Selling Stock in Cyberspace

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

Online retailer Overstock.com 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 Overstock.com has won SEC permission to sell as much as $500 million in stock using the technology behind bitcoin.