The Securities and Exchange Commission has approved a plan from online retailer Overstock.com to issue company stock via the Internet, signaling a significant shift in the way financial securities will be distributed and traded in the years to come.
Over the past year, Overstock and its freethinking CEO, Patrick Byrne, have developed technology for issuing financial securities by way of the blockchain, the vast online ledger underpinning the bitcoin digital currency. The blockchain is essentially an enormous database that runs across a global network of independent computers. With bitcoin, this ledger tracks the exchange of money. But it can also track the exchange of anything else that holds value, including stocks, bonds, and other financial securities. Overstock has already used the blockchain to issue private bonds, which did not require explicit regulatory approval. Now, the SEC has told the company it can issue public securities in much the same way.
Public documents filed by Overstock show that the SEC has approved an amended Form S-3 that would allow the company to issue public securities via blockchain-based technology, and Byrne plans to announce the news this evening at a bitcoin conference in San Diego. It's unclear when the company will actually issue a public security on the blockchain. "You can assume its high on our list of priorities for 2016," Byrne tells WIRED.
Overstock built its technology under the aegis of a subsidiary called TØ.com, and it plans to offer this "cryptosecurity" tech as a service to other businesses, so that they too can issue stock via the blockchain. Each business would need separate approval from the SEC, but Overstock could use the system to issue stock for a third-party before issuing its own.
Byrne believes the technology "can do for the capital market what the Internet has done for consumers." It's designed to provide a secure, transparent, reliable, and largely automatic way of tracking who owns a given security at any given time. And in Byrne's mind, it could replace systems run by the New York and Nasdaq stock exchanges. Such a system could eliminate many of the middlemen who have traditionally controlled the market, and thanks to its technological precision, it could close certain market loopholes. "There are all kinds of ways to rig the market," Byrne told WIRED earlier this year. "We want to make it un-rig-able."
TØ is now just one of several efforts to reinvent the financial markets via the blockchain. Even Nasdaq is looking at it. Nasdaq OMX, the company behind the Nasdaq stock exchange, is building a system that uses the blockchain to oversee trades in private companies, but the company says it could also apply similar tech to the public stock markets.
For Jeffrey Steiner, counsel with the international law firm Gibson Dunn, who specializes in blockchain technology, this project shows what the blockchain can do for so many markets. "It can not only ensure that there's security in the transaction, but it provides a full record of ownership for things like corporate bonds and stocks," he says. "It can increase transparency, reduce costs, and remove the middleman—in this case remove a [traditional] exchange or a broker." He calls Overstock's plan "very interesting" but notes this is new territory and the regulatory landscape can be tricky because there's little precedent for such a thing. Indeed, many investors may be wary of using such a technology. Finance is a conservative industry, after all. But with so many outfits starting to build this kind of technology, including names like the Nasdaq, attitudes are poised to change.
Beyond Bitcoin
Byrne is a protege of Warren Buffet, and he carries a PhD in philosophy, with a focus on economics and jurisprudence. He leans libertarian, has long made a crusade of reforming Wall Street, and sees bitcoin as something that can transform society in myriad ways. In early 2014, Overstock became the largest online retailer to accept bitcoin, letting consumers buy everything from smartphone cases to patio furniture with the digital currency. Byrne hails the technology as a way of freeing our money system from the whims of banks and big government.
Today, bitcoin accounts for a tiny fraction of sales on the site, but Byrne believes the technology will continue maturing—and that blockchain, the technology behind the technology, will have an equally enormous impact on the stock market. A decade ago, Overstock fell victim to a Wall Street dark art called naked short selling, and Byrne believes a digital ledger can, among other things, close the type of loopholes that made naked shorting possible. Basically, naked shorting involves selling stock shares that don't exist. Something like the blockchain can provide a way of tracking all shares, at all times.
In the fall of last year, Byrne revealed that Overstock was using blockchain technology to build a system that would allow the company to issue stock over the 'net. And last spring, it filed papers seeking SEC approval for such an offering. As it turns out, Overstock had purchased a 25 percent stake in an outfit called PRO Securities, and the system will operate through this company. PRO Securities—now TØ.com—is an alternative trading system, or ATS, an alternative to central stock exchanges such as the NASDAQ, the New York Stock Exchange, and others. It's regulated by the SEC, and in a government filing earlier this year, the company amended its charter to say it may handle trades in digital securities using technology related to the blockchain.
A $954 Billion Market
The plan is to turn TØ into a business that can help other companies manage financial securities via the blockchain. And this already is happening. Beyond issuing private bonds, TØ offers tools that let companies lend and borrow shares through the blockchain. This is designed to remove the traditional middlemen overseeing the $954 billion stock loan market in the US—and close the kind of stock settlement loophole that allows traders to "naked short sell" shares they hadn't actually borrowed.
According to Overstock and TØ, some hedge funds and other outfits have tested this system. And TØ hopes to extend its blockchain technology into other parts of the market. In its filing with the SEC, Overstock said it could issue as much as $500 million in stock and other securities via blockchain technology, and though the initial offerings will be little more than a proof of concept, this points the way to something larger. "This could be a trend we see across the board—though there are any of a number of issues that would need to be ironed out," Steiner says. "I'm sure Overstock will not be the last to do this."
