Blockchain 2.0 (Part 7): Legality, Compliance and Advantages of Blockchain Equity

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In the field of financial services, blockchain has broad application prospects, including equity, supply chain, securities, banks, funds, etc. In this article, I mainly discuss the feasibility of blockchain in the field of equity crowdfunding.

What is the current legal status of the company’s equity (shares)?

Domestic companies are divided into two categories: joint-stock companies and limited liability companies. Joint-stock companies correspond to shares, and limited liability companies correspond to equity.

Stock companies are divided into "listed companies" and "unlisted stock companies". The shares of listed companies are registered with the China Securities Depository and Clearing Corporation; the shares of unlisted companies, according to the Company Law, are registered with stocks as rights certificates, and are accompanied by shareholder registers to record shareholders. It is worth noting that the issued shares of unlisted stock companies do not need to be registered by a third-party agency, and the company itself issues stocks and maintains shareholder registers to determine equity.

For a limited company, since there is no such certificate as stock, the proof of equity becomes the "shareholder register" maintained by the company itself.

In summary, the Company Law grants greater autonomy to the equity (shares) of any type of company: allowing the company to provide the final proof of its equity (shares) on its own.

What is the legal effect of blockchain equity (shares)?

The Company Law allows companies to create and maintain shareholder registers in any form of written records, not limited to specific carriers. As a public ledger, blockchain is not only fully in line with the provisions of the Company Law, but also a trend of the future. For comparison, stocks in the early years were paper-based and required manual bookkeeping transactions, but later they were digitized; the process of currency from paper to digitization is also the same.

Chinese company equity registration is also increasingly tending towards the mature experience of developed countries. Equity is not registered with state agencies, but rather by non-governmental autonomous organizations such as chambers of commerce and trade unions, with market-recognized third parties providing proof of rights to equity (shares).

Therefore, if the equity is registered through the blockchain, the trusted third party will be completely decentralized, that is, it is no longer limited to a specific third party, and all participants will jointly maintain a registration system. This system has four characteristics:
First, the registration rights are handed over to the company, which reflects the spirit of autonomy;
Second, it ensures that the equity registration is open, transparent, authentic and reliable, and reduces disputes;
3. Promote equity circulation and resource sharing, and make equity registration and transfer more convenient and safe;
4. Timely and permanent safe storage of data.

Next, let’s talk about the advantages of blockchain in equity registration and circulation.

Equity registration management

Equity registration plays a role in making public information to the public, allowing potential transaction entities to understand the ownership status; registration is also a key link in transactions, recording the transfer of ownership. Currently, equity in non-listed companies often needs to be processed manually, and the maintenance of shareholder registers is cumbersome, and the maintenance and tracking of historical transactions has also become difficult.

Blockchain equity registration is completely digital, and has the characteristics of security, transparency, immutability, and easy tracking, which has great advantages.

Equity transfer and circulation

Equity transfer and circulation is an important link. Traditional OTC equity transactions are based on the credit of both parties to the transaction. Transactions can only be carried out after bilateral credit is established. The credit risk is borne by both parties to the transaction, while the trading platform centrally bears the credit risk of market participants.

Blockchain can effectively reduce the credit risk of transactions. Equity ownership is registered in the blockchain, and equity transactions must be verified with the owner's private key signature. After the transaction is confirmed, the equity change will also be recorded in the blockchain, protecting the interests of both parties to the transaction.

In summary, blockchain equity is legal and compliant, and has natural advantages in registration, circulation and transfer. Especially in the current popular equity crowdfunding field, due to the diversified and decentralized characteristics of participating entities, the advantages of blockchain equity will be more prominent. We will discuss this in detail later.