March 2016 – Overstock, a long time bitcoin advocate, received approval from the Securities and Exchange Commission (SEC) to issue and trade public shares of Overstock on its own exchange called, www.t0.com. This is on the heels of Overstock’s purchase in 2015 of SpeedRoute LLC, a brokerage firm. The SpeedRoute purchase helped connect www.t0.com, and Overstock, to a securities trading platform within the US equity market. What impact will tØ have on emerging trade trends like blockchain technology, fintech innovation, and same-day trade clearing? Bracing for any impact is a smart idea. We hope this one will be positive.
What’s so special about www.t0.com – pronounced: tee-zero
In August 2015 Overstock announced the formal launch of www.t0.com (zero – not the letter “O”). CEO Patrick Byrne introduced tØ as a blockchain-based private and public equities trading platform. But the excitement didn’t stop there; Byrne explained the larger goal of the platform would mark a milestone in trading. Byrne asserted that on tØ, each entry will be both a trade and a settlement (T+ zero days to settle). Further, Byrne explained, the platform interfaces with any decentralized ledger, as opposed to the more traditional centralized ledger used by current exchanges.
Decentralized ledgers are a platform growing in popularity since they were first introduced as part of the Bitcoin evolution. The way a decentralized ledger works is it utilizes digital securities where ownership and transfer of the investment is recorded on a secured distributed ledger system. The ledgers are updated by “members of the general public” using timestamps and digitally secure technology. As one can imagine, concerns about money laundering schemes are front and center. However, the tØ ledger is unique in that it is comprised of military grade crypotgraphically secure technology to protect against fraud and limit fraudulent activity. Alternatively, bitcoin and other cryptocurrency use blockchain for their distributed public ledger.
What are the differences between a Centralized Ledger and a Decentralized Ledger ?
|Centralized Ledger||Decentralized Ledger|
|Controlled by single entity – bank||Exists in perpetuity regardless of market entities|
|Bank has control of transaction and verifies it||Shared system is scalable with multiple contacts|
|Bank can charge various fines and fees||Eliminates over-lapping and expensive IT systems|
|Entity or Bank – makes mistakes or commits fraud||Cryptographic authentication and verification|
|Entity or Bank – goes out of business or closes||No master database, uses peer-to-peer network|
Advantages and Disadvantages of Decentralized Ledgers
While there are some advantages to Decentralized ledgers, technology hiccups have been pointed out by experts. One such claim is that “blockchain technology” is not where it should be just yet. The structures available are over-replicating and generally very slow in memorializing transactions. What will happen as transaction volume increases? Additional concerns are made that the data structure is expensive to maintain from an energy and cost standpoint. With this in mind, it would seem IT aficionados and crypto-technology experts have overcome these challenges to create a scalable, viable blockchain trading platform. Is this what Byrnes intended by launching t0.com (tee-zero dot com)? Not only….
Get Faster Trades with T+Zero Crypto-Technology
The other part of Byrnes excitement is in the trade time to complete a settlement. Digital securities are designed to settle trades immediately, unlike traditional securities which settle on the 3rd day following the exchange of money, known as T+3 settlements. T0.com transactions are settled in exactly that, T + Ø, zero days. The revolutionary vision is that trade clearing houses and public exchanges would become less and less relevant as t0 blockchain based trades and technology takes off. Savvy experts warn exchanges and clearing houses not to be naïve about the potential; pointing to failed newspaper and magazine companies that disavowed the impact of the Internet and didn’t adapt to emerging technology or the way people and businesses do things now.
While Overstocks blockchain technology and www.t0.com are enticing as an emerging trend there are still some market deficiencies; as addressed in the risk factors of Overstocks recent Edgar filing.
Risk Factors – Overstock Edgar Reporting
- Our digital securities may be traded exclusively on a closed trading system with limited volume and liquidity.
- The distributed ledger technology used by the ATS is novel and untested with respect to digital securities
The digital securities trading ledger is publicly available which may give rise to privacy concerns.
- The private cryptographic keys representing digital securities could be stolen.
- The number of securities traded on a digital securities ATS (Alternative Trading System) may be very small, making the market price more easily manipulated.
- The payment mechanics for digital securities are novel and untested.
- An ATS is not a stock exchange and has no listing requirements for issuers or for the securities traded.
The price of our digital securities, even when we issue equity securities that rank on a parity with our common stock, is not pegged to the value of our common stock. Adding varied causes:
- lower volume and liquidity of the digital securities on a closed trading system;
- immediate settlement of the digital securities compared to traditional T+3 settlement; and
- novelty of the digital securities trading platform.
These things aside, tØ.com is an exciting new endeavor that presents a whole degree of Fintech variables to be considered by the SEC, FINRA, FinCEN, and other regulating entities. Presumably as volume creeps up, alternative trade systems will be subject to changing regulations that could disrupt trading activities. As well, technical flaws that may be uncovered when more and more traders use the platforms; and the possibility of breakdowns or compromised trades is always a risk.
If you’re into technology and concepts like Bitcoin, Crypto-bonds, and blockchain-based exchanges then this is likely to be very exciting news for you.
Blockchains, Distributed Ledgers, Smart Contracts: In the News
Read FINRA report January 2017: Distributed Ledger for the Securities Industry
Read about the blockchain technology start up, Digital Asset Holdings, led by former JP Morgan executive, Blythe Masters which raised $50 million from 13 financial firms.
The round drew support from ABN AMRO; Accenture; ASX Limited; BNP Paribas; Broadridge Financial Solutions; Citi; CME Ventures; Deutsche Börse Group; ICAP; J.P. Morgan; Santander InnoVentures; The Depository Trust & Clearing Corporation (DTCC); and The PNC Financial Services Group, Inc.
Need help with Fintech development for your BD or RIA firm? We’re happy to assist. Visit our Fintech Strategy section for financial service firms just getting started with a Fintech concept. We also work with start-up and emerging Fintech service providers in need of compliance and regulatory guidance.
RND Resources Inc outsourced compliance solutions to brokerage and investment advisory firms, for more details visit RND Resources services