Brattle Principal George S. Oldfield co-authored an article for Law360 on the potential use of a blockchain-based recording system in solving 10b-5 damages allocation issues.
The article, “How Blockchain Could Rescue 10b-5 Damages,” outlines the current difficulties associated with identifying damaged investors in the indirect ownership system, and details how blockchain may provide a solution. The primary challenge results from the creation of “artificial shares” by short sellers. Under the current share recording system, both the investor whose share was lent and the buyer of the artificial share believe they have beneficial ownership leaving it unclear who is eligible to receive damages.
The authors note that blockchain distributed ledger technology (DLT) may solve ownership recording problems, though this prospect may need more development. In a blockchain-based transactions record system, each physical share would have an assigned token. The token would instantaneously record the shares transaction history. With this record it would be possible to know who had the beneficial share ownership at any given time and therefore who would be qualified to make 10b-5 damages claims. While DLT appears to be advantageous given today’s high-frequency trading environment, this system also has its own challenges. For example, there is uncertainty as to how much information such a system would be able to process with trades for single companies in the multi-millions of shares per day.
According to the authors, while the indirect ownership system was an improvement to prior paper-based recording systems, it is no longer adequate for current markets. As blockchain technology develops, it may prove a viable solution in recording share transaction records and resolving issues associated with 10b-5 damages distribution.