Will the SEC approve this?
Overstock's Patrick Byrne down to 'brass tacks' with SEC over public crypto-securities
International Business TimesBy Ian Allison | International Business Times – Fri, Nov 20, 2015
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Wall Street
Overstock CEO Patrick Byrne has a long history with the Securities and Exchange Commission. He is now on the brink of a make or break decision from the regulator over his plan to a public crypto-security.
Byrne says that since filing with the SEC to issue a public crypto security from Overstock, he has been batting responses back and forth with them. He told IBTimes: "We are really down to the brass tacks. We have answered all their questions, all their concerns.
"It's really down to - do they want to let it go forward or do they want to prevent it from going forward, in which case I'm taking it to Europe or Asia. There are plenty of companies and governments in Europe and Asia who want to be the hub of this technology. And we think we are a good bit in advance of the field."
Byrne admits he has "a long history of antipathy for the SEC". The crypto-security discussion he is currently engaged in with the regulator could be seen as a culmination of two decades worth of relentless theory and praxis.
Byrne, who holds a PhD in philosophy as well as a black belt in Tae Kwon Do, has followed a well beaten path from classical liberalism of Friedrich Hayek towards decentralisation, which is also how he fosters innovation directly from employees at Overstock. Along the way he has tried to arraign Wall Street for its unethical trading practises, which he hopes will finally be vanquished by an age of frictionless digital assets.
Regarding the regulator Byrne said one of the big problems of our centralised financial system and institutions is "regulatory capture".
"We set up regulators to protect us from certain industries not knowing (not remembering) that regulators have a tendency to become captured by those industries and turned against us - the SEC being one example of this. There is even the possibility of deep capture where they capture the whole political process, journalists, even academics."
Byrne sees stock settlement in its current form as one of the institutional pillars propping up a broken financial system. Therefore he advocates a shared real time ledger system for more than simply the sake of achieving cost efficiency.
"When your broker tells you own 100 shares in IBM, you actually have a contractual right to a contractual right to a contractual right to a company that owns the property rights. This system can be manipulated by high frequency trading, front running, regulatory capture.
"The beauty of the blockchain is it's stateless. There's nothing to capture; it's consensus based. We have to get the permission of the state to turn it on - but we are building it. There's no DTCC to capture, there is no flash trading, there's none of the games that are being played on Wall Street now."
IBTimes asked for any detail on what exactly the SEC requires in terms of "brass tacks" from Overstock to be able to issue a public crypto security. Alec Wilkins, chief technology officer at T0 (tee zero), said he could not comment on such specifics at this time. He also declined to comment on the nuts and bolts of the putative two-week optimisation period needed to make the crypto security work on any ledger.
Wilkins told IBTimes: "The T0 platform is designed to work with multiple distributed ledgers. Currently, we are using the Bitcoin blockchain to provide immutability and transparency. Our software integrates to existing broker dealer platforms and provides a performant solution for managing the transaction volume required for capital markets. What sets T0 apart from others is that we have already launched all of the components to issue and trade securities.
Wilkins said that as the benefits of crypto-securities are more widely understood, the conversion of certificated assets into digital assets will be required. "Our current priority is new issuances. Similarly, while distributed execution has benefits, the inefficiencies and costs in the current system are very concentrated in clearing and settlement. Trading venues are incredibly efficient at placing and executing large volumes of orders.
"Smart contracts may one day eliminate the need for exchanges, but there are much more pressing use cases in clearing and settlement. T0 is focused on real benefits that can be immediately realised: guaranteed settlement, market transparency, and reducing exploitative gaps in the current technology. In comparison, smart securities solve a very minor problem. "
Wilkins said T0's software supports high-volume throughput and meets the speed requirements of securities trading. He said the company is focused on identifying patterns and technologies which make cryptocurrencies successful and designing and implementing similar solutions.
"There is a crypto-trend to build expansive platforms that can be everything, to everyone. We will soon see a shift in the conversation about which ledger is generically 'best'. Specific use cases and patterns will require different applications of different technologies. This is a huge step forward in terms of driving real-world adoption and the realisation of the efficiencies provided by these technologies."
T0, as the name suggests, aims to finalise transactions instantaneously. Traditional stock and bond sales take three business days to fully settle before the assets are available in the buyer's account and the purchase value is available to the seller. Those traditional transfers are logged by the Depository Trust Company, created in the 1970s to track the ownership of securities.
Byrne is vociferous regarding the "huge philosophical" question of actual settlement versus net settlement. He traces historical precedents like the Wall Street paper crisis, and the switch to electronic trading in the 1970s, at which point a more peer-to-peer approach was stymied by the SEC when it imposed central counterparty clearing.
This has led to system based on IOUs where hopefully everything comes out in the wash, said Byrne. "It's a terrible system which relies on shearing people's property rights, which I philosophically disagree with. On the blockchain you have a public ledger, which is the form of ownership. That means you are not doing net settlement - just netting everything down, which means that everything has been turned into fungible numbers."
Byrne says his tokenised system can run on any ledger. "It can work with Nasdaq, it can work with New York Stock Exchange, it can work with a large bank, It can work with a settlement system like DTCC.
"Our system is the equivalent of an exchange and a settlement system all in one. It tokenises stock then it records it on a ledger. It's built to work on anyone's ledger.
"We have a deep understanding of the stock loan industry for various historical reasons. In our view that's really the great profit centre of prime brokerage.
"There are basically three groups – there are the large banks, there are the exchanges, and there is the settlement system. And what's going to happen is one of those three are going to use this technology to disrupt the other two. I think that's the bottom line."
Overstock's Patrick Byrne down to 'brass tacks' with SEC over public crypto-securities
International Business TimesBy Ian Allison | International Business Times – Fri, Nov 20, 2015
Share
Wall Street
Overstock CEO Patrick Byrne has a long history with the Securities and Exchange Commission. He is now on the brink of a make or break decision from the regulator over his plan to a public crypto-security.
Byrne says that since filing with the SEC to issue a public crypto security from Overstock, he has been batting responses back and forth with them. He told IBTimes: "We are really down to the brass tacks. We have answered all their questions, all their concerns.
"It's really down to - do they want to let it go forward or do they want to prevent it from going forward, in which case I'm taking it to Europe or Asia. There are plenty of companies and governments in Europe and Asia who want to be the hub of this technology. And we think we are a good bit in advance of the field."
Byrne admits he has "a long history of antipathy for the SEC". The crypto-security discussion he is currently engaged in with the regulator could be seen as a culmination of two decades worth of relentless theory and praxis.
Byrne, who holds a PhD in philosophy as well as a black belt in Tae Kwon Do, has followed a well beaten path from classical liberalism of Friedrich Hayek towards decentralisation, which is also how he fosters innovation directly from employees at Overstock. Along the way he has tried to arraign Wall Street for its unethical trading practises, which he hopes will finally be vanquished by an age of frictionless digital assets.
Regarding the regulator Byrne said one of the big problems of our centralised financial system and institutions is "regulatory capture".
"We set up regulators to protect us from certain industries not knowing (not remembering) that regulators have a tendency to become captured by those industries and turned against us - the SEC being one example of this. There is even the possibility of deep capture where they capture the whole political process, journalists, even academics."
Byrne sees stock settlement in its current form as one of the institutional pillars propping up a broken financial system. Therefore he advocates a shared real time ledger system for more than simply the sake of achieving cost efficiency.
"When your broker tells you own 100 shares in IBM, you actually have a contractual right to a contractual right to a contractual right to a company that owns the property rights. This system can be manipulated by high frequency trading, front running, regulatory capture.
"The beauty of the blockchain is it's stateless. There's nothing to capture; it's consensus based. We have to get the permission of the state to turn it on - but we are building it. There's no DTCC to capture, there is no flash trading, there's none of the games that are being played on Wall Street now."
IBTimes asked for any detail on what exactly the SEC requires in terms of "brass tacks" from Overstock to be able to issue a public crypto security. Alec Wilkins, chief technology officer at T0 (tee zero), said he could not comment on such specifics at this time. He also declined to comment on the nuts and bolts of the putative two-week optimisation period needed to make the crypto security work on any ledger.
Wilkins told IBTimes: "The T0 platform is designed to work with multiple distributed ledgers. Currently, we are using the Bitcoin blockchain to provide immutability and transparency. Our software integrates to existing broker dealer platforms and provides a performant solution for managing the transaction volume required for capital markets. What sets T0 apart from others is that we have already launched all of the components to issue and trade securities.
Wilkins said that as the benefits of crypto-securities are more widely understood, the conversion of certificated assets into digital assets will be required. "Our current priority is new issuances. Similarly, while distributed execution has benefits, the inefficiencies and costs in the current system are very concentrated in clearing and settlement. Trading venues are incredibly efficient at placing and executing large volumes of orders.
"Smart contracts may one day eliminate the need for exchanges, but there are much more pressing use cases in clearing and settlement. T0 is focused on real benefits that can be immediately realised: guaranteed settlement, market transparency, and reducing exploitative gaps in the current technology. In comparison, smart securities solve a very minor problem. "
Wilkins said T0's software supports high-volume throughput and meets the speed requirements of securities trading. He said the company is focused on identifying patterns and technologies which make cryptocurrencies successful and designing and implementing similar solutions.
"There is a crypto-trend to build expansive platforms that can be everything, to everyone. We will soon see a shift in the conversation about which ledger is generically 'best'. Specific use cases and patterns will require different applications of different technologies. This is a huge step forward in terms of driving real-world adoption and the realisation of the efficiencies provided by these technologies."
T0, as the name suggests, aims to finalise transactions instantaneously. Traditional stock and bond sales take three business days to fully settle before the assets are available in the buyer's account and the purchase value is available to the seller. Those traditional transfers are logged by the Depository Trust Company, created in the 1970s to track the ownership of securities.
Byrne is vociferous regarding the "huge philosophical" question of actual settlement versus net settlement. He traces historical precedents like the Wall Street paper crisis, and the switch to electronic trading in the 1970s, at which point a more peer-to-peer approach was stymied by the SEC when it imposed central counterparty clearing.
This has led to system based on IOUs where hopefully everything comes out in the wash, said Byrne. "It's a terrible system which relies on shearing people's property rights, which I philosophically disagree with. On the blockchain you have a public ledger, which is the form of ownership. That means you are not doing net settlement - just netting everything down, which means that everything has been turned into fungible numbers."
Byrne says his tokenised system can run on any ledger. "It can work with Nasdaq, it can work with New York Stock Exchange, it can work with a large bank, It can work with a settlement system like DTCC.
"Our system is the equivalent of an exchange and a settlement system all in one. It tokenises stock then it records it on a ledger. It's built to work on anyone's ledger.
"We have a deep understanding of the stock loan industry for various historical reasons. In our view that's really the great profit centre of prime brokerage.
"There are basically three groups – there are the large banks, there are the exchanges, and there is the settlement system. And what's going to happen is one of those three are going to use this technology to disrupt the other two. I think that's the bottom line."
