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States are starting to consider blockchain companies as a whole different type of corporate animal.
Vermont began allowing companies to incorporate in the state, starting July 1, using a new structure called a blockchain-based limited liability company (BBLLC). It follows a similar move by Wyoming in March.
The goal is to attract more technology-oriented companies to places that have trailed coastal states in wooing employers. They also underscore the rapid rise of blockchain as a tool for boosting efficiency, record-keeping and cybersecurity.
A blockchain, which is the technology behind bitcoin and other cryptocurrencies, is a decentralized, digital ledger used to securely record transactions. People who record these transactions—who are building the blocks in the blockchain—are called miners or nodes and can be located anywhere in the world.
Vermont’s new law tries to address the complexity of blockchain’s reliance of armies of participants in diffused networks.
“I think this is a piece that has been missing until now in the blockchain world,” Oliver Goodenough, co-director for Vermont Law School’s Center for Legal Innovation, whose December 2017 report influenced the law’s passage, said. “I hope folks take advantage of it.”
A typical LLC’s operating agreement identifies key roles, such as owners, members or managers, and spells out their rights and duties. Vermont’s new structure expands a company’s ability to specify rights and duties of blockchain participants who wouldn’t normally fall into those roles, such as node operators, token holders or miners.
As a result, the company can, to a certain extent, define miners’ tax obligations and legal liability with the rights and duties it specifies about the miners. And blockchain LLCs also retain some benefits of traditional LLCs, such as limiting personal liability of people involved.
“Token holders, miners or node validators don’t neatly fall into any of those existing categories that existing LLC laws are setup to deal with,” Ethan B. McLaughlin, partner at Gravel & Shea PC, who helped develop Vermont’s blockchain LLC structure, told Bloomberg Law.
“You don’t necessarily want to make a miner the equivalent of a director on a board of directors of your blockchain company,” he said.
McLaughlin said his firm’s clients—ranging from cannabis startups to cryptocurrency issuers—want an alternative structure allowing them to build a blockchain network without giving each and every participant equity or a vote on governance decisions.
“It would be really helpful to have a more mature and powerful legal framework to deal with governance issues than just a set of terms and conditions that someone agreed to,” he said.
Some companies may see the new structure as a marketing tool to showcase their technology and to work with governments that value blockchain’s potential.
Trace LLC, a company that’s using blockchain to help cannabis companies track their supply chain and comply with regulation, plans to be one of the first companies to use Vermont’s new corporate structure.
“Similarly to cannabis, they’re both young industries and they need to be brought into current institutions,” Josh Decatur, co-founder of Trace, said.
“If it brings people back to the state, we’re supportive of that,” Paul Lintilhac, another Trace co-founder, said.
Wyoming is hoping that its new law, which is aimed largely at cryptocurrency companies, shows the state is making efforts to be business friendly, one lawmaker said.
The legislation would allow businesses to use subsidiaries to run blockchain projects and contain any of their financial struggles or bankruptcies without affecting their parent company. “A lot of states want to have that big government feel, and Wyoming is completely against that,” Rep. Landon Brown, a co-sponsor of the law, told Bloomberg Law.
There has been “a flurry of interest” in the new law from startups, Cindy DeLancey, president of the Wyoming Business Alliance, told Bloomberg Law.
But the new corporate structure may be unnecessary, says Jerry Brito, executive director of Coin Center, a Washington D.C.-based cryptocurrency advocacy group. New structures may create more compliance or legal issues down the road, he said.
“I worry about the unintended consequences,” Brito told Bloomberg Law. “I think that your typical LLC would work just fine for your cryptocurrency startup.”
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