Sell­ing Stock in Cy­berspace

Over­ ex­plores is­su­ing shares us­ing bit­coin tech­nol­ogy “We ba­si­cally have a Wall Streetin-a-box now”

Bloomberg Businessweek (Asia) - - Markets/finance - −Selina Wang

On­line re­tailer Over­ has a plan to use the tech­nol­ogy be­hind bit­coin to change the way com­pa­nies dole out shares in ini­tial and sec­ondary of­fer­ings. The on­line dis­counter moved a step closer to its goal on Dec. 9, when the U.S. Se­cu­ri­ties and Ex­change Com­mis­sion gave it per­mis­sion to is­sue as much as $500 mil­lion in its own stock and other se­cu­ri­ties in a sec­ondary offering through a dig­i­tal trad­ing sys­tem—which could be less costly than a con­ven­tional offering.

Over­stock Chief Ex­ec­u­tive Of­fi­cer Pa­trick Byrne says that rules gov­ern­ing stock of­fer­ings pre­vent him from say­ing much about the com­pany’s plans for us­ing the tech­nol­ogy. He says, “I’m spend­ing my Christ­mas break” try­ing to fig­ure out “if we’re go­ing to use this, and how.”

The idea, ac­cord­ing to an Over­stock SEC fil­ing, is to is­sue shares us­ing blockchain, the soft­ware that gov­erns bit­coin trans­ac­tions. Es­sen­tially, blockchain is a pub­lic ledger that records all trans­ac­tions for what­ever in­stru­ment it sup­ports, be it a cryp­tocur­rency or com­pany stock. Jeremy Al­laire, CEO of Cir­cle, a dig­i­tal cur­rency com­pany, de­scribes blockchain as “a gi­ant trust ma­chine”—a glob­ally shared data­base that can ir­refutably prove own­er­ship of records in the data­base.

Byrne has em­braced bit­coin with gusto, ac­cept­ing pay­ments at his Web store and speak­ing fre­quently on

the topic. “Are we in the busi­ness of sell­ing dis­count toast­ers, or are we in the busi­ness of build­ing high­er­per­for­mance tech­nol­ogy that’s match­ing buy­ing and sell­ing?” he says.

In June, Over­stock is­sued cor­po­rate bonds through blockchain—a move that didn’t re­quire SEC ap­proval—to test how the sys­tem might work. A per­son who wants to buy or sell shares on Over­stock’s blockchain sys­tem would need to open an on­line bro­ker­age ac­count to get ac­cess to Over­stock’s dig­i­tal trad­ing plat­form, ac­cord­ing to its SEC fil­ing. Own­er­ship and trades of the dig­i­tal se­cu­ri­ties would be pub­lished on the pub­lic ledger. Over­stock’s tech­nol­ogy could ul­ti­mately be used by other com­pa­nies to sell shares in ini­tial pub­lic of­fer­ings or sec­ondary of­fer­ings.

“We’re tak­ing a crawl, walk, run ap­proach,” says Byrne. “The crawl was to in­tro­duce a pri­vate cryp­tose­cu­rity that did even one trade. So we did that. The walk would be is­su­ing a pub­lic se­cu­rity that’s Over­stock’s pub­lic se­cu­rity. That would be the pos­si­ble next step. Then the third step, the run, would be is­su­ing a pub­lic cryp­tose­cu­rity for some­one else.”

Even if the me­chan­ics work, there’s no guar­an­tee there will be a suf­fi­cient sup­ply of blockchain shares—and enough de­mand for them—to make a mar­ket work. “The ques­tion still is, can you get a crit­i­cal mass of in­vestors?” says Michael Casey, se­nior ad­viser on blockchain at MIT Me­dia Lab. “A mar­ket is only as good as the num­ber of par­tic­i­pants in it.”

Blockchain shares would pose a chal­lenge to the banks and se­cu­ri­ties firms that earn fees for han­dling con­ven­tional stock of­fer­ings. Byrne says that af­ter he an­nounced Over­stock had re­ceived the SEC’s per­mis­sion, “I had small com­pa­nies ap­proach­ing me, say­ing, ‘We’re near an IPO, and can we do it on your sys­tem?’ ” he says. “We ba­si­cally have a Wall Streetin-a-box now—a cryp­toWall Street.”

At the same time, Wall Street banks, ex­changes, and star­tups are ex­plor­ing how blockchain soft­ware and dig­i­tal ledgers could be used to process fi­nan­cial trans­ac­tions more quickly and cheaply than cur­rent meth­ods. Nasdaq OMX Group an­nounced ear­lier this year that it’s test­ing blockchain tech­nol­ogy for trad­ing among pri­vately held com­pa­nies. “This is the first glimpse of the fu­ture of eq­uity trad­ing,” says Camp­bell Har­vey, a pro­fes­sor of fi­nance at Duke Univer­sity, who teaches a class on bit­coin and blockchain. “It’s show­ing how vul­ner­a­ble the tra­di­tional meth­ods of eq­uity trad­ing po­ten­tially are, and how easy it will be to dis­rupt the sta­tus quo.” The bot­tom line Over­ has won SEC per­mis­sion to sell as much as $500 mil­lion in stock us­ing the tech­nol­ogy be­hind bit­coin.

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