HBI

By Jason Piper, ACCA’s Senior Manager, Tax and Business Law – Professional Insights

At the European Commission’s 2011 Conference on the future of company law in Europe, Michel Barnier (whatever happened to him?) warned of the dangers of sterile academic discussion of legal forms while entrepreneurs simply go out and do things, and in the six years since he made those comments the pace of change in technology and business models has illustrated that more starkly than perhaps anyone could have imagined.

From about 2014 I started to tease colleagues in audit and corporate reporting by asking them how they were going to respond when someone put together a non-incorporated business structure, crowd-funded entirely in cryptocurrencies. Such a structure would sit outside every known framework of transparency, accountability and regulation.

In 2016, we all stopped laughing when the Ethereum based decentralised autonomous organisation (DAO) hit the headlines – first for doing just what I’d predicted, and crowdfunding a non-incorporated business venture in cryptocurrency, and then for doing the bit I’d feared, which was demonstrating why it’s not a good idea to throw away several hundred years’ of social development in favour of an untested software model.

It seems likely that the DAO has tempered enthusiasm for blockchain based “incorporation” models in the short term at least. The blockchain’s USP, disintermediation, only works if it’s the intermediary that you don’t trust. However, the roles of actors such as courts and auditors is precisely to bridge the trust gap that started to open up as soon as trade moved beyond entirely local face to face transactions with the fellow villagers you’d grown up with.

Warren Buffett is famous for saying you should never invest in anything you don’t understand, and one thing the DAO incident did do was ram that message home loud and clear. Without the recognised corporate institutions of memorandum and articles, backed up by the authority of the courts in case of dispute, the DAO was an exercise in faith in the software for the investors, combined with trust in every other investor. Ultimately all that really amounted to was a hope that things would turn out fine, and $50m of opportunity cost for those investors caught out by the “undocumented features” of the code dashed that hope.

However, just because the DAO didn’t do what most of the investors had hoped for doesn’t mean we can write off the concept of software-based business forms. Nicholas Cugnot racked up a fair bit of expense after running into trouble (quite literally) in the development of the steam wagon until he cracked the bit about needing some brakes to stop it as well as a way of making it go.

One thing the DAO’s architects did get right is that the legal form of a business, just like the model it uses to make money, is no more than a bunch of agreements about transactions. In principle, the key feature of the blockchain (irrefutable evidence of agreements) is perfectly suited to recording and enabling the underlying agreements about how trading decisions are to be taken just as it is to evidencing the trades themselves.

So, what’s the future for business forms, and in particular company law? Whatever the mechanisms used to implement the goals, investors are going to be concerned about transparency, accountability and (to put it bluntly) getting at the return on their investment.

For now, more efficient administration of the existing tried and trusted forms is going to offer the best ROI for governments. But in the long run, whether deliberately or out of well-intentioned ignorance, entrepreneurs and investors are going to develop more and more “non-standard” ways of doing business that exploit the features of new technology and the broader societal changes that brings with it; patterns of production and consumption alike are changing fast in significant markets.

Policymakers need to look ahead and be ready to recognise the new forms, if for no better reason than to be able to tax them. That may involve looking more fundamentally at the relationship between individuals, business and the state, but if those things are changing fast then blundering on with outdated tools will do no-one any long-term favours.