Blockchain is racking up all kinds of firsts. The distributed immutable ledger now has its own blockchain-as-a-service market, a host of new blockchain startups, coalitions, and open-source projects, and is seeing adoption in countless industries from global banking and finance to the legal cannabis space. The latest first for the buzzy emerging technology comes in digital stock trading.
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This month, e-commerce retailer Overstock.com became the first publicly traded company to issue stock on the blockchain, selling 126,565 shares through its t0 subsidiary, the first-ever blockchain-based trading platform for stocks and securities. Overstock has been developing t0 for more than two years to serve as a distributed immutable ledger for capital markets.
Overstock CEO Patrick Byrne has called t0 a blockchain version of Wall Street. Byrne is well-known for his campaign against Wall Street short-selling, and believes blockchain technology can fundamentally transform not only finance and banking but countless global industries. Byrne chatted with PCMag about what t0 represents, how the platform works, and where blockchain goes from here.
PCMag: The t0 platform had its official launch recently with the trading of more than 26,000 Overstock shares on the platform. You called this a "Sputnik moment" for blockchain. Why?
Patrick Byrne (PB): When the Soviets launched Sputnik in 1957, the analogy goes that the satellite was a soccer ball with a couple radio antennas that put out a "beep, beep, beep" signal. Thing is, the "beep, beep, beep" went out on an FM frequency that people could listen to on their car radios. Americans in a corn field in Iowa could listen and it scared the hell out of America. Same thing with the Chuck Yeager moment, where he broke the sound barrier by milliseconds. It was the dawn of a whole new age.
We did one tiny offering on t0 by Wall Street standards. We didn't really need the money. When it comes to blockchain in capital markets, everyone is talk, talk, talk. They say they're two years off and there are rumors it's not even that close. On t0, anyone can open an account through Keystone Capital (the securities broker dealer partner of t0) right now and trade a public blockchain security.
It isn't some Mt. Gox capital market, either. We built this from square one working with the US regulatory system, with the SEC and FINRA. Over the next decade there will be disruption as significant as the internet was for publishing, where blockchain is going to disrupt dozens of industries, one being capital markets and Wall Street. So this is just a "beep, beep, beep." All that matters is that you can tune in.
PCMag: What's the blueprint for expanding usage and adoption of t0? Trading other types of stocks and securities on the exchange, licensing the exchange software to other companies, or both?
PB: The big revenue picture is licensing to other people who want a blockchain exchange but we're not waiting around for that to happen. We're going to keep developing the platform.
There are six companies lined up that want to go public on it. We're talking about non-public companies that want to issue stock but they are smaller companies. We've got a marijuana supplier business; it's a company that manufactures grow equipment, for instance. Smaller companies that would go public in the current market under Regulation A.
PCMag: t0 is a distributed ledger and trading platform for capital markets, but that could mean a lot of things when it comes to how the platform is used. What sorts of use cases are you exploring?
PB: The real big market here is pre-IPO, large companies that don't want to go public in the American capital market. Imagine if you're a venture capitalist and you want 12 years of liquidity and investment. With t0, we could take the Series B of some monster unicorn startup out of Silicon Valley and tokenize it on the blockchain. So, when a company like Uber does a Series B funding round, 40 people invest. Only those 40 people can then sell their Series B stock to each other and not to someone else. We can program that right into the blockchain system [using a smart contract].
Another big application is that, oftentimes in something like a Series A or B, one investor—let's use JPMorgan as a fictional example—would act as "investment vehicle #1," investing $100 million in Uber and then 50 clients would each put in $2 million. Uber just sees one investor, but what a party like JPMorgan could do with high net worth clients is tokenize that, and those clients all get to trade shares bought and sold.
A third application is that we've integrated all of this with a securities lending system and, once we get permission from the SEC, we can turn that on and it will revolutionize the world of securities lending, meaning short selling.
PCMag: Short selling is a Wall Street practice you've been crusading against for quite a while.
PB: I've been crusading against the huge amount of slack in it. I was never against short selling. Around four years ago, the SEC started to get serious about short selling and are now policing it quite toughly, which is putting a crimp on the industry. At the same time, the stock market is very inefficient and there's no sort of central marketplace. We've created a blockchain version of a securities lending system that would make it 100-percent trustworthy. With this kind of immutable ledger record, there's no more slack in the system. We could simultaneously make the industry honest while helping our own profitability.
PCMag: t0 runs on a private blockchain, but publishes all ledger entries to the public Bitcoin blockchain. Why the delineation?
PB: t0 is blockchain-agnostic so, ultimately, we can use anybody's blockchain. But the Bitcoin blockchain has nowhere near the throughput to secure financial transactions. Last I heard, it could handle about seven transactions per second. You need more than that to secure a capital market. Visa and MasterCard can each do 20-30 thousand transactions per second.
It has become a standard approach to create a middle blockchain layer that still has all the virtues of the ledger it's creating—truth, transparency, immutability—and then you have that publishing or hashing periodically. So you still get the permanent immutable records, but our middle layer can handle 20-30 thousand transactions per second.
PCMag: How do you think t0 fits into the financial ecosystem emerging around blockchain? Has Overstock/t0 discussed joining Hyperledger or R3? Would Overstock ultimately open source parts of t0 to begin building out its own ecosystem?
PB: We don't want to build out our own ecosystem. I want to integrate with existing players and license to them. I have kind of a legacy reputation on Wall Street; people don't know what to make of me. Twenty years ago I was on Wall Street and 10 years ago I exposed a bunch of stuff. Some people can get over that, some can't. We would love to license this. Goldman Sachs used to be my enemy but now I'd love the opportunity to work with them.
In order to get our offering done, we had to integrate with four different pieces of the capital market system. We had to find a shareholder services company, a transfer agent, a broker, and a clearing broker. Now we'd like to see more brokers integrating it or we can license the whole thing to them. So we can license t0 for people and we'll continue to improve the software, and we can keep having more share and trading flow through our platform.
PCMag: There were a ton of legal and regulatory hurdles with the SEC, FINRA, and other agencies to get to this point. Do you feel you've laid the groundwork for how blockchain technology could be accepted by US regulatory authorities or is there a long way to go?
PB: I think we have. I made the decision two years ago that we were going to do this right down the middle of the fairway, right down Constitution Avenue. Because of this historic bad blood, if we made a mistake, they were going to come after me. This would've been a lot easier to do if we skirted the US regulatory system but we've had dozens of meetings with the SEC and FINRA.
We're in constant communication with them. We've addressed every challenge and objection. I think that's the way to do it. In the process, I think the agencies also came to like [the platform]. They realized that much of the mischief they're in the business of preventing actually becomes impossible in a blockchain market in the first place, like the shenanigans around short selling.
One of the big ones for them is systemic risk. I noticed that the people who warmed to this early, both in FINRA and the SEC, were thinking about it from that point of view. Blockchain takes all the risk out. Right now, you've got three days between a trade and a settlement, with hundreds of millions in settlement risk tied up in that time. That all goes away in a blockchain system because you've reunited the trade with the settlement. They're not two separate processes.
In a room of 30 people, the regulators were the ones with smiles on their faces asking that question. Their jobs are about to become much easier to do. The SEC has been mandated by Congress through the Dodd-Frank Act to find ways to create a consolidated audit trail (CAT) to help oversee securities trading. So, if someone does an illegal trade and breaks up the trade into different pieces over dozens of different exchanges in a millisecond, the SEC's market surveillance needs to spot that and put them together. They've been budgeted billions of dollars to develop technology for this and our system can create that kind of consolidated audit trail for free.
PCMag: You're also in discussions with multiple foreign governments about t0. Can you talk about that in the larger context of how you see the platform evolving?
PB: Our biggest possibilities are international. One country wants us to create a blockchain exchange for them. There are a lot of players in Europe and Asia.
Everyone has realized the same dynamic. In each capital market, there are three groups that really matter: the exchanges, the central security depository, and the broker dealers. In each industry, people are realizing that A: this is an extinction moment for the industry as they know it, and B: if any one of the three gets their hands on the technology first, they can disrupt the other two with it. It's like Game of Thrones is going on in each capital market. Forming alliances but stabbing each other in the back. That's the next announcement you'll see from us: a deal with a very large international institution.
PCMag: Blockchain is often talked about in the context of fintech but the technology has universal applicability. What are some of the innovative or outside-the-box use cases that excite you?
PB: I've been in a room in Silicon Valley where on the wall they have 160 industries they think blockchain can disrupt. We picked six of them to focus on. Overstock has a subsidiary called Medici Ventures, which is the owner of t0, but its purpose is to invest in a number of blockchain technologies. We have an underlying investment in a blockchain company called PeerNova, which came out of stealth mode recently. It's an industrial-strength immutable ledger for large-scale commercial applications [such as financial services like enterprise accounting].
We also have an investment in where blockchain meets the formation of money, where it meets central banking. That's a company in Barbados called Bitt.com. T0 is blockchain meets capital markets. We also have an investment in where blockchain meets land titling and other forms of titling; we've invested in two different blockchain companies for that.
Then there's what's called AML/KYC, which stands for anti-money laundering/know your customer. All global financial institutions have AML/KYC obligations. So we've invested in a company that's basically blockchain meets AML/KYC.
The last one is blockchain meets voting. I think that's a new age coming that will be built on blockchain. I hope in that age, the consensus of the governed still matters. We've invested in a company called SettleMint, and one of their blockchain applications is a digital ballot box for secure, immutable voting on the Bitcoin blockchain. I hope it's part of the governmental process for the new age.
I think what's going to happen is similar to what English common law did over a century ago. Blockchain is going to disrupt all kinds of legal work, notary publics, contracts, lawyers, judges, you name it. You're going to start seeing open-source, self-executing contracts gradually improve over time. What the internet did to publishing, blockchain will do to about 160 different industries. It's crazy.