The V-Enterprise: On Blockchain Governance, Encryption, and Internalization

The “Sound Money Project” of the American Institute for Economic Research (AIER) released the paper “V-shaped Enterprises: On Blockchain Governance, Cryptocurrency, and Internalization”. The paper reviewed the theory of market internalization and the case of the Eurodollar market, and proposed regional The role of blockchain technology in the construction of the internal market of enterprises. The authors argue that V-shaped businesses using blockchain technology can reduce transaction costs, and the use of cryptocurrencies in the operation of such businesses could have implications for public governance. The Institute of Financial Technology of Renmin University of China (WeChat ID: ruc_fintech) compiled the core content of the paper.

introduction

The blockchain revolution has been underway over the past decade. Many businesses are trying to use blockchain technology to enhance their existing businesses, and while not all companies that have tried have been successful, there are already businesses that have created value through blockchain. Financial markets have been quick to embrace blockchain to reduce operating costs, with the use of the Ripple blockchain network and the adoption of blockchain by Nasdaq being two prominent examples. In recent years, the blockchain field has been extensively explored by Ethereum, IBM Hyperledger and Microsoft Azure, and a large blockchain ecosystem has developed. Although more than a decade has passed since the advent of Bitcoin, we are still in the early stages of the blockchain revolution.

Transaction Costs and Ownership

In 1937, Ronald Coase conducted a seminal study of business. Coase believes that the fundamental reason for the existence of an enterprise is that, compared with obtaining resources directly in the market, the enterprise reduces the cost of resource acquisition (ie transaction cost); an enterprise is a collection of a series of contracts, and the boundary of an enterprise is determined by the terms of the contract. While the contract determines the scope of the enterprise’s internal control; while the employee provides services to the employer, his discretion in the enterprise project is also limited. According to Coase’s theory, market internalization is a means of reducing transaction costs.

Scholars such as Williamson (1985) pointed out that the boundaries of enterprises are not as clearly defined as one would expect. Foss and Klein (2012) provide a clearer definition of the firm: a firm exists on the basis of control over resources—ownership that can govern control with the permission of the original owner. Thus, a principal can assign decision-making power to its agent, partially constrained by contract.

The author adopts the definition of Foss and Klein, regards each agent with resources as a startup company, and adopts the nested view that a business has multiple owners, and constructs the blockchain from two perspectives: in a In one case, a blockchain is an integral part of a particular company; in another, a blockchain connects different businesses that are members of that blockchain. If blockchain can support the internalization of the market, or if the constructed blockchain itself can be legally recognized as a business, then blockchain technology can open up new organizational forms and reduce the cost of internalization.

The case for the Euro-dollar Market

Before expounding the theory of using blockchain to develop internal markets, the author reviews the emergence of the Eurodollar market to familiarize readers with the concept of internalization.

Canadian scholar Rugman (Rugman, 1981) believes that multinational corporations can use their internal information economy to coordinate resources. In a case of regulatory arbitrage, Merrill Lynch developed a money market mutual fund (MMMF) account that allows account holders to write checks against funds in the account that are legally not considered a deposit. Funds in these accounts were transferred from banking institutions in the United States to banking institutions in European countries and lent with interest through European banks. Amid high inflation and a depreciating dollar, account holders earn substantial interest on this.

The Euro-dollar Market existed before the development of MMMF accounts. In the 1960s and 1970s, the Fed’s Regulation Q, which regulated deposit rates, capped interest rates on bank deposits, creating inefficiencies in the checking and term deposit markets. Americans can invest in banks in other countries that can legally offer yields above the maximum rate set by Regulation Q.

Simultaneously with the development of the Eurodollar market, money market mutual funds (MMMFs) with the same purpose emerged. At first, the MMMF was just a way for small savers to circumvent the Regulation Q cap. But in 1976, Merrill Lynch launched the Cash Management Account (CMA), which merged the traditional brokerage account with the MMMF, and regularly transferred idle funds in the interest-free brokerage account to the MMMF. Customers could use a credit card or Pay by check and the amount used will be automatically deducted from the account’s cash balance. If there is no cash in the account, shares in MMMF will be liquidated to make payments; if there are insufficient shares in MMMF, Merrill Lynch will pledge securities in the client’s portfolio to make payments.

The introduction of MMMF and the Eurodollar market is an important innovation in the global financial market, greatly reducing liquidity costs and improving market efficiency. This case shows that multinational corporations can coordinate resources across borders by establishing internal markets. It can be seen that the organizational structure of the enterprise can create profit opportunities, and the blockchain may enable the internal operation of the enterprise to have greater autonomy, thereby changing the nature of enterprise ownership and resource control.

Blockchain and Enterprise Organizational Structure

Blockchain will change how we understand business. Enterprises can use blockchain as an integral part of the enterprise; they can also build a common blockchain for enterprises in the supply chain, so that enterprises can integrate operations under the support of this common blockchain, and then form a common blockchain. V-shaped organization. V-shaped organizations can take two forms: one is to optimize the information flow and trust of multiple decentralized enterprises, and the other is to integrate multiple decentralized enterprises into one organization. The Ripple blockchain network is a successful example of the latter.

Large organizations can benefit from the creation of internal markets, whether private companies, nonprofits, or public institutions. In this internal market, managers can exchange resources with each other without going through the external market, and internal resource exchange provides the possibility to improve efficiency.

In the past few decades, the academic community has been interested in the role of the internal market in the theory of the firm, and some conclusions have been drawn: the internal market can insulate the firm from external market risks; in highly uncertain markets , MNCs can provide internal financing for branches; internal resource allocation is cheaper than market allocation; internal transactions are governed by the rules of multiple branches or MNCs, as long as the corporate culture and corporate structure are set to prevent destructive opportunism (destructive opportunism) opportunism), there is little need to resort to external enforcement.

V-shaped enterprise

Compared with the M-shaped organization, the basic units in the supply chain of the V-shaped organization show greater autonomy. Scholars Berg, Davidson, and Potts have theoretically described the V-shaped organization, but have not explored the implications if some or all of the V-shaped organization were treated as a single legal entity. The authors explore the incentives for developing a V-shaped organization into a single entity, and suggest that MNCs gain additional benefits by developing internal markets, thereby avoiding transaction risks, taxation, and regulatory policies in external markets.

V-shaped organizations differ from M-shaped organizations in that: V-shaped organizations do not necessarily contain a point of control, and distributors on the supply chain mainly respond to price signals when directing production; V-shaped organizations integrate blockchain members into a single transaction system and coordinate production processes; blockchain protocols for V-Organizations could provide a shared organizational structure that reduces the likelihood of contractual breaches within that structure and facilitates conflict resolution.

In past practice, we have found that blockchain technology can indeed improve efficiency. For example, in agricultural production, blockchain reduces the costs associated with monitoring, financial transactions and legal documents; improved security of property rights and reduced opportunism can improve supply chain efficiency, allow for increased automation of processes, and reduce provisioning processes The cost of relevant information.

Another important service provided by blockchain is product tracking. By leveraging blockchain and radio frequency identification (RFID), companies can securely record information such as the origin of products, environmental conditions at various stages of the transportation process, and more. Similarly, companies can provide consumers with access to this information to guide consumers’ purchases.

More importantly, blockchain technology has begun to be applied to vertically integrated supply chains, which has the potential to transform the inter-enterprise relationship in the supply chain into the relationship between branches within the enterprise, while still retaining the enterprise’s relationship with resource ownership. High degree of autonomy. If used as an institutional technology, blockchain could integrate its members into a political and economic entity, all members would operate under a common rules structure, and blockchain protocols could treat cryptocurrencies as complete Fiat currency for transactions. Additionally, a blockchain can also be considered a business if ownership of resources across the supply chain is managed by a specific blockchain, and the resource ownership is technically vested in the blockchain itself or the organization that nominally owns the blockchain. V-enterprises can recognize “quasi-ownership” within their own ecosystems under the terms of the blockchain agreement, which would enable agents controlling resources to participate in internal market transactions within the enterprise. Control of resources will be determined by the competitive process within the supply chain, and the level of transactions that occur across blockchain boundaries will be low, as transactions across blockchain boundaries are taxed and regulated by the government.

The blockchain economy will bring additional benefits: higher familiarity among members within the enterprise and a culture of fair play will reduce the risk level of transactions within the enterprise, trust supported by the blockchain protocol and mutual familiarity among members can Reduce fraud. Although such a V-shaped enterprise as a whole requires traditional currency to trade with external markets, its internal monetary policy can be adjusted according to the needs within the blockchain-integrated economy.

Monetary Policy & Supply Chain Integrated with Blockchain

A small-scale national economy, whose production may be concentrated in one or two productive sectors, is not that different from a V-shaped enterprise. Since cryptocurrencies powered by blockchain technology are believed to be able to mitigate macro fluctuations in the overall national economy, this moderating effect is also applicable to V-shaped enterprises integrated through blockchain. Just as multinational corporations are able to implement internal financing, V-shaped firms are able to transfer resources to branches that suffer from currency crises. V-type businesses can also use the blockchain protocol to create new units of cryptocurrency during a recession, reducing the level of internal economic volatility by, for example, distributing their direct loans.

wider impact

Blockchain is an institutional technology, and its existence will inevitably interact with existing institutions. The blockchain economy will need to interface with existing currency markets, meaning investors will be able to buy and hold cryptocurrencies. Even if these investors are not producers within the blockchain, they cannot directly consume cryptocurrencies, but are purely speculators. If cryptocurrency holders are allowed to transfer cryptocurrency ownership between each other, the V-enterprise will offer cryptocurrency to interested non-members. If a V-enterprise has a presence in a region with unstable monetary policy, people in that region will be willing to hold more cryptocurrencies than local fiat currencies, which could lead to policy adjustments by the controllers of local fiat currencies.

Assuming that the V-enterprise allows people in the region to enter at a relatively low cost, and the local property rights system is not secure enough, people in the region may register their resources on the V-enterprise’s blockchain. The V-enterprise will have clear ownership of these resources, while allowing the original owners to maintain control according to the blockchain protocol, although the original owners of these resources will become “class owners”, they may consider this “Class ownership” will be more reliable than the ownership recognized by the local government, and the owners of the V-enterprise will also have an incentive to guarantee members’ ability to exercise their “class ownership”. This could mean that the owners of the V-businesses would act as intermediaries between internal members and the local government. As a result, the development of a V-shaped firm creates competition in the areas of funding and governance, and affects governance models in the regions in which they operate. If local government governance fails to provide secure property rights, or more broadly, the rule of law, V-enterprises may even assume some governance functions.

Epilogue

The application of blockchain can not only reduce the transaction cost of enterprises, but also lead to changes in the organizational structure of enterprises. It is a new means of separating resource ownership and control. The cryptocurrency system within the blockchain economy can provide financial stability to areas affected by currency devaluation, and areas with insecure property rights can use large supply chains to provide security for members of V-shaped enterprises.

The new forms of organization enabled by blockchain could disrupt the boundaries between private business activity and public governance, and if the authors’ vision in this paper comes true, blockchain could even have major geopolitical implications.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/the-v-enterprise-on-blockchain-governance-encryption-and-internalization/
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