Overstock Wants To Fix Wall Street By Trading Brokers for the Blockchain
Patrick Byrne has a new weapon in his crusade against Wall Street: the blockchain.
The New York Stock Exchange. Image: Flickr/Michael Daddino
Today Overstock.com became the first US company to receve the blessing of the Securities and Exchange Commission to issue public stocks over the blockchain, the public ledger at the heart of Bitcoin. Overstock also owns the only blockchain stock exchange approved by the SEC, called T0.
You could say that Overstock, an Amazon clone that started out selling the discounted assets of failed dot-com boomers, is sitting pretty in a new field: finance. But hey, we're human beings, not Wall Street traders, so why should any of that matter?
Overstock CEO Patrick Byrne thinks the answer to that question is obvious: He believes T0 is going to put a stop to some of the shady speculative trading that Wall Street-types get up to by eliminating humans from the equation altogether—a personal crusade for Byrne, and one that's been criticized as a smokescreen for his own company's failings.
"T0 lets you create a version of Wall Street that nobody can cheat," Byrne said when I spoke to him on the phone.
"A whole category of mischief that's occurred on Wall Street for decades is eliminated on this system"
The first thing to understand about trading real-world stocks is that it's a byzantine system with a whole lot of fuckery going on. When a stock is traded, it goes through brokers, exchanges, and finally it needs to be "settled"—this is when the stocks actually trade hands. Everybody takes a cut along the way, and settling a stock can take up to three days, or longer if the trade happens on a Friday. The cost to the buyer from going through this system of intermediaries is called a "friction cost."
Not only does this system put costs on the buyer, some traders take advantage of it with an abusive practice called "naked short selling." This is basically like a normal short sell—when a trader borrows a stock and sells it to an unsuspecting buyer; if the sold stock drops in price, they buy it back, turning a profit, and return it to the lender. But there's a twist: in a naked short sell, the trader never even borrowed a stock to sell in the first place.
Instead, the trader banks on getting their hands on the stock they sold without owning before the three-day deadline for a settlement is up. If that doesn't happen, oh well! It's a sham, and the SEC really, really doesn't like it. This practice has been the focus of Byrne's own years-long campaign against the evils of Wall Street.
T0 would nuke all of this, Byrne said. "Primarily, a whole category of mischief that's occurred on Wall Street for decades is eliminated on this system," he said. "That's the sort of world-historical effect of this."
The platform is essentially both an exchange and a broker for digital tokens, or "cryptosecurities," and the blockchain itself executes the settlement, instead of a person. When you purchase a stock in the form of a cryptosecurity on T0, the transaction itself goes through their system, and a proof of ownership—the settlement—is uploaded to the blockchain in the form of a cryptographic hash attached to a tiny amount of Bitcoin.
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The settlement time here is only the amount of time it takes for a transaction to be confirmed by the Bitcoin network (usually around 10 minutes) and the friction cost is dramatically reduced, because the middlemen are cut out of the deal. Most importantly, the three-day loophole that shady brokers can jump through would be effectively closed.
Perhaps most interesting about the project, from a technical perspective, is that the platform is blockchain-agnostic. Sure, proof of ownership is neat and all, but it's been done. Bitcoin acolytes have been floating the idea of a blockchain-based exchange for years, too. But the thing about T0 is that it isn't really tied to Bitcoin. The Bitcoin blockchain is robust and trustworthy right now because of the number of people using it, who can thus confirm transactions, but it's not the only player in the game. Cryptocurrencies besides Bitcoin have their own blockchains, and so do payment companies like Ripple.
"Maybe we're not going to use the Bitcoin blockchain," Byrne said. "Maybe there's another blockchain we want to integrate with, with higher throughput."
The "throughput" that Byrne is referring to is really the ability of the Bitcoin network to process large numbers of transactions and upload them to the blockchain without getting bogged down. As numerous spam attacks—or "stress tests," depending on your outlook—have proven over the last year, the Bitcoin blockchain is pretty easily gummed up. If this happens, that proof of stock ownership might not take 10 minutes to go through, but hours, or even days. Another chain might not have these issues.
Cheaper, faster, less susceptible to gaming—all these things sound pretty nice, but the real question is whether anyone will actually go for it. Byrne said that Overstock is currently the only company with SEC approval to issue cryptosecurities (again, on a platform that it owns), and he was coy when I asked if Overstock would actually sell any of their stocks over T0.
"We do have a head start, of course, but if somebody else wants to get there first…" Byrne trailed off for a moment. "...If IBM came along, I'd probably make room for them."
Byrne is also looking for an investor to come along and take T0 off of the company's hands. "It's not really a part of Overstock's core business, and does not belong within Overstock," Byrne said. "I want someone who can take a chunk, invest in it, but it's got to be the right partner—someone who can build the board of directors, lead the firm… I don't want a second job. I like my job."