Most business activities are conducted through legal entities. Corporations, partnerships and proprietorships are ancient and primitive forms of legal entities. A completely new species, programmable legal entities (PLE), now emerge, not as some development of previous business and legal concepts, but as a side product of an unrelated technology branch.
One way or another, the coming of programmable legal entities was always inevitable — software eventually penetrates to all classes of objects. Make no mistake: this is not “death of the firm” which many decentralisation radicals advocate these days. This innovation applies only to the technical legal shell.
Affordable and Convenient: More People Can Do More Business, Legally
Software is universally less expensive than human labour. Plus, PLEs can legally operate with crypto tokens which reduces operational friction and costs. PLEs will also allow automatic taxation through methods of triple-entry bookkeeping.
In this Internet age, ordinary entities always use a third party to pass payment, provide service, or release cargo. There’s always “someone of trust” to provide an online coordination between the two, for a fee. PLEs transfer value and managing signals in a very different way. They exchange authentic operational tokens, hand-to-hand, almost free of charge. This convenient and intuitive reality is the heritage of the trustlessness concept that inspired much of the underlying blockchain technology.
Notably, while PLEs exploit the idea in a healthy way, to cut costs and reduce pressure of monopolies, the original decentralisation aficionados seem to have monstrously misinterpreted things, all the way down to the denial of the principle of trust between business parties. PLEs don’t question natural ways of creating relations in business, they use the technology to create the new advanced business fabric based on the “token calculus”.
Super Advanced Investor Relations
PLEs may also induce new governance models and free us from hierarchies of primates and morale of wolves that still dominate all our management systems, despite the fact we all know they are heavily influenced by instincts and hormonal background. Well-designed PLEs will allow coordination of people and machines in a more civilized way by cutting out pointless middlemen, simplifying contracts, and reducing political friction.
Today, accounting systems dominate the processes of issuance and circulation of securities. The terms between the entrepreneur and the investor are mostly defined by an instrument standard (for example, a share of a stock that gives the right to receive dividends and vote) and the rules the particular exchange has to obey.
Financial tokens take away the function from a whole layer of intermediaries who have successfully institutionalized themselves in the wet gap between the entrepreneur and the investor over the past centuries.
Need to pay dividends? The token will do. Need to ensure the right to vote? No problem. Any function of any existing investment instrument can be coded in a few lines. Even more astonishing from the traditional perspective: the very same token can be traded on any number of exchanges.
Uninstalling mediators in investments is only the beginning. At the next step, well-established investment scenarios, such as stocks and bonds, may give way to sophisticated, customized, almost “complete contracts”.
Securitization and Fractionalization
What share, do you think, of the world’s wealth is already put into circulation today? In other words, how much worth can be freely bought and sold, more or less, in relation to everything that is of monetary value on this planet (we’re talking real stuff — abstract derivatives do not count)?
Surprisingly, no more than 1%! To begin with, the largest asset class, real estate, is practically not securitized. There are, of course, a variety of funds in which you can buy shares but, in practice, it is impossible to “short Palo Alto” or “long Brooklyn”, for a reasonable amount of money.
Comparative size of several important asset classes. Data source: Savills World Research (end of 2017).
We can safely expect that in the presence of a convenient technological framework, a few percent of these three-hundred trillion dollars will be securitized. In addition, in several years the market of agricultural land should face the tectonic shifts due to the introduction of cultured meat. So, securitization comes in very handy.
Securitization of small business may create another powerful wave. The aggregate value of small business is much higher than the market capitalization of public companies. In the current situation, it is extremely difficult and expensive to bring small enterprise stocks to an exchange, while almost all owners want it. Titanic amounts of money will enter.
Libraries of “Standard Firms”
One fair objection may be that most people won’t rush to buy the shares of small businesses, as a company is small probably because it is simply not good enough to grow. True, but do not forget about the factor of an artificial fragmentation of a bigger traditional enterprise. Programmable legal entities will allow the creation of modular management and libraries of “standard firms”. The complexity of the software structure can be increased indefinitely, as opposed to manually managed organizations.
If you have shares of a large company, you are forced to sponsor all its initiatives, including, for example, flirting with the military, expensive attempts not to look like a monopolist, and dozens of dead projects. The company cannot issue shares on a project basis, but tokens issued by an interconnected group of programmable legal entities is quite a realistic approach.
It is important to abstract from the old patterns and recognize that individual, contractual relations is what investors should reasonably want and demand. And companies need it too. Economically responsible opinions of thousands of people is worth a lot. This may be a whole new facet of crowdsourcing.
New Class of Big Data
With the broad adoption of programmable legal entities, it will be the turn of businesses, as independent “smart” units, to directly become new big data accumulators. We will soon see completely new forms of the network effect.
Technically, both the relevant regulation and the software frameworks that support programmable legal entities have emerged as the result of the interest in cryptocurrencies and blockchains. Enduring the odour of paradox all over, the broader business community has given the benefit of the doubt to those narratives. Ten years in, not a single distributed application represents a significant threat to an incumbent rival.
Dependence on existing public blockchain platforms is dangerous, as they were created in conditions of extremely facilitated financing through mining of overvalued cryptocurrencies and, not too uncommonly, dishonest token sales to undereducated gamblers. The situation is described by reputation cycles and right now it’s not pretty.
All tokens are authentic, and their security level is generally considered equal to the transport blockchain’s. However, each family of tokens will be backed up by a different unconditional legal promise of the issuer, varying in quality, just like fiat currencies (there are reserve ones, there are ordinary ones, and there are junk ones). A token, being a negotiable instrument, can be legally enforced to be redeemed by the party in possession but with a different effort.
The above creates a stratification problem when various underwriters will create and use tokens representing same class nominal property and value but different redemption reality. Of course, the market price will reflect that but the high speed and convenience of digital exchanges do not takes us any closer to the high standards of the legacy environment. There will be just too many issuers. Jurisdiction that will follow Malta (and they will follow) will need time to make their rules interoperable, even if they have the will.
To reduce stratification and to avoid the future assets space from devolving into a junkyard, competing agencies will offer paths to operator validation procedures. That might do the opposite and increase the chaos of the transition period. It’s going to be filtering war against the creeping invasion of shit-operators in an environment of good operators being stubbornly conservative.
Maybe the altruistic evolutionary mechanisms will be turned on. This is probably the case where the format/standard war is not good for anyone. Should we see one stratum showing some traction, others should join their standard rather than compete.