In April 2024, Trent came to me with a problem that had been bothering him since he graduated from UNC, our mutual Alma Mater. He wanted to decompose a stock into the constituent asset and dividend components and allow investors to engage with each (or both) individually. And he came to me because he believed he could solve it using the Chia blockchain’s unique capabilities: efficient bulk payments, deterministic and transparent peer-to-peer trading and enterprise custody with Chia Vaults™.
Suffice to say that, from the beginning, the Permuto Trusts were a blockchain-first project.
We spent many months with legal counsel trying to come up with the correct structure to register the vehicle we’d need with the SEC that would be held and traded on the Chia blockchain. Once we landed on Single Stock Voting Trusts, it was time to address our other regulatory choices.
We had always planned to register the trusts as securities with the SEC. However, if we stayed blockchain only, then we would have to go state-by-state and “Blue Sky” the trust certificates. It can be done – and famously before federal laws changed – Apple couldn’t get Massachusetts to Blue Sky the Apple IPO. The subsequent federal law changed so that if your registered securities trade on a national exchange, then state Blue Sky laws are pre-empted.
In exploring our options, Trent reminded me of an earlier regulatory structure I had come up with to ultimately allow Chia Network Inc. stock to trade and be self-custodied on chain. We could use our Transfer Agent (TA) as a bridge to allow a shareholder to send their shares from their brokerage account to our TA where the TA would then inform us that the stock was being removed from the DTCC and we would then issue the stock as a Chia Asset Token into a Chia wallet or vault that the shareholder had requested.
Since we were the issuer of the Trust Certificates, we could use this exact same game plan for the trust certificates. That would allow us to back port the Trusts into the traditional financial system via the TA and the DTC with one small problem.
Cost.
It turns out that it’s much more expensive and cumbersome to administer the trusts on traditional Wall Street rails. The primary cost savings fall into three core areas: ease and cost of sending millions of small payments, decimalization and other capabilities to easily handle corporate actions for the underlying corporation, and tax administration.
Secure the Bag
A few years ago, Jeremy Rubin, a Bitcoin developer proposed the Bitcoin network implement Secure the Bag as a novel way to efficiently bundle payments. This atomic bulk payment allows a payor to bundle up all the payments they need to make into one large coin with a list of all of the individual payments and destination addresses. With one fee, the payor can securely commit payment to all the payees. This is designed so that it will unroll during the times when there is less block congestion. For payees who want their payment faster, they can easily add fees to their part of the unroll and get paid – usually in the next block. Bitcoin never implemented the technology, but Chia did.
Using Secure the Bag, Permuto could send millions of dollars to billions of accounts on the order of $20 on a usual day and $100 in the worst block congestion environments. This would provide the ability to cost-effectively pay someone $0.40 by bundling it with the folks getting $100,000.
And this is an entirely unique benefit from using the Chia blockchain.
What does this look like in the real world?
In the world of DTCC – the traditional stock world you see through your Robinhood/Fidelity/Schwab account – you can’t send fractional shares. Many brokerage firms have begun to offer fractional purchase and ownership but that’s because they hold all of, say the MSFT shares, at that brokerage in one omnibus account underneath. They just add internal accounting and buy a whole share when you only order half. They then either net the other half or temporarily hold it until they can net it out.
If one of the underlying companies of a Permuto Trust issues a stock split dividend – let’s say 1.1 shares for each share you hold – well it’s a real problem for Permuto on the DTCC side of the house as the Trust will receive a rounded amount of shares to the one share. But now we need to send only integer amounts of those new shares to the rightful holders in brokerage firms everywhere they are held. Lots and lots of rounding and adding some cash here or there to buy some shares to try to get to the right integer amounts. Pain. Cost.
On the Chia blockchain, we simply calculate what each holder is owed and send a Secure the Bag transaction of exactly what they deserve down to the third decimal place. One chain crawl, one $20 fee, and then everyone has their new shares.
To keep the tax advantages of qualified dividend treatment for the Dividend Certificate (DC) holders, Permuto Trusts will be treated as a public partnership. This means however, that we need to send everyone a K-1 – Asset Certificate (AC) holders, DC holders – AC holders who only held for 24 hours… On DTC, we have to hire a service that canvasses every single broker around the world who has a customer who had either ACs or DCs and report back to us their name, address, and tax identification number.
Pain. Cost.
On the Chia blockchain, each individual holder can log in with the wallet or Vault that corresponds to their holdings and once they supply the basic tax information on a W-8 or W-9, then we can generate their K-1 right there from our readily available on chain records.
What’s Next
Blending proof of possession with the actual stock register really has extreme advantages.
We don’t think everyone is ready to buy, sell, and hold on a blockchain so we decided to take that idea of bridging Chia Network stock to let people take the baby step of buying, selling, and holding these certificates on a national stock market.
However, we have to pass the pain and costs above on to those who use DTC instead of the blockchain. At start the DTC versions of the DC will cost twice as much annually as their same instantiation held and traded on chain. We are going to make it easy to adopt our self custody tools – which frankly are superior to any other custody tooling out there – blockchain or traditional – to help investors save money by being on chain and giving them the unique global open outcry trading 24×7 which settles in five minutes too. Even as major national exchanges are starting the discussion to go 24×5, we think that many classes of investors will come to love both the cost convenience of the chain, but the ability to react to global markets in real time – even at 2am eastern time.
Over the long term, we believe the traditional system will recognize the underlying cost and efficiency benefits, and slowly but surely migrate on chain – into One Market™. It’s because every stake holder will make more money by saving more costs at every step of the way. You will be able to trade globally 24×7 on the most secure financial rails with actual RWAs and material value on chain.
You will buy coffee in San Francisco with your Apple stock. Tech will have eaten your fin. Soon™.