Overstock.com is preparing to offer a $25 million private bond using the blockchain, the distributed online ledger that underpins the bitcoin digital currency.
Earlier this week, the online retailer circulated a document among hedge funds, private equity groups, and other potential Wall Street investors indicating it was offering such a bond. Company CEO Patrick Byrne, the circular says, “believes that cryptotechnology can do for the capital market what the internet has done for consumers”—a reference to the type of technology that drives bitcoin.
Byrne confirms the plan, saying that Overstock could issue its bond as soon as today. Though the company would like to raise the full $25 million from investors, he says, it could issue a bond for less than that total just to get it out the door. Byrne, an outspoken crusader for this type of technology, is intent on being the first to offer what’s called a cryptosecurity.
‘There are all kinds of ways to rig the market. We want to make it un-rig-able.’ Overstock.com CEO Patrick Byrne
On one level, the bond is a mere curiosity—a security issued in a slightly different way. But Byrne sees it as a step towards a public stock market driven by blockchain-like technology—a replacement for the types of systems that run the NASDAQ and New York stock exchanges. Overseen by cryptographic algorithms, such a market would potentially be more transparent, more reliable, and more secure that then existing system. “There are all kinds of ways to rig the market,” Byrne tells WIRED. “We want to make it un-rig-able.”
The blockchain uses mathematical algorithms to verify bitcoin transactions, and the aim is to use these same algorithms to verify security trades. Though this could shore up holes in the market, many question whether blockchain technology can keep up with the rapid-fire nature of Wall Street transactions.
That hasn’t discouraged the larger movement towards cryptosecurities, of which Overstock is a part. Last month, Nasdaq OMX—the company behind the NASDAQ Stock Exchange—announced that it will use the blockchain to drive a private stock market. A company called Digital Asset Holdings is also developing a blockchain-based system for the trading of securities, as is Symbiont, a startup that includes coders who previously worked on Overstock’s project.
Building His Own Wall Street
Byrne has a complicated history with Wall Street. A decade ago, Overstock was the victim of what’s called naked short selling. In essence, this involves traders selling stock they don’t have. Byrne, in unusually public fashion for a CEO of a publicly-traded company, battled back against the practice, criticizing not only traders but regulators, politicians, and reporters. He sees cryptosecurities as a way of finally changing the system.
In the fall, Byrne revealed that Overstock was using bitcoin-like technology to build a system that would allow the company to issue public stock over the Internet, and the company recently filed papers with the Securities and Exchange Commission seeking approval for such an offering.
The SEC has not yet approved the plan. But Overstock is using this same system to issue its private bond, which does not require explicit SEC approval. This can serve as a proof-of-concept for Overstock’s push towards a blockchain-based public stock market.
James Angel, a professor of finance at the Georgetown University, sees some promise in this basic idea. But he questions whether Overstock can convince others to adopt it. “Getting lots of stodgy fiduciaries to sign up is the hard part,” he says. “People are very conservative about their money. We have a custodial system that pretty much works. The thinking is: If it ain’t broke, don’t fix it.”
Nonetheless, Byrne sees his project not just as an ideological endeavor, but as a potential business. Other companies, he says, could use the company’s technology to issue their own securities.
The Tiger Cub
According to Overstock’s Wall Street circular, the company plans to offer a $25,000,000 Top Line Income Generation Rights Certificate, or “TIGRcub.” This bond will be issued as 25 one-million-dollar digital tokens, and the company says these will trade over what’s known as an alternative trading system, or ATS.
Late last year, Overstock purchased a 25 percent stake in an ATS called PRO Securities. This is essentially an alternative to central stock exchanges such as the NASDAQ and the New York Stock Exchange, and it’s regulated by the SEC. Earlier this year, in a government filing, PRO Securities amended its charter to say it may handle trades in digital securities overseen by technology related to the blockchain.
As part of its move towards cryptosecurities, PRO Securities is now called “T0″ or “T0.com” (this is what Overstock calls the company in its circular). Overstock plans to offer its bond using blockchain tech that runs atop the system operated by the ATS.
Byrne acknowledges that the company’s cryptobond is a small step forward. But he sees it as a significant step. With typical brio, he compares it to Chuck Yeager breaking the sound barrier. “That’s what we’re trying to do,” he says.
Update: Though Byrne originally told WIRED the bond would not be issued on the blockchain proper, it indeed will. This story has been updated to correct the error.