N. Ralph Merkle, an American computer scientist, has been responsible since the 1970s for numerous breakthroughs in modern cryptography, many of them involving the secure creation of hash functions and the concatenation of hash functions within one another. Making such powerful third parties obselete and disintermediating financial transactions was the central goal of Nakamoto’s (2008) proposal for a peer-to-peer electronic cash system. Traditional financial institutions and fintech companies continue to debate the future of financial services and the role such innovations as blockchain and cryptocurrency will play in that future. Hu and Black (2006) and Christoffersen et al. A blockchain registration system would also preclude managers’ backdating of compensation instruments. This would occur automatically if the firm used digital currency as its medium of exchange, since the currency itself would reside on a blockchain, but it could also be done by means of tokenization, as discussed earlier, or even in conventional currency if done on a permissioned blockchain. A blockchain is a sequential database of information that is secured by methods of An important event in 2016 highlighted the problems that can arise due to the uncertainties of blockchain governance. The company’s entire ledger would then be visible immediately to any shareholder, customer, lender, trade creditor, or other interested party. In recent years, these have included the NASDAQ odd-eighths scandal (1994), the technology stock IPO scandal (2002), the after-hours mutual fund trading scandal (2003), the LIBOR manipulation scandal (2011), the foreign exchange front-running scandal (2013), and the gold and silver fixing scandals (2014), among others. S. It seems highly unlikely that all the institutions will agree upon the need and form of future modifications to their trading protocols, and they will need to work with R3 to establish governance procedures for these situations. (, Kocherlakota Assuming that the market could identify activists as the buyers of shares—which might be apparent due to the large size or well-known patterns of their purchases—then shareholder activism might become more costly and less prevalent for firms with blockchain share trading. H. In a “sidechain” (Back et al., 2014) a sponsor can operate a private or permissioned ledger but periodically connect some aggregation of its transactions to an open, distributed ledger, or two private ledgers could exchange transaction data in both directions. https://commons.wikimedia.org/wiki/File:Bitcoin_Block_Data.png. This process amounts to a modernization of the de-coding methods that Wall Street participants have used for decades if not centuries, attempting to infer the presence of certain buyers or sellers in the market by observing details of the size, timing, and sequence of their trades. D. If blockchains improve the transparency of investor identities, then informed selling could become easier to differentiate than before, and the speed with which adverse news is impounded into share prices could therefore increase. Professor Yermack teaches joint MBA - Law School courses in Restructuring Firms & Industries and Bitcoin & Cryptocurrencies, as well as PhD research courses in corporate governance, executive compensation, and distress and restructuring. Nakamoto wrote that “[T]ransactions must be publicly announced, and we need a system for participants to agree on a single history of the order in which they were received.”. Admati In the area of shareholder voting, one of the topics discussed later in the paper, the Estonian stock exchange (a unit of the US-based NASDAQ) began in 2016 to conduct shareholder voting on a blockchain platform. This open model of a blockchain, with no restrictions on entry, complete transparency of data, endogenous adjustment of proof-of-work incentives, and a passive system of governance, offers a sharp contrast to a private blockchain that limits access. Found inside – Page 149A. Mitigating uncertainty: improving governance structures in blockchain-based organizations David Yermack has shown, in an influential paper, how blockchain technology stands to uproot corporate governance mechanisms;” however, ... Blockchains represent a novel application of cryptography and information technology to age-old problems of financial record-keeping, and they may lead to far-reaching changes in corporate governance. , Matthews D. (, Brochet Large shareholders as monitors: is there a trade-off between liquidity and control?, Does stock liquidity affect incentives to monitor? A rich literature has analyzed both of these channels, and, ceteris paribus, the increased liquidity of a blockchain market should reduce the costs of selling and therefore lead to more emphasis on exit as opposed to voice. Entrepreneurs are actively investigating blockchains’ suitability for recording ownership of a wide range of assets, from stocks and bonds to real estate, automobile titles, luxury handbags, and works of art. Stock exchanges around the world have begun to experiment with blockchains as a method for companies to list, trade, and vote their shares, and stockholders may benefit from lower costs of trading, faster transfers of ownership, more accurate records, and greater transparency of the entire process. If any element of transaction data in a block is changed, the Tx_Root (or Merkle root) of the transaction data will change, causing the hash of the block header to change. Protecting against these types of governance attacks may emerge as a significant problem for open source blockchains, and the issue does not seem to have received much attention from Nakamoto (2008) and other creators of the Bitcoin blockchain.25 Even though Nakamoto’s original paper raised concerns about the possibility of attacks against “honest nodes” by potential saboteurs, it does not consider the possibility of collusion among miners in a mining pool, something recognized as a clear potential danger today. David L. Yermack is the Albert Fingerhut Professor of Finance and Business Transformation at New York University Stern School of Business. This interactive masterclass is given by David Yermack, one of the world's foremost professors in this field of study. , Harvey C., Rajgopal S. (, Grossman These smart contracts could extend into areas such as the pre-contracted resolution of financial distress. Metz (2015) provides a good introduction to this process and discusses the current controversy within the Bitcoin community over whether to increase the sizes of blocks in the Bitcoin blockchain in order to accommodate higher transaction volume in real time. They did a 3 day conference on blockchain, and here is a link to the presentation. , Levit D., Reilly D. (, Ernstberger After that, voluntary user fees from agents seeking fast verification of transactions (i.e., liquidity) will serve as incentives for miners to include them in their next blocks. The gatekeeper can restrict entry into a market, assess monopolistic user fees, edit incoming data, treat some users preferentially, limit users’ access to market data, and possibly share user data with outsiders, among other problems. Kocherlakota’s formal model shows that any economic allocation achieved through the use of money could be replicated if all agents knew the complete history of everyone’s exchanges and kept a running account of their net contributions to the economy, using each agent’s net economic surplus earned as a signal of their claim against other agents with net deficits. Building share positions secretly is a time-honored strategy of these investors, who wish to minimize their costs of acquisition by avoiding publicity as they buy (Bebchuk and Jackson, 2012). These issues are explored in a recent paper by Swanson (2015). Shareholder voting would become much more reliable and less costly. Since the hash of the block header is included as an element in the header of the next block, the hash of the next block header will also change, as will the subsequent block headers, ad infinitum, thereby making fraud or theft easy to detect at the point at which it occurred. Blockchain technology has been proposed as a platform for voting in all types of elections (Boucher, 2016),19 and it appears to be a viable substitute for the archaic corporate proxy voting system that has endured for hundreds of years with surprisingly few concessions to modern technology. According to a recent survey by Holden, Jacobsen, and Subrahmanyam (2013), liquidity is “the ability to trade a significant quantity of a security at a low cost in a short time.” Due to their potential to reduce costs and shorten the time required for executing and settling securities trades, blockchains offer the possibility of significant improvements in liquidity, whether they are used as the main platform for share registration and exchange, or alternatively, whether they are introduced by stock markets in a more limited way to streamline the post-trade clearing and settlement process. Many perceived the technology as enabling illegal transactions. BLOCKCHAIN, AI, GOVERNANCE, AND LEADERSHIP 971 V. COMPOSERS, CONCERTOS, AND PIANOS 975 VI. Journal of Financial Economics, – Albert Fingerhut Professor of Finance and Business Transformation, © 2020 Leonard N. Stern School of Business, Recruiting, Organizations, Collaborations, Professor David Yermack's research on the economic impact of Michelle Obama's fashion choices is cited, Professor David Yermack is quoted in a story examining Kodak board member George Karfunkel's recent stock gift of $116 million to a charity he started, Professor David Yermack shares his perspective on the growing prevalence of virtual shareholder meetings, Professor David Yermack explains why he believes the recent Hertz bankruptcy had little to do with its previous private equity ownership, Professor David Yermack's research on the economic impact of Michelle Obama's fashion choices is featured, Professor David Yermack's joint research on the investment returns and distribution rates for U.S. non-profit endowment funds is highlighted, In an Q&A interview, Professor David Yermack offers advice for consumers interested in applying for an unsecured credit card, Professor David Yermack offers his perspective on Brooklyn Nets player Spencer Dinwiddie's plan to tokenize his new contract, In a video interview, Professor David Yermack explains how Facebook's Libra differs from Bitcoin, Professor David Yermack offers thoughts on the demand for Ether futures contracts, Professor David Yermack offers insights on University endowment investment strategies, Professor David Yermack offers insights into how he develops and updates the curriculum for his course on blockchain, Professor David Yermack's joint research on cryptocurrency's impact on monetary policy is featured, Professor Sabrina Howell is quoted in a feature article on her joint research with Professor David Yermack on initial coin offerings, Professor David Yermack's comments on bitcoin at the Mapping the Financial Frontier Conference are featured, Professor David Yermack discusses the impact Facebook's virtual currency proposal could have on the payments industry, Professor David Yermack is quoted in an article on common myths about blockchain, Professor David Yermack explains why regulation will be a hurdle for Facebook's efforts to establish its own currency, Professor David Yermack's comments on bitcoin at the Consensus 2019 event are highlighted. Andrew Hinkes and David Yermack NYU Law School LAW-LW.12371 NYU Stern School FINC-GB.3324 KMC 2-60, 44 West 4th Street Mondays & Wednesdays, 10:30 a.m.- 11:50 a.m. Fall 2019 Course overview Bloomberg summarized a research report issued by McKinsey & Co: Firing people won't be enough to save the world's biggest banks from P. Blockchain: Myth And Reality. R. With the price of a bitcoin reaching record highs of more than $10,000, more and more ordinary people consider investing in the cryptocurrency. Activists could also liquidate their positions more easily and more transparently, which might make the “exit” channel of corporate governance increasingly attractive at the expense of the “voice” or intervention channel. This is especially true when an investor is selling, since many sales occur due to liquidity shocks whereas purchases are more likely to be driven by informational advantages, since positive liquidity shocks are far less frequent than negative ones. One clear cost of the public blockchain model is the cost of the proof of work needed to update it, comprised of computer hardware and electricity. 2005 2016. M. (, Lazanis The potential microstructure implications of a blockchain share market are vast, and a thorough study of these possibilities is beyond the scope of this paper. Found inside – Page 283Howell, Sabrina T., Marina Niessner, and David Yermack. 2020. “Initial Coin Offerings: Financing Growth with Cryptocurrency Token Sales.” The Review of Financial Studies 33(9), pp. 3925–3974. Lambert, Thomas, Liebau, Daniel and ... Universities begin to offer classes in #Bitcoin and #blockchain as student demand grows. Participants representing a broad cross-section of . Review of Financial Studies, Yermack, D. (2006) During this interval, funds pass between brokers and their clients, and shares are transferred on the books of the brokerage and the ledger of the corporation, all under the supervision of the Depository Trust Clearing Corp. Blockchain as a tool for building an international registry of ownership for fine art Authentication in Art Congress Wednesday 14.15, May 11, 2016 Prof Dr David Yermack Albert Fingerhut Professor of Finance and Business Transformation - Stern University Okay, first I would like to thank this great organization. See Brav and Matthews (2011). , Dey A., Lys T. (, Collin-Dufresne . It's just over one hour but it's worth your time. E. Found insideDavid Yermack, 'Corporate Governance and Blockchains' Harvard Business Review (6 January 2016) accessed 23rd October 2017. World Government Summit ... The ability to observe whether the investor sells the other share at the same time would improve the precision of the market maker’s inferences about whether individual trades are information driven or liquidity driven. , DeFilippi P. (, Yermack A. This effect would have governance implications by improving the outside monitoring of management. Not all shareholders would be attracted to this arrangement; activists, raiders, or managers might wish to conceal their trades for exactly the same reasons that small shareholders or fund managers might wish to observe them. This paper explores the potential corporate governance implications of blockchain technology. (, Bushman Other divide-and-conquer strategies, using game theoretic analysis as the foundation, could also be devised. Found inside... 13D both require beneficial owners of more than 5 percent of a class of equity securities in a publicly traded company to file a report with the SEC. 55. David Yermack, “Corporate Governance and Blockchains,” Review of Finance 21, ... The software code for Bitcoin is open source, and any user may propose a change to the code at any time. For example, Stanford University recently held a successful three-day conference exploring the architecture and security of blockchain software. (2016). Join Young Professionals of the Americas and NYU Stern for an expert-led, 101-style rundown on the basics of blockchain, Bitcoin, and the transformative potential of digital currencies—in plain English. Of course, the company could also operate a private blockchain that it updated itself. As shown in a survey by Edmans (2014), a large number of papers have studied the impact upon shareholder activism of either or both of these forces, and certain models predict either greater or lesser involvement by major shareholders in corporate governance when either transparency or liquidity is increased. L. For example, in Edmans’s (2009) model, liquidity increases the credibility of a blockholder’s threat to sell, helping blockholders induce managers to improve project selection. Found inside – Page 177neW blockchain applications There are new blockchain apps appearing left, right and center all the time. ... According to the World Economic Forum, the blockchain will wreak havoc on the financial world.26 David Yermack, a professor at ... Tess Bennett is the editor of Which-50 and is responsible for leading the publication's daily coverage of Australia's digital businesses for C-Suite executives, strategists, founders and directors. See www.v-initiative.org for a well-known example. Leonard N. Stern School of Business This code specifies basic inputs for each transaction, the timing and priority for encoding these transactions into the blockchain, and limits on the sizes or contingencies associated with each transaction, among other issues.

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