As the European Parliament just passed new legislation stating that from August 1st, 2021 every European country has to offer full digital incorporation of limited companies, the Netherlands feels the pressure. In the Netherlands we currently have rigid notary structure used to incorporate limited liability businesses (Dutch: BVs) and to trade its shares. With this new legislation the European Parliament has set a timetable on the digital incorporation of companies, digital shareholder registers and digital transfer of shares.
The Digital Notary use-case has been established to find a way to change the standard on corporate structuring and the trading of private shares. In the future, those wishing to establish a new company will now be able to do so in a fully digital and affordable way. Various partners have come together acknowledging the same problems that exist today: the process of incorporation and transfer of shares of private limited companies is too cumbersome, expensive, and time-consuming (in the Netherlands).
As described, current legislation is on the side of this Digital Notary use-case, as the European Parliament has set a timetable on the digital incorporation of companies. The new directive requires European member states to allow private limited companies to be formed by digital means before the 1st of August 2021. Thanks to this directive, a digital deed, digital identification, and digital signature can be provided, without the time and money consuming process of manually getting a notary involved. The Royal Dutch Association of Civil-law Notaries (KNB) has developed a central digital filing platform, aiming to be ready on August 1st, 2021. However, the Dutch Ministry of Justice and Security has recently requested a postponement of up to one year as it needs more time to carefully complete the legislative process.
2Tokens, The Share Council, Nxchange and Bondex realised that they all were faced with having the same problems around the process of digital incorporation and they discovered there were many other like-minded people wanting to change the paradigm. This created the incentive to create a use-case called Digital Notary. Supported by government, private companies and semi-public organisations, focusing on digitising the complete incorporation journey of a start-up, limited liability company (a BV in the Netherlands). Supported by some of the best notary firms in the Netherlands such as FieldFisher and Westerdok Notariaat.
The first step of the Digital Notary project was to start with the question, why? Why do we need the Digital Notary? Next to the demanding position of the European Parliament there are at least three other mentionable reasons to execute this project:
- First of all, we see a transition in ways of funding and owning new companies and new initiatives which puts more and more strains on our legal system.
- Secondly, we see a stronger focus on community funding and co-ownership of all stakeholders which is creating the demand for different corporate structures in comparison to the mainstream constructs we have currently.
- Thirdly, the current incorporation practices and share transfer methods create bottlenecks and inefficiencies in this transition, largely influenced by notary practices.
There are a number of factors that lead to such inefficiencies in terms of the day-to-day activities on behalf of notaries:
- the notaries have typically been slow to embrace new digital solutions
- the notary practice is extremely standardised and rigid
- the incorporation and transaction of shares process is heavily regulated
- the market of incorporation has a lack of transparency
One key factor is process and workflow for incorporation, in other words the entrepreneur’s journey, is very standardised. Next to that, a lot of separate pieces have been digitised. Therefore, by creating a digital solution that has a standardised process to enable incorporation, shareholder registration, share trade and even public funding, could improve the process immensely. It was believed by the cohort of organisations that established the Digital Notary case study that blockchain technology offered a great solution to bring greater transparency and efficiencies for notaries and all those involved in incorporating new companies and trading shares in private limited businesses.
So, what is this Digital Notary project going to focus on? To summarise all key elements, we can state that the Digital Notary project focuses on creating one digital journey for entrepreneurs, using transparent tokenised structures.
For the execution of this project, it was agreed to focus and address the following:
- Tokenise current notary structure (be accepted)
- Create a fully legalised digital register
- Fully implement tokenised share depot structure
Once the above had been achieved the objective was to create and test a Minimal Viable Product (MVP) and then validate the MVP using real life examples. It was decided to sketch out the journey of an entrepreneur from incorporation to shareholder registries and exchanges. These sketches were created to identify where there were gaps and how, and where, tokenomics could, if at all, assist to make the process smoother.
Is the legal/technical framework there? The apparent legal framework that is needed is to be able to register capitalisation tables on-line, followed by being able to pass a notary deed on-line in order to transfer limited shares. Technically, we have found that there are no boundaries nor compromises to be made. The first test with the digital shareholder register has been executed, while the transfer of limited shares is within reac
Do the current regulations suffice? Together with notaries and official bodies (DBC) we will need to research any possible regulatory objection to this path. So far, we have yet to discover any legal reason why it is not possible to fully digitise the incorporation work of the notary.
Does the token strategy work? There are proven minimal viable business cases of a digital notary to deliver greater transparency while reducing the time it takes to incorporate a company. The overarching tokenisation of the notary framework still needs to be proven.
In the midst of the challenges such as personal notary deeds to impersonal digital signing of statutory articles, there is clearly a path forward. Seemingly, it is a ‘no brainer’ to focus on digital assets to guide the digital notary. Even more so because great parts of this journey have already been digitised. The intention of the Digital Notary case study is to work with various stakeholders to determine a way to chain all actions together!