Increasingly over recent months, a debate is raging over whether the true potential of Satoshi Nakamoto’s invention lies in bitcoin or the concept of a blockchain. For one camp, the focus should be on bitcoin’s potential to compete with or replace fiat currencies, along with the bitcoin blockchain’s many other potential uses. For the other, the true innovation lies in the development of blockchains—plural—which need not have anything to do with bitcoin: in other words, private or permissioned distributed ledgers.
The second group now counts most of the financial world’s heavyweights among its members. Nine of the world’s largest banks have formed a partnership called R3CEV LLC to explore blockchain technology. Goldman Sachs Group Inc. (GS) and Nasdaq Inc. (NDAQ) have both developed blockchain-enabled platforms, called SETLcoin and Linq, respectively (see disclosure).
Overstock.com Inc. (OSTK), meanwhile, has issued bonds on the bitcoin blockchain, becoming the first company to offer a crypto-security, and has gained regulatory approval to do the same with equity. The company’s platform, t0, isn’t entirely one thing or the other when it comes to the blockchain-bitcoin debate. While it deals in fiat-denominated securities, it has so far embraced the bitcoin blockchain.
Medici and t0
Overstock’s enthusiasm for bitcoin and the blockchain go back at least to January 2014, when it became the first large retailer to accept bitcoin payments. A year later, it installed a bitcoin ATM at its headquarters in Salt Lake City, announcing in the same statement that it had made $3 million in bitcoin sales the previous year and would begin offering to pay employees in bitcoin.
In 2014 the company took a 24.9% stake in Pro Securities LLC, a broker-dealer operating an alternative trading system (ATS). Around that time Overstock formed Medici Inc. with the goal of developing a crypto-securities trading platform.
On June 5, 2015, Overstock announced it would offer the “world's first cryptosecurity,” a TIGRcub bond issue, on Medici’s platform. This platform’s name, t0, derives from the Wall Street jargon for bond settlements, which typically take three days (“t + 3”) to finalize. According to company statements, bond trades on t0 settle the same day.
Three days later, Overstock CEO Patrick Byrne became the crypto-bond’s first buyer, picking up $500,000 of the $25 million issue. In July, FNY Managed Accounts LLC purchased $5 million. The following month, Overstock increased its stake in Medici to 81%, while Medici made further broker-dealer acquisitions.
Overstock issued its crypto-bond on the bitcoin blockchain using “colored coins.” This technique involves making a transaction with a de minimis amount of bitcoin and adding other information, in this case a bond trade, to the transaction. When that transaction is added to the blockchain, the parties involved benefit from the bitcoin network’s public, trustless verification, without exposure to the crypto-currency.
Now Overstock has gained approval to move past bonds into other crypto-securities. In an SEC filing, the company said it plans to offer up to $500 million in common stock, preferred stock, depositary shares, warrants and units, in addition to debt securities, using blockchain technology.
On a phone call Tuesday, Byrne said that Overstock’s “accomplishment was that it proved that the system can get regulatory approval.” He declined to confirm whether or when the company would issue shares on t0, stressing that Overstock was not making an offer to buy or sell securities at that time.
He described the future of the platform as “to partner with entities on Wall Street that want to partner with us, in order to disrupt the parts of Wall Street that don’t want to partner with us.” He sees t0’s particular place in the financial industry as removing the “slop” from securities lending and becoming the “Uber of stock loans” in the process.
Rethinking the status quo
Byrne’s fight against certain securities lending practices, in particular naked short-selling, has been a public and occasionally bruising affair. He has advocated what he calls “actual property rights” and characterized the status quo as “a daisy chain of contractual rights,” in which investors do not own the securities they think they do. In the past he’s described “the way to fix Wall Street” as: “you drag it behind the barn, you kill it with an axe and you create an alternative.”
On Tuesday’s call, and on other occasions such as a talk at Nasdaq’s New York headquarters, he stressed that eliminating the “fuzziness of property rights” was in line with the original vision of Nasdaq, whose first president and CEO, Gordon Macklin, was a childhood mentor to Byrne. He reiterated Tuesday that Overstock is a “great friend of Nasdaq,” the exchange on which the company lists its shares.
As for t0’s future relationship to Overstock, he discussed “moving this technology out of the Overstock family and turning it over to someone else to build,” echoing earlier hints that Overstock would spin off the platform.
According to the SEC filing, t0 will trade securities on the bitcoin blockchain unless otherwise stated. Byrne confirmed that this leaves the door open to use other blockchains, saying t0 is “ledger-agnostic.” He added, “we’re open to using any of the other technologies that are emerging, including some of the private ones,” saying that integrating t0 into other blockchains would take “a matter of weeks.”
But while t0 is not married to bitcoin’s blockchain, it is notable that Overstock did not develop a proprietary blockchain to issue its crypto-bond, and has not indicated that it would do so to issue other crypto-securities. Jeremy Allaire wrote in a recent opinion piece on Re/code that the urge to build “permission blockchains” compromises the “distributed and decentralized trust” that lends the (bitcoin) blockchain its value.
Overstock appears to be resisting the drive to fragment blockchain technology, though it could in theory list securities on multiple ledgers. Instead of building another blockchain, the company has built an application for the blockchain. For the time being, that is bitcoin’s.
Blythe Masters recently wrote that a “clear distinction has been drawn between bitcoin and other cryptocurrencies, on one side, and the technology that underpins them.” Byrne agrees that the “great triumph is blockchain technology,” for which bitcoin is one application. But at the same time, t0 undermines Masters’ “clear distinction.” True, t0 is built for fiat assets—so far, dollar-denominated bonds—but it entrusts these assets to the bitcoin network. If miners give up on bitcoin, investors can no longer trade Overstock’s crypto-bond issue (not that there was ever much of a secondary market for it).
Perhaps the bitcoin vs blockchain debate misses the point. Bringing the blockchain into the financial mainstream doesn’t have to mean rebuilding it, and embracing the bitcoin blockchain doesn’t have to mean shunning all others.
Disclosure: The author received compensation from Nasdaq for writing this article.