the sustainability of
corporate activities.85

Let us first examine the case for using DLTs in the area of financial accounting. It has been
suggested that DLTs could enable “real-time accounting”, with firms posting transaction and
asset data to a (public or private) DLT. This, it is claimed, would allow investors and others to
get a real-time perspective of a company’s financial position, aggregate the information into
real-time income statements and balance sheets and hence remove the need for periodic
financial disclosures. Data so recorded and made available would be safe from (clandestine) ex
post alterations due to the design of most blockchain protocols.86

There are two reasons to remain very sceptical of the significance of any impact DLTs will –
or could ever – have on accounting and financial disclosures. First, it is not clear that companies
providing more direct access to its financial records would indeed be beneficial for the
company itself or its investors. The vision of a firm providing reliable, useful (and to some
extent “immutable” or tamper-evident) real-time data on its operations seems to largely ignore,
for instance, the significant and unavoidable judgement and discretion involved when a
company, at least one of meaningful complexity, prepares its financial statements. The extent
of this discretion as well as its importance for corporate decision making and corporate
governance more broadly are topics long recognised, and extensively studied, in both
accounting and corporate governance research.87

83
See e.g., Jun Dai & Miklos A. Vasarhelyi, Toward Blockchain-Based Accounting and Assurance, 31 J.
INFO. SYS. 5 (2017).
84
See e.g. Rita Azzi, Rima Kilany Chamoun & Maria Sokhn, The power of a blockchain-based supply chain,
135 COMPUTERS & INDUS. ENGINEERING 582 (2019). Vishal Gaur & Abhinav Gaiha, Building a Transparent
Supply Chain, 98 HARV. BUS. R. 94 (2020). Nir Kshetri, Blockchain’s roles in meeting key supply chain
management objectives, 39 INT’L J. INFO. MGMT. 80 (2018).
85
See e.g., Mahtab Kouhizadeh, Sara Saberi & Joseph Sarkis, Blockchain technology and the sustainable
supply chain: Theoretically exploring adoption barriers, 231 INT’L J. PROD. ECON. 107831 (2021)
86
Yermack, supra note 51, at 24; Dai & Miklos, supra note 83.
87
See e.g. Connie L. Becker, Mark L. Defond, James Jiambalvo & K.R. Subramanyam, The Effect of Audit
Quality on Earnings Management, 15 CONTEMP. ACCT. RES. 1 (1998); Alex Edmans, Vivian W. Fang &
Katharina A. Lewellen, Equity vesting and investment, 30 REV. FIN. STUD. 2229 (2017); Robert M. Bowen,
Shivaram Rajgopal & Mohan Venkatachalam, Accounting Discretion, Corporate Governance, and Firm
Performance, 25 CONTEMP. ACCT. RES. 351 (2008); Michael Ettredge, Ying Huang & Weining Zhang, Earnings
restatements and differential timeliness of accounting conservatism, 53 J ACCT. & ECON. 489 (2012).

Electronic copy available at: https://ssrn.com/abstract=4258114

When Apple Inc., for instance, defers some of its revenue to reflect the “unspecified software
upgrade rights […] bundled in the sales price of the respective product”,88 it will presumably
determine the appropriate revenue deferral based on its non-public and commercially sensitive
information, sharing of which would be potentially harmful as it may aid competitors and
others. Similar examples can be found on virtually every page of a company’s financial
statements – from allocation of costs and revenues to different business segments to decisions
about provisions and contingent liabilities or the accounting for restructuring costs.

Accounting is both a big industry and an academic discipline precisely because it involves
complex decisions and requires experts to assess how rules and principles should best be
applied to the specific circumstances of a firm. Modelling it as little more than stubbornly
adding and subtracting objectively verifiable numbers demonstrates gross misunderstanding.
If, however, the preparation and presentation of financial statements involve a strong human
element and require the exercise of judgement and expertise, the automated real-time disclosure
of meaningful financial data appears impossible – at the very least unless companies
dramatically increase the resources they devote to the disclosure process, which is of course
the exact opposite of the technology’s apparent promise.

Moreover, even if publishing informative, real-time transaction data were indeed feasible and
of value for investors, disclosing such data would necessary entail obvious indirect costs for
the affected firms. The ability of private firms to avoid the costs associated with third-party
effects of public disclosures – i.e. the positive effect such disclosures have on competitors –
has for instance been identified as one of the reasons for the rise of private markets.89 More
granular, real-time data would likely greatly increase these negative effects for issuers.

Finally, even a passing examination of typical accounting scandals will show that the use of
openly accessible real-time financial data is highly unlikely to prevent accounting fraud.
Accounting fraud tends to be perpetrated by high level executives90 and hardly ever involves –
and likely never requires – a nefarious ex post alteration of database entries. It is hard to see,
for instance, how the use of Enron’s infamous SPVs91 could plausibly have been prevented by
making – still fraudulent – data accessible in real time on a blockchain ledger. This is a simple

88
See Apple Inc, Annual Report (Form 10-K) (Oct 29, 2021),
https://www.sec.gov/ix?doc=/Archives/edgar/data/320193/000032019321000105/aapl-20210925.htm.
89
See e.g. the excellent discussion in Elisabeth de Fontenay, The Deregulation of Private Capital and the
Decline of the Public Company, 68 HASTINGS L.J. 445 (2017).
90
See e.g. the analysis of cases in Zabihollah Rezaee, Causes, consequences, and deterrence of financial
statement fraud, 16 CRITICAL PERSP. ACCT. 277 (2005); Mark S. Beasley, Joseph V. Carcello & Dana R.
Hermanson, Fraudulent Financial Reporting: 1987-1997, An Analysis of U.S. Public Companies (1999),
https://egrove.olemiss.edu/cgi/viewcontent.cgi?article=1330&context=aicpa_assoc.
91
For a description, see e.g. Steven L. Schwarcz, Enron and the Use and Abuse of Special Purpose Entities
in Corporate Structures, 70 U. CIN. L. REV. 1309 (2002).

Electronic copy available at: https://ssrn.com/abstract=4258114

case of the classic “garbage in – garbage out” problem that pervades cryptomaniac logic:92 if
the initial data is incorrect, whether inadvertently or due to fraud, securing it cryptographically
does little to improve its reliability.

We thus conclude that there is little theoretical justification for expecting that moving to a DLT
based system for financial data disclosure in fact offers tangible advantages to investors,
creditors, or other stakeholders. The second, and potentially stronger, reason for scepticism
towards a DLT revolution in accounting is more technical in nature.

As we have explained, the key characteristic of permissionless blockchains is their supposed

immutability. At their core, therefore, blockchain-based ledgers differ from traditional
databases not by the type (or richness) of data they can hold, but simply by the way data is
organised, stored and secured. Consequently, when discussing the benefits of blockchain-based
ledgers in accounting – real-time or otherwise – we must focus on features and applications
that are specifically enabled by, and thus plausibly connected to, the use of the technology in
question, rather than on advantages of, for instance, digitalisation more generally.93

Upon closer inspection, however, it is evident that blockchain ledgers are neither necessary nor
sufficient for enabling the perceived benefits of real-time accounting, to prevent fraudulent
alteration of accounting data, or to increase the transparency of company’s financial data.
Virtually all major, publicly traded corporations already use sophisticated business software to
record, track and validate their transactions. Companies like SAP and Oracle, and countless
vendors of enterprise accounting and inventory software, specialise in creating data solutions
for enterprises that enable managers to access and utilise internal data in their decision making.
These systems typically provide different levels of data access to internal users, and – where
appropriate – interface with systems of third parties, such as suppliers and customers.

Put differently, the very data that one could be tempted to “put on the blockchain” already
exists in easily accessible form within firms. If not for the – as we think – overwhelming
commercial reasons not to do so, companies could easily make some of these data accessible
to outside investors, creditors or others. If, say, Apple wanted to share real-time data on iPhone
sales with its shareholders, it could presumably make the relevant data available at negligible
(direct) cost. The fact that companies generally choose not to make such data available is
unsurprising – the indirect costs of doing so likely far outweigh the benefits.

92
Low and Mik, supra note 1, at 155.
93
For a more detailed discussion of the right comparator for benchmarking blockchain solutions see
Schuster, supra note 3, at 997-998.

Electronic copy available at: https://ssrn.com/abstract=4258114

How, if at all, can the use of blockchain technology alter the benefit-cost calculus that has lead
firms to almost universally reject an “open data” approach to accounting so far? The direct
costs of making available data using traditional (non-blockchain) systems are already
negligible, and in any event the addition of blockchain-based ledgers to existing internal
systems cannot plausibly reduce these direct costs. The indirect, commercial cost of disclosing
more granular financial and transaction data in real time, on the other hand, is a consequence
of third parties acquiring the knowledge underlying the data, 94 and is hence generally
independent of the way in which it is stored. It follows that blockchain applications in
accounting would need to somehow increase the benefits of making real-time disclosures to
justify any expectation of the technology’s transformative potential.

However, whereas blockchains are regarded by some to have introduced some technologically
novel concepts, the subset of features that could reasonably be used to improve the permanence
or immutability of a company’s internal data are in no way unique to blockchains, and often
absent from DLTs more broadly. In particular, companies could easily design their traditional
systems in a way that ensures data tampering is evident to any of its users. Technologies like
cryptographic hash functions95 have been available for decades,96 and they enable companies
to digitally commit to the data made available, whether or not they use blockchain ledgers.
Similarly, as discussed above, companies are acutely aware of the risk of data losses, and
generally ensure that backups of crucial business data are available. It would therefore be
incorrect to assume that the use of blockchains, or indeed any other type of DLT, unlocks
functionally novel possibilities for companies.

Instead, it appears that – as so often in the cryptoverse – the proposed use of DLTs largely aims
to solve non-existent (or long-solved) problems, while offering no tangible benefit over the use
of traditional systems, often as a result of ignorance of the complexity of commerce and/or the
corporation.

The same is largely true for the use of DLTs for increasing the transparency of and improving
the security of supply chains.97 Perhaps even more so than in the case of financial data, supply
chain data suffers from the limitations of the “garbage in - garbage out” problem. The design
challenge thus is to create a system that addresses the risk that data held in the blockchain

94
See the discussion in de Fontenay, supra note 89.
95
For an excellent overview, see ARVIND NARAYANAN, JOSEPH BONNEAU, EDWARD FELTEN, ANDREW
MILLER & STEVEN GOLDFEDER, BITCOIN AND CRYPTOCURRENCY TECHNOLOGIES: A COMPREHENSIVE
INTRODUCTION (2016), 2-10.
96
Bart Preneel, Cryptographic hash functions, 5 EUR. TRANSACTIONS ON TELECOMMUNICATIONS 431
(2010).
97
See e.g. Azzi et al., supra note 84; Gaur & Gaiha, supra note 84.

Electronic copy available at: https://ssrn.com/abstract=4258114

ledger “may simply be immutable garbage”98 – no blockchain or DLT system can, in and of
itself, ensure the veracity of the data entered.99 This, however, is the obvious main risk for
supply chain data: an untrusted third party can just as easily add false data to a blockchain
ledger as into any traditional database.

One proposed technological solution for this problem is the utilisation of IoT devices (i.e.
essentially network-connected sensors) to improve the reliability of the data in the ledger.100
While it is undoubtedly true that sensor-based monitoring can in some cases improve the
reliability of data compared to manual entries,101 no plausible reason exists for assuming that
the use of DLTs meaningfully contributes to this reliability. Even more so than in the case of
financial data, the users of supply chain data are unlikely to be particularly worried about data-
tampering, as they will often be in a position to ensure direct receipt of the data (and would
thus only have to worry about their own tampering). As in the case of financial data, the
database-facing technology to replicate the features of blockchains relevant for this application
have existed for decades. This seems to imply that the actual problems with creating reliable
supply chain data are not rooted in problems with holding and processing of data, but instead
exist, as so often, at the interface between our complex and messy world on the one hand, and
its simplified representation in the world of machine-readable data on the other hand.

Based on our analysis of how companies and its stakeholders use and process data, we thus do
not believe that a rational case can be made for DLTs holding the potential to revolutionise
how firms account for or trace their assets, liabilities or transactions. Rationality, of course, is
not a reliable guide.102 While we remain sceptical, we readily admit that DLTs could of course
be used to hold corporate financial or supply chain data, irrespective of whether more efficient
alternatives exist. As such, we may well see an increase in the use of DLTs by companies; we
submit, however, that the results are unlikely to differ significantly from the status quo and are
driven more by hype than functionality.

III. The Way of the DAO

98
Warwick Powell et al., Garbage in garbage out: The precarious link between IoT and blockchain in food
supply chains, 25 J. IND. INFO. INTEGRATION 100261 (2022).
99
Low and Mik, supra note 1, at 144-145.
100
See e.g. Neda Azizi et al., IoT–Blockchain: Harnessing the Power of Internet of Thing and Blockchain
for Smart Supply Chain, 21 SENSORS 6048 (2021); Abderahman Rejeb, John G. Keogh & Horst
Treiblmaier, Leveraging the Internet of Things and Blockchain Technology in Supply Chain Management,
11 FUTURE INTERNET 161 (2019); Muzammil Hussain et al., Blockchain-Based IoT Devices in Supply Chain
Management: A Systematic Literature Review, 13 SUSTAINABILITY 13646 (2021).
101
But with the caveat that sensors can malfunction and be tampered with.
102
TOMMY KOENS & ERIK POLL, The Drivers Behind Blockchain Adoption: The Rationality of Irrational
Choices, in EURO-PAR 2018: PARALLEL PROCESSING WORKSHOPS, at 535 (Gabriele Mencagli et al., eds., 2019).

Electronic copy available at: https://ssrn.com/abstract=4258114

There have also been attempts to utilise blockchain-based smart contracts to create DAOs. No
universally accepted definition of DAOs has yet emerged, but they are usually described as
“algorithmic” business organisations103 using blockchain technology and smart contracts for
its governance.104 DAOs have been described as alternatives to traditional corporations,105 and
a potential solution to the managerial agency problem at the centre of the traditional corporate
governance debate.106

While DAOs come in many different varieties, what they tend to have in common is that they
use smart contracts enabling investors to directly participate in its decision making. While this
participation has obvious parallels to shareholder voting in a traditional corporation, the
protocol-based interactions between the participants in a DAO allow, in principle, for more
timely, continuous and far more granular involvement of investors in “corporate” decisions
than what we usually observe in traditional firms,107 and are said to offer a “a radically different
template for organizational behavior”108 compared to the classic Berle-Means109 model.

The first DAO was created in 2016 and raised about USD150 million from investors buying
DAO Tokens.110 The aim was to operate an organisation comparable to a traditional venture
capital fund, albeit with investors, i.e. DAO token holders, voting on the use of funds based on
(smart contract) proposals submitted; the DAO would then autonomously implement the
decisions of the DAO token holders.111 Shortly after its inception, one of the DAO participants
exploited a weakness in the DAO’s smart contract code in what is often described as a
“hack”.112 The hacker managed to withdraw about a third of the funds raised, a situation that

103
See e.g., KEVIN WERBACH, BLOCKCHAIN AND THE NEW ARCHITECTURE OF TRUST (2018) at 110.
104
See e.g. PRIMAVERA DE FILIPPI & AARON WRIGHT, BLOCKCHAIN AND THE LAW: THE RULE OF CODE
(2018).
105
Wulf A. Kaal, Blockchain-based Corporate Governance, 4 STAN. J. BLOCKCHAIN L. & POL’Y 1, 5-6
(2021).
106
Id.; see also Anne Lafarre & Christoph Van der Elst, Blockchain Technology for Corporate Governance
and Shareholder Activism (ECGI LAW WORKING PAPER NO. 390, 2018), at 6,
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3135209.
107
In traditional public corporations, only the most significant corporate decisions will usually require a
shareholder vote, with day-to-day management delegated, typically, to a board of directors; see generally e.g. John
Armour, Henry Hansmann, Reinier Kraakman & Mariana Pargendler, What Is Corporate Law? in THE ANATOMY
OF CORPORATE LAW 1, at 11 (Reiner Kraakman et al., eds., 3rd ed., 2017).
108
Chris Brummer & Rodrigo Seira, Legal Wrappers and DAOs
(2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4123737.
109
Adolf A. Berle and Gardiner C. Means, MODERN CORPORATION AND PRIVATE PROPERTY (1932).
110
See Securities and Exchange Commission, Report of Investigation Pursuant to Section 21(a) of the
Securities Exchange Act of 1934: The DAO, RELEASE NO. 81207 (2017),
https://www.sec.gov/litigation/investreport/34-81207.pdf.
111
Id. For a brief description see also e.g. Michele Finck, BLOCKCHAIN REGULATION AND GOVERNANCE IN
EUROPE 182–209 (2018) at 187-189.
112
Securities and Exchange Commission, supra note 110; see also Finck, id., at 187-189; Michael
Schillig, Decentralized Autonomous Organizations (DAOs) under English Law,
(2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4221221; David Gerard, ATTACK OF THE 50 FOOT
BLOCKCHAIN: BITCOIN, BLOCKCHAIN, ETHEREUM & SMART CONTRACTS (2017), at 108-110.

Electronic copy available at: https://ssrn.com/abstract=4258114

was ultimately remedied by “hard forking” the underlying blockchain protocol, Ethereum,113
in what can be seen as a powerful demonstration of the fact that blockchains are not, ultimately,
immutable,114 provided that sufficient consensus towards ex post correction emerges among its
users.

Despite this rocky start, various DAOs have since been created emerged, with varying levels
of autonomy and decentralisation.115 A discussion of the precise governance mechanisms of
existing and proposed DAOs is beyond the scope of this chapter. Instead, we want to briefly
examine the disruptive potential of DAOs as such as an alternative organisational form for
business activity. The reader will perhaps not be too surprised at this point that we have strong
doubts about the potential of DAOs as a viable alternative to or a replacement of the traditional
corporation – or indeed the concept’s potential to play any significant role in our economy in
the longer term. While the reasons for our scepticism are very much based on the limitations
of DLTs described above, we regard the attempt of using the technology to emulate or replace
traditional corporations as particularly naïve.

There are, it is submitted, at least two fundamental reasons for doubting the usefulness of
DAOs. First, DAOs, rather than solving an existing corporate governance problem, reintroduce
a challenge that has long been identified, and addressed more efficiently than DAOs can, by
all major corporate law jurisdictions. Second, the usefulness of DAOs ultimately depends on a
wholesale adoption of blockchain technology in our economies – a development we regard as
neither likely nor desirable.116

Virtually all corporate law jurisdictions provide for delegated, centralised management,
typically vested in a board of directors or similar corporate body. The reason for this choice is
simply that the costs of involving all owners of a firm in decision-making usually far outweigh
the benefits.117 There are two components of the costs of direct decision-making by a firms
shareholders: First, gathering shareholders and holding meetings is obviously costly in itself,
and given the myriad decisions a firm of any relevant size has to take on a daily basis,
continuous direct decision-making by shareholders on day-to-day matters clearly is not
feasible. The second type of cost relates to inefficiencies and the value of private information:
high-quality decisions can only be made by informed agents. A lively debate exists, of course,
on the optimal delineation of powers of board and shareholders, but few if any corporate

113
See Werbach, supra note 103, at 67;
114
See Finck, supra note 111, at 188.
115
For an overview of existing design choices, see e.g. recently Australian Law Reform Commission, New
Business Models, Technologies, and Practices (2022), https://www.alrc.gov.au/publication/fsl7/.
116
See e.g. Low & Mik, supra note 1, Schuster, supra note 3, Low, supra note 4.
117
For a discussion of centralised management as core feature of corporations generally, see e.g. Armour et
al., supra note 107 at 11-13.

Electronic copy available at: https://ssrn.com/abstract=4258114

scholars would doubt that a degree of general centralised authority, vested in a board, will
generally bring about better decisions at lower cost.118 Having a smaller group of specialised,
professional managers acquire and evaluate business information and act on this basis is not
only more efficient than collective shareholder voting, it also enables companies to hold and
take into account proprietary, non-public information without sharing it with all investors, and
hence, functionally, the public. Indeed, we suspect that very few businesses could operate
successfully without using some confidential information, which naturally requires a degree of
centralised decision-making as soon as a firm has more than just a handful of investors.
Centralisation of authority does of course also introduce agency problems,119 the minimisation
of which is the central focus of much of corporate law and governance.

How do DAOs fit into this debate? One view is that DAOs “solve” agency problems and hence
remove or mitigate agency costs.120 However, the deep flaw of this thinking is that this is
ultimately a proposal to remove the agent (i.e. the manager) to solve the agency cost problem.
While it is self-evidently true that agency costs can be avoided by not utilising agents (in the
economic sense), what is missing, of course, is a plausible way of replicating the significant
advantages traditional corporation derive from creating the managerial agency relationship in
a form that can be utilised by DAOs without rendering them pointless.

One could argue that the exercise of voting and other governance rights by participants (token
holders) of a truly autonomous DAO does not entail the direct costs of continuous shareholder
decision-making described above, which could thus shift the optimal allocation of authority
towards investors compared to a traditional firm. Historically, these costs have largely been
linked to holding physical meetings – costs DAOs would not incur. This argument ignores,
however, that the legal and (non-DLT) technological prerequisites for electronic voting by
shareholders and virtual shareholder meetings have long existed,121 with no discernible effect

118
For a discussion of the trade-off between shareholder and board power, see e.g. Stephen M. Bainbridge,
Director primacy and shareholder disempowerment, 119 HARV. L. REV. 1735 (2006); Lucian Arye Bebchuk, The
Case for Increasing Shareholder Power 118 HARV. L. REV. 833 (2005); William W. Bratton & Michael L.
Wachter, The Case Against Shareholder Empowerment, 158 U. PA. L. REV. 653 (2010). For a review of the debate
and the evidence it relies on, see e.g. David Kershaw & Edmund Schuster, The Purposive Transformation of
Corporate Law, 69 AM. J. COMP. L. 478 (2021). See also Sofie Cools, The Dividing Line Between Shareholder
Democracy and Board Autonomy: Inherent Conflicts of Interest as Normative Criterion, 11 EUR. COMPANY &
FIN. L. REV. 258 (2014).
119
For an overview, see e.g. John Armour, Henry Hansmann & Reinier Kraakman, Agency Problems and
Legal Strategies, THE ANATOMY OF CORPORATE LAW 29 (Reiner Kraakman et al., eds., 3rd ed., 2017).
120
See e.g. Kaal, supra note 105, at 6, arguing that blockchain and smart contracts could enable “near error
free, and zero transaction/agency cost coordination” between corporate actors; Alex Murray, Scott Kuban, Matt
Josefy & Jon Anderson, Contracting in the Smart Era: The Implications of Blockchain and Decentralized
Autonomous Organizations for Contracting and Corporate Governance, 35 ACAD. MGMT. PERSP. 622 (2021).
121
This has for instance widely been used in the context of the recent pandemic, but virtual shareholder
meetings have been possible in many jurisdictions throughout the last decade; see e.g. Dirk A. Zetzsche, Virtual
Shareholder Meetings and the European Shareholder Rights Directive - Challenges and Opportunities,
(2007), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=996434.

Electronic copy available at: https://ssrn.com/abstract=4258114

on the typical allocation of powers in the modern corporation. The reason for this is simply, it
is submitted, that the direct costs of transmitting and aggregating investor votes pales in
comparison to the far greater indirect costs a direct “shareholder democracy” 122 would
necessarily impose on the firm and its investors. From this perspective, the attempt to remove
agency costs by putting a diverse and uncoordinated group of investors directly in charge of
corporate decision making feels more like an attempt to rerun the history of company law, than
a serious proposal to improve how businesses are organised.123

Moreover, it is worth highlighting that DAOs are currently used mainly in “Decentralised
Finance” (DeFi) applications. 124 The reason for this is simple: DAOs can only be truly
autonomous as long as they operate exclusively within the blockchain ecosystem. For any
interaction with the non-crypto world, a DAO will need to rely on “oracles”125 – reintroducing
the agency problem, but without the benefit of two centuries worth of agency cost mitigation
technology (i.e. company law).126 Thus, even ignoring the economic obstacles of DAOs as
viable forms of business organisation, the technical prerequisite for truly autonomous DAOs
replacing traditional corporations is that sufficiently vast parts of our economy reside on the
blockchain, and that said blockchains are immune from the immutable garbage problem. As
we have argued elsewhere, there are strong reasons to doubt the feasibility, and question the
desirability, of such a future.127

Finally, it is worth highlighting that the DAO structure is fraught with significant legal
uncertainty. A “typical” unincorporated DAO, for instance, risks being classified as
unincorporated partnership under national partnership laws128 – a problem currently at issue in
CFTC v. Ooki DAO.129 The reasoning to such a conclusion is not difficult to discern: whatever
nomenclature participants may adopt, the characterisation of their legal relations is determined

122
DAO governance is highly concentrated. “By analyzing the distribution of ten major DAOs’ governance
tokens, we find that, across several major DAOs, less than 1% of all holders have 90% of voting power.”:
Chainalysis, The Chainalysis State of Web3 Report (Jun. 2022), at 47, https://go.chainalysis.com/2022-web3-
report.html (last visited Oct. 24, 2022).
123
See also Lafarre & Van der Elst, supra note 106, at 8.
124
Schillig, supra note 112.
125
Low and Mik, supra note 1 at 172.
126
See also Brummer & Seira, supra note 108, highlighting the need for “legal personhood” to interface with
the real world.
127
See e.g. Low and Mik, supra note 1, Schuster, supra note 4; Low, supra note 4.
128
See Carla L. Reyes, Autonomous Corporate Personhood, 96 WASH. L. REV. 1453 (2021); Carla L. Reyes,
If Rockefeller Were a Coder, 87 GEO. WASH. L. REV. 373 (2019); Carla L. Reyes, Autonomous Business Reality,
21 NEV. L.J. 437 (2021); Stephen D Palley, How to Sue A Decentralized Autonomous Organization,
COINDESK (Mar. 20, 2016), https://www.coindesk.com/markets/2016/03/20/how-to-sue-a-decentralized-
autonomous-organization. See also Schillig, supra note 112
129
Currently pending in the US District Court for the Northern District of California; see e.g. Brief of
LeXpunK as Amicus Curiae, CFTC v. Ooki DAO, NO. 3:22-cv-05416 (N.D. Cal. 2022),
https://www.courtlistener.com/docket/65369411/commodity-futures-trading-commission-v-ooki-dao/.

Electronic copy available at: https://ssrn.com/abstract=4258114

by the law, not their labels. Thus, “licences” have been found to be leases,130 “sub-leases” to
be assignments,131 and “floating charges” actually fixed in nature.132 “The manufacture of a
five pronged instrument for manual digging results in a fork even if the manufacturer,
unfamiliar with the English language, insists that he intended to make and has made a spade.”133
The legal consequence of such a classification is usually the unlimited personal liability of the
“partners” (i.e. the token holders) of the DAO. Without incorporation or registration,
eliminating this risk can be difficult, even for legislators, as each jurisdiction will make its own
determination of a DAO’s legal status under national law. 134 The law applicable to this
determination depends on the applicable national conflict rules for business organisations,
which differ significantly across jurisdictions.135

Some DAOs thus use so-called “legal wrappers”, formally adopting a traditional corporate
form or a purpose-made legal structure136 to ensure members benefit from limited liability and
the “DAO” benefits from separate legal personality.137 Such incorporated or LLC DAOs are,
in our view, best understood as traditional firms with unconventional – and in our view
inefficient – governance arrangements. Since these governance arrangements have long been
theoretically available to companies, but rarely if ever used, it seems plausible to assume that
they are not ultimately superior to more widely used modes of corporate governance. The fact
that governance decisions are implemented using a blockchain protocol, it is submitted, does
not plausibly alter the costs or benefits in a significant way.

IV. Conclusion

The blockchain and DLT space is replete with resplendent promises. It is unsurprising, given
public dissatisfaction with large corporations, that some of these extend to revolutionising the
corporate form. However, it is pertinent to observe that, some 14 years after the pseudonymous
Satoshi Nakamoto introduced the concept of a blockchain and sparked cryptomania, practically
all these promises have remained unfulfilled or metamorphosized into an unrecognisable form.
To mention but one, the promise of a decentralised non-fiat currency has descended into a

130
Street v Mountford [1985] AC 809.
131
Milmo v Carreras [1946] 1 KB 306.
132
Re Brumark Investments Ltd sub nom Agnew v IRC [2001] 2 AC 710; Re Spectrum Plus Ltd [2005] 2
AC 680.
133
Supra note 130, at 819 (Lord Templeman).
134
See for a parallel non-blockchain case, see e.g. European Court of Justice, Case C-208/00, Überseering
BV v. Nordic Construction Company and Baumanagement GmbH, E.C.R. I-9919 (2002).
135
For a detailed overview from a European perspective, see e.g. CARSTEN GERNER-BEUERLE, et al., THE
PRIVATE INTERNATIONAL LAW OF COMPANIES IN EUROPE (2019).
136
See e.g. Wyoming’s law on DAO LLCs, Wyoming Statute § 17-31-101 et seqq.
137
See Brummer & Seira, supra note 108, for an analysis of legal wrappers and possible structures. See also
Iris H-Y Chiu, REGULATING THE CRYPTO ECONOMY: BUSINESS TRANSFORMATIONS AND FINANCIALISATION
(2021) for an analysis of structuring options.

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speculative investment perhaps better characterised as unlicensed gambling.138 Although the
potential is mostly imagined, the hype is real.139 Those who do not invest the time to properly
understand the technology, and those unfamiliar with the real challenges of the corporate form,
and their historic and economic roots, are at risk of being lulled by the siren call of the
cryptoverse, where every misunderstood problem and each under-analysed path dependency
has a common solution – the blockchain. We will thus be unsurprised by greater use of DLTs
in corporations and the formation of yet more DAOs in the coming years. What we do not
expect to see, however, is either “innovation” solving any genuine problem. If anything, some
seem doomed to resurrect the dreadful ghosts of past corporate depravities.

138
BOB SEEMAN, THE COINMEN (2022) at 107-143.
139
KOENS & POLL, supra note 102.

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