T Zero’s Blockchain-Based Securities Trading Platform by Medici Ventures: "Deep in the details of how Wall Street trades are managed is a loophole that allows a seller to get the funds for selling stocks without having to produce a certificate of sale for a few days, meaning an unscrupulous trader could sell stocks without actually owning or borrowing them."
This story originally appeared on CoinDesk.com here.
(@DelRayMan) | Published on December 16, 2016 at 22:48 GMT
The first-ever day of stock trading on a blockchain-based, shared ledger has come to a close.
After six-and-a-half hours of being open for business, Overstock.com’s t0 blockchain platform has very little to show in terms of trade activity. In fact, there was almost no activity at all.
But that’s not the point, according to Patrick Byrne, Overstock’s founder and CEO, who has been waging a personal fight against some of Wall Street’s more opaque business practices. In conversation with CoinDesk, Byrne likened the day of trading to test pilot Chuck Yeager breaking the sound-barrier for the first time — but for only a few seconds.
While activity on the t0 blockchain explorer was confined to the verification of two blockchain addresses, the fact that there’s a public record at all is what Byrne says is the most important detail.
In the market ecosystem Byrne imagines, it is exactly this record that will prevent a wide range of profit generation employed by the middlemen responsible for connecting buyers and sellers and helping them settle their transactions.
"There’s a new age coming to humanity riding the blockchain. Over the next decade, what the Internet did to communications, blockchain is going to do to about 150 industries, and capital markets is just one of them."
The reason for the slow start might not be because of lack of interest.
Yesterday, Overstock announced it had raised $10.9m in an unusual offering comprised of $1.9m worth of stock traded via digital assets on the t0 platform. Fifty-five people purchased a total of 126,565 shares for $15.68.
And it's not just investors who stand to benefit from increased transparency.
Byrne cites the recent "IPO drought" as evidence that entrepreneurs are increasingly reluctant to list their shares on public stock exchanges from fear the value might be unfairly driven down by price manipulation.
"It’s like being dropped in a shark tank," said Byrne. "The people who’ve been up to mischief have the most to lose because they can’t do it with a blockchain-based capital market."
While multiple parties have posted sell offers, the difficulty that inhibits new people from creating and capitalizing accounts has prevented purchases from being made, according to Byrne.
Overstock’s broker-dealer Keystone Capital yesterday released instructions to investors looking to participate in the offering, including details on how to create an account and add funds.
While Byrne said he would have preferred to let investors know sooner, Keystone Capital CEO Steven Capozza described the onboarding process as "extremely smooth and orderly."
"We continue to open new accounts and there appears to be a good amount of interest," Capozza told CoinDesk. "The shares from the rights offering have been credited to the accounts and new accounts are being opened and funded for secondary trading."
Byrne expects that as these accounts are activated, the trading session set to begin at 9:30am ET on Monday will be more active than today.
A bold proposal
Johnathan Johnson, the president of Overstock subsidiary Medici (which developed the t0 platform) told CoinDesk he expects additional firms to list over time.
The result, he said, would be a small but growing ecosystem of stocks that are easy for regulators to audit.
Yet as far as introducing radical transparency to the stock trading ecosystem is concerned, Byrne has another strategy up his sleeve.
Last month, the US Securities and Exchange Commission (SEC), which regulates post-trade in the US, approved a plan to create a "consolidated audit trail", a plan the regulator estimates will cost $3.4bn to implement and an additional $1.7bn per year to run.
As the federal regulatory body is taking these steps to force shady trades into the light, Byrne told CoinDesk that he’ll build them a blockchain-based audit trail at no cost instead.
"The SEC has half a billion dollars to create a consolidated audit train and it falls out of our office for free. We’ll give it to them for free if they use our system."
SALT LAKE CITY, Dec. 22, 2016 -- Financial technology company t0.com, Inc. announced the successful implementation and production level use of its distributed ledger technology-based platform in the issuance of a registered security. The shares, issued by Overstock.com, Inc. (NASDAQ:OSTK), are the first in history able to trade on an alternative trading system (ATS) utilizing distributed ledger technology.
Equity transactions generally settle three days after trade date, or T+3. By contrast, trades executed through the t0 (t-zero) platform, settle on trade date, or T+0, a fact that gives rise to t0’s name. Same day settlement has long been the aim of both investors and securities exchanges.
“The efficiencies that blockchain technology introduces to securities trading and settlement are so significant, it makes their eventual broad-based adoption inevitable,” said t0 President and securities trading expert Joe Cammarata. “It’s exciting to be on the leading edge of this wave of fintech innovation. We look forward to applying our technology to a very broad range of asset classes and stages in the trade lifecycle.”
t0 software leverages the security, transparency and immutability of cryptographically protected, distributed ledgers to transfer the digital representation of cash and digitized assets between accounts with unprecedented speed. This greatly decreases transaction friction and the need for many incumbent intermediaries while eliminating counterparty risk.
“t0’s platform not only utilizes and builds upon the well-known strengths of distributed ledger technology, but is designed to be compatible with financial institutions’ back office processes,” said t0 Chief Operating Officer Raj Karkara. “We believe that this combination of technologies will be invaluable in reducing time to market for a wide range of asset classes and in simplifying the ever-growing challenge of maintaining strict regulatory compliance.”
Having achieved what Overstock.com founder and CEO Patrick Byrne has termed the “Chuck Yeager Moment,” in which a formidable barrier is proven to be breakable, t0 will now build upon and expand its suite of offerings to include solutions for streamlining back office operation, securities lending and exchange of other asset classes such as ETFs, mutual funds and pre-IPO company shares.
t0.com, Inc. (pronounced tee-zero) is a majority owned subsidiary of Overstock.com, focusing on the development and commercialization of financial technology (FinTech) based on cryptographically-secured, decentralized ledgers – more commonly known as blockchain technologies. Since its inception, t0 has pioneered the effort to bring greater efficiency and transparency to capital markets through the integration of blockchain technology. More information is available at t0.com.
Overstock.com, Inc. (NASDAQ:OSTK) is an online retailer based in Salt Lake City, Utah that sells a broad range of products at low prices, including furniture, rugs, bedding, electronics, clothing, and jewelry. Additional stores within Overstock include Worldstock.com, dedicated to selling artisan-crafted products to help developing nations around the world and Main Street Revolution, supporting small-scale entrepreneurs in the U.S. by providing them with a national customer base. Other community-focused initiatives include Farmers Market and pet adoptions. Forbes ranked Overstock in its list of the Top 100 Most Trustworthy Companies in 2014. Overstock sells internationally under the name O.co and regularly posts information about the company and other related matters under Investor Relations on its website.
SOURCE t0.com, Inc.
Media Contact: Judd Bagley, t0.com, Inc. (801) 947-5352 firstname.lastname@example.org
This story originally appeared on Wired.com here.
Online retailer Overstock.com has become the first publicly traded company to issue stock over the internet, distributing more than 126,000 company shares via technology based on the bitcoin blockchain.
Through a subsidiary called tØ, the Salt Lake City-based Overstock has spent the past two years building the technology that facilitates this new way of trading financial securities. The online retailer and its free-thinking CEO, Patrick Byrne, view the blockchain as a way of significantly streamlining not only stock exchanges like the NASDAQ, but all sorts of other capital markets.
The blockchain is an online ledger controlled not by any one company or government agency, but by a global network of computers. With bitcoin, this ledger tracks the exchange of money, but it can also track anything else that holds value, including stocks, bonds, and other financial securities. The idea is that this technology can more accurately and inexpensively oversee financial trades while eliminating many of the middlemen and loopholes that characterize today’s markets.
Byrne calls today’s stock offering a “Sputnik moment.” In other words, it’s a first, but it’s largely symbolic. “It’s not a big Titan rocket. It’s not a moonshot,” he says. “But it demonstrates that we’re live.” He hopes to license tØ’s technology to outside organizations, including not just businesses like Overstock, but stock exchanges, banks, and other financial institutions.
Ironically, for legal reasons, today’s offering required the participation of about as many middlemen as the blockchain is meant to replace. Even as it offered its internet-only stock, the company also distributed a new batch of shares for trading on the conventional over-the-counter market. And to satisfy regulators, the company drove the blockchain shares through a broker and various other middleman that typically accompany a stock offering—yet another sign that this young technology is still a long way from overhauling Wall Street.
Today’s stock offering is a ‘Sputnik moment’: it’s a first, but it’s largely symbolic.
That said, Wall Street has certainly taken notice of technologies designed to reinvent the capital markets via the blockchain. Last December, big-name banks JP Morgan, Wells Fargo, and State Street got behind an open source project called Hyperledger. Many others have joined a blockchain-focused consortium called R3. The company behind the NASDAQ, meanwhile, has explored blockchain technology as a way of tracking the exchange of shares in private companies. But for now, it’s still unclear what technologies the big players will use or how they’ll use them.
And the momentum isn’t all in the same direction: Goldman Sachs and three other big-name players recently pulled out of R3. The move towards the blockchain has slowed after an initial frenzy, which was driven largely by a fear of “disruption,” says Rick Stinchfield, head of technology at Finadium, the financial consulting firm that closely follows the progress of blockchain technology on Wall Street. The big banks, it seems, have realized this disruption isn’t happening anytime soon. “Things have slowed down, gotten more methodical,” he says. “Bankers and brokers are in the risk business, but one of the things they don’t like is technology risk.”
A New Exchange
Byrne first revealed Overstock’s new blockchain stock offering in October at a fintech conference in Las Vegas, and over the past month, any existing Overstock shareholder could subscribe to take part. Today, the company actually moved the stock into investor accounts, including 126,565 shares traveling via tØ’s blockchain technology. Investors can begin trading the shares via the blockchain tomorrow. The Securities and Exchange Commission officially green-lit the operation last December, and Byrne says his company spent $5 to $6 million in legal fees securing regulatory approval from both the SEC and FINRA, the financial industry’s private overseer.
tØ runs its own private blockchain, which would seem to defeat the purpose of the technology. The power of the blockchain lies in its distributed nature—as a technology that no one entity controls. But tØ publishes all transactions to the blockchain proper—the ledger that underpins bitcoin—which provides a very public record of anything that happens on its private system. Part of Byrne’s aim is to offer a transparency that today’s markets don’t provide.
Byrne says Overstock and tØ are in discussions with multiple foreign governments about launching exchanges on the technology. But Stinchfield and others warn that this sort of tech can’t keep up with the rapid-fire nature of the modern markets here in the US. “I can’t imagine the Nasdaq on a blockchain,” he says. “The technology is not up to snuff. And it’s unlikely regulators will get comfortable with this.”
In the near term, such tech is more likely to reinvent relatively obscure pieces of the capital markets like the stock settlement system or the stock loan market. On Wall Street, it still takes up to three days to settle a stock trade—to actually move the shares between two parties. Blockchain tech can take this from three days down (T-3) to zero (T-0). Hence the name of Byrne’s company). Separately, the stock loan market is driven by a wide-range of well-paid middlemen that the blockchain could potentially eliminate from the equation.
Ultimately, three main players drive today’s financial markets: the stock exchanges, the brokers, and the central security depositories that oversee settlement. Byrne believes that if any one of these embraces the blockchain, the other two will go extinct, significantly reducing the cost of trading securities. “It’s a like a Games of Thrones,” he says.
No one is likely to win that game anytime soon. But Stinchfield agrees the blockchain could eventually streamline the system. “The blockchain could essentially combine the stock exchange and the central securities depository,” he says. “Trade and settlement become one.” The internet isn’t about to supplant Wall Street just yet. But the incentives are there to make 21st century stock trading look very different than it ever has before.
By Cade Metz
It will only take one broker-dealer to usher in the era of distributed securities settlement, according to Overstock's blockchain innovation lead.
Once the technological barriers of connecting the platform to a blockchain are crossed and the regulatory climate has been navigated, Johnathan Johnson expects a floodgate of securities professionals looking to cut out pricey middlemen to open.
In new statements, Johnson said that while the technological undertaking of Keystone is actually quite minimal, what separates the firm is its willingness to take on those middlemen.
In this light, Johnson said the potential gain to those who cut out some of the financial system's most important figures is "huge".
Johnson told CoinDesk:
"I think they want to see that an offering has worked and trades have come through and a digital security has settled. Once that's in place, I think if I were a broker dealer I'd be pretty eager to adopt because it potentially means more business with less cost."
Johnson breaks down the work of building a blockchain-based settlement platform into three categories. The first, building the product, is "knocking on the door of being done," he says.
The final two steps, ensuring regulatory compliance and signing up market participants, he contends, will happen simultaneously as the integration is completed.
Plugging into tØ
Technologically speaking, tØ’s settlement platform is designed to be blockchain agnostic, but today it's unconventional in that it uses the bitcoin blockchain for additional security.
But maybe more importantly, the platform is also set up so that most of this technological heavy-lifting (and understanding) is done by the software, not the broker.
Other than the time it takes to plug into the tØ system, Johnson says a broker-dealer's most demanding technological tasks are generating digital wallets to hold the cyrypto-securities and signing the transactions.
What distinguishes Keystone, according to Johnson, isn't that the San Diego-based firm is much more technologically astute that its competitors. Rather, it is willing to work with regulators during the ongoing "rigorous regulatory review."
"One of the reasons this isn’t happening as quickly as it otherwise might is because regulators want to make sure it’s done right," said Johnson. "Keystone is willing to work with them."
"Plowing fields that have already been plowed is so much easier than plowing a field that's got a bunch of rocks."
What's at stake?
In a statement yesterday, Overstock’s CEO, Patrick Byrne, went so far as to describe tØ as "working on a blockchain version of Wall Street."
As part of that effort, Keystone's integration with the tØ settlement platform is aimed at the Depository Trust & Clearing Corporation, or DTCC — the US post-trade financial services company that last year processed $1.5qn in securities.
While the DTCC lists the majority of settlement times after those securities are moved at three days — or T+3, tØ wants to settle instantly, hence its name.
Johnson said that stock issuers and broker-dealers stand to benefit the most from saved fees and faster transactions on a blockchain-based post-trade infrastructure, leaving traditional infrastructure providers like the DTCC to work on their own blockchain solutions.
"They’re basically a middleman that camps out in the middle that goes away when you can trade on blockchain and trade plus zero, when the trade becomes the settlement. That's one of the greatest benefits of blockchain is removing middlemen that extract from inefficiencies."