Back in 2019, the Ibero-American Institute for Law and Finance (SSRN) published recommendations for modernising Ecuadorian corporate laws. Ecuador’s business framework was relatively unchanged, but the recent Corporate Modernization Act passed by the Ecuadorian government incorporates a lot of the recommendations in the SSRN’s paper and brings the Ecuadorian business landscape galloping into the 21st Century.
The Corporate Modernisation Act started rolling out in 2020 and contains a host of new provisions, but the latest permission with the greatest scope for technological advancement of the business sector is that Ecuadorian companies will now be able to record their accounting books on distributed ledgers, provided the technology allows for the individualisation of accounting records and their subsequent verification. Which, in a nutshell, gives express permission for the use of blockchain technology for accounting purposes in Ecuador.
La cadena de bloques es un tipo de base de datos compartida que almacena la información en bloques que luego se enlazan entre sí. A medida que llegan nuevos datos, se introducen en un nuevo bloque. Una vez que un bloque se llena de datos, se encadena con el bloque anterior en orden lineal y cronológico, lo que lo hace perfecto para la contabilidad.
An electronic equivalent
The Act confirms that corporate accounting books on blockchains are functionally equivalent to paper copies – and are therefore admissible as valid evidence and should be accepted for any other lawful or regulatory purpose.
This single item in Ecuador’s Corporate Modernisation Act holds the potential for more corporate growth, innovation and investment than any other adjustments to the Commercial Code. We look forward to hearing about how companies are developing the use of blockchain.
Blockchain is a type of shared database that stores information in blocks which are then linked together. As new data comes in, it is entered into a fresh block. Once a block is filled with data, it is chained onto the previous block in linear and chronological order – making it perfect for accounting
What is blockchain?
Blockchain is a type of shared database that stores information in blocks which are then linked together. As new data comes in, it is entered into a fresh block. Once a block is filled with data, it is chained onto the previous block in linear and chronological order – making it perfect for accounting.
Blockchains are decentralised and don’t exist in just one location. No single person or group has control of a blockchain, rather all users have collective control. This offers redundancy (as the information appears in multiple locations), and also maintains data security, since (and perhaps most importantly) decentralized blockchains are immutable. Once entered, the data is irreversible and can’t be edited. Transactions are permanently recorded. Should someone try to alter a record in one part of the database, the other links in the chain would not be changed, making discrepancies easily identifiable. The data is locked, encrypted and yet transparent, viewable by anyone in the chain.
Many various types of information can be stored on a blockchain, but blockchain is most often used as a ledger for transactions and most often (at the moment) in relation to cryptocurrency. Indeed, blockchains are also known as distributed ledger technology.
Other corporate uses for blockchains
- Ease of audit: Because of its immutable and decentralised nature, audits could be easier and cheaper, since auditors, shareholders and authorised corporate users will have direct access to the ledger and be able to immediately examine and track transactions.
- Product traceability and trackability: through production, warehousing, and delivery, companies can use blockchain tech to manage their supply chains and inventories.
- Smart contracts: to immediately and automatically record and execute shareholder agreements for both allocations and transfers; self-execution of procedures without human intervention.
- Shareholder voting: implementing shareholder agreements using smart contracts gives companies a self-enforced tool. For example, it’s impossible to violate a smart voting agreement at an AGM since the blockchain immediately executes it. This can also reduce the influence and/or intervention of controlling shareholders.
- Tokenization of shares: i.e. shares represented electronically, instead of on paper. Ecuador’s regulator (the Superintendence of Companies, Securities and Insurances – commonly known as the SC) needs to give approval for publicly traded tokenised shares, but shares for private companies do not need regulatory permission.
If you’d like further information on this or have any other queries about operating in Ecuador, contact our Ecuador office.
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