Bitcoins
Overstock.com CEO Patrick Byrne created quite a stir in the financial world when he announced his intention to sell uncertificated digital securities on a decentralized alternative trading system using the same technology used to trade Bitcoin digital currency. It certainly wasn’t the first time the maverick has been in the spotlight. Byrne, a protégé of Warren Buffet with a doctorate in philosophy from Stanford, has long been an outspoken critic of Wall Street and has been involved in protracted legal battles with investment firms. In recent years, he has become an equally passionate proponent of Bitcoin.
Created in 2009, Bitcoin is both a currency, like the dollar or the euro, and a decentralized peer-to-peer payment network that transmits money like a credit card network or PayPal. The worldwide open-source software system that underlies Bitcoin is a means of instantly verifying ownership and transactions. The Bitcoin network uses an encrypted, distributed public ledger called a blockchain that records every Bitcoin transaction ever processed, updating the user account balances on the entire system as each transaction occurs, and allowing any user’s computer to verify the validity of each transaction. Digital signatures corresponding to the users’ addresses protect the authenticity of each transaction. As long as the encryption on the blockchain is working, every trade remains publicly visible in the blockchain in perpetuity, making tampering or fraud difficult and eliminating the need for financial institutions or government agencies to verify and guarantee payments. This blockchain technology is really the key innovation of Bitcoin, and the aspect that has entrepreneurs, activists, and financial reformers so excited.
On January 9, 2014, Overstock.com, an online store with $1.3 billion dollars a year in sales, became the first large retailer to accept Bitcoin as payment from customers. In September 2014, Byrne announced that Overstock would donate 4% of its global Bitcoin revenues to foundations promoting the adoption of cryptocurrencies. On January 9, 2015, one year after Overstock started accepting Bitcoin as payment, the company installed a Bitcoin ATM at its corporate headquarters in Salt Lake City, Utah. The ATM is accessible to the public 24 hours a day and allows conversion of U.S. dollars to Bitcoin, and Bitcoin to U.S. dollars. At the same time, Overstock announced that it would be giving employees the opportunity to be paid in Bitcoin.
However, Byrne had more grandiose aspirations for the Bitcoin technology: “an instant, frictionless market, while having the added benefit of wiping out a whole parasitic class of society—that is, the whole financial industry.” In his keynote address at the Bitcoin2014 conference in Amsterdam in May (see below), Byrne revealed that he was interested in selling securities on a blockchain exchange. Five months later in a keynote address at the October 2014 Inside Bitcoins Conference in Las Vegas, Byrne discussed his plans for this new digital securities exchange in more detail.
Byrne’s Bitcoin2014 keynote address
Byrne refers to his cryptofinance initiative as the Medici project, named after the Medici Bank of Florence. According to Overstock’s Director of Communications, Judd Bagley, “This bank grew very rich because it invented dual entry accounting, which engendered trust which led to wealth which in turn led to the Renaissance.” Overstock’s cryptosecurities will be traded on its own T0.com (Tee-Zero) platform intended to offer greater transparency, reliability, and speed and reduced costs compared to traditional bond trading technology. Investors who purchase securities through T0.com will be able to track their ownership on the Bitcoin blockchain. Trades on T0.com will settle securely on the same day, as opposed to the typical 3-day settlement on Wall Street (referred to as “T+3”). And because the data is distributed across all of the computers in the network, there will be no need for the Depository Trust & Clearing Company (DTCC), the New York Stock Exchange (NYSE), or the various other intermediaries overseeing the financial markets. Of course, new technology always poses new risks, and no one knows yet how enthusiastic the public will be to adopt this new means to invest.
On April 24, Overstock filed a Form S-3 with the Securities and Exchange Commission (SEC) to register $500 million worth of company equity as digital securities. The SEC hasn’t approved the S-3 registration yet, but SEC approval isn’t required to issue a private bond. On June 1, Overstock distributed information about the cryptosecurity offering to accredited investors. On Friday, June 5, Overstock announced its $25 million corporate bond offering, and on Monday, June 8, Byrne purchased what is believed to be the world’s first cryptosecurity for $500,000.
NY Stock Exchange
While Byrne and Overstock seem to be at the forefront of the cryptofinance movement, many other finance executives and institutions are exploring the territory. Both UBS and BNY Mellon are researching the use of blockchain technology for financial transactions. During a talk at the IDX Derivatives Expo in London, UBS’s Chief Information Officer for innovation, Alex Batlin, said that the Swiss bank is working on a blockchain-based system for trading cryptobonds. NASDAQ plans to test using blockchain technology for clearing of securities in its Nasdaq Private Market. In May, NYSE announced and launched the NYSE Bitcoin Index (NYXBT), which it touts as the first exchange-calculated and disseminated bitcoin index. Former bankers at firms such as Goldman Sachs and Morgan Stanley are developing Bitcoin futures and other cryptocurrency derivatives. Duncan Niederauer, former CEO of the NYSE, serves as an advisory director to Tera Exchange, a bitcoin derivatives trading platform. Niederauer is also one of several Wall Street executives who’ve provided seed funding to Symbiont, a startup developing a blockchain-based system for trading cryptosecurities. Blythe Masters, former head of global commodities at JP Morgan, left earlier this year to be the CEO of Digital Asset Holdings LLC, another blockchain technology startup for trading securities.
Of particular interest to us here at Greenfield Advisors is the use of blockchain technology to record property ownership. Our Director of Economic Research, Dr. Clifford Lipscomb, has written before about how problems with land title documentation weaken land tenure. Factom and Epigraph, two technology companies, are creating a blockchain-based land title registry for the Honduran government.
Proof of ownership could be established for more than just land. Ownership of any high-value item such as vehicles or art could be recorded and transferred within the blockchain. Blockchain technology could be also used to establish intellectual property rights; intellectual property could be timestamped and recorded in the blockchain, replacing traditional copyrights, trademarks, and patents. Contracts of all types could be verified and recorded, further disrupting the legal industry. Companies are already exploring many of these applications.
Do you think the enthusiasts are getting carried away, or do you agree that blockchain technology could revolutionize how we do business? Let us know in the comments.
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