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A Distributed Ledger Platform for Capital Markets

Cryptocurrency has entered the financial lexicon but is still viewed by suspicion by many professional in business. Unfortunately, the majority of business leaders have been unable to evaluate the impact of distributed ledger technology (DLT) on the businesses they operate. One business leader who could see through the haze (and had the courage to invest before blockchain became a fad) is the CEO of Overstock.com, Patrick M Byrne. In fact, Overstock.com became the first major retailer to accept Bitcoin in 2014.

Byrne was born in 1962 in Fort Wayne, Indiana. He has a Ph.D. in philosophy from Stanford University, a Bachelor Degree of Arts in Chinese studies from Dartmouth College, and a certificate from Beijing Normal University. Byrne served the Stanford University from 1989 to 1991 as a teaching fellow, and concurrently also managed Blackhawk Investment Co. and Elissar, Inc. In 1999, he explored the business potential of liquidating excess inventory. That period also marked the commencement of online shopping, and there were huge opportunities presenting itself to smart and motivated technocrats. Byrne acquired a majority stake in a company (later rebranded to Overstock.com) and then pivoted it to sell excess inventory over the internet. The company came went public in 2002 and made $1.8 billion in revenue in 2016.

Patrick Byrne’s Crypto Journey

In December 2013, Byrne discovered that the largest company accepting Bitcoin was a restaurant in Australia with just $800,000 in total revenue. He stepped up and helped Bitcoin reach the next level of adoption by getting Overstock.com to accept the coin. He later also gave the keynote speech in Amsterdam at the first global conference on Bitcoin.

Overstock.com bought SpeedRoute, a Wall Street trade routing technology firm, for an estimated $30 million. The company is said to route almost 2.5% of US equity order flow. The acquisition took place under Overstock’s blockchain and fintech incubator arm Medici. It has made investments in almost a dozen companies through the investing arm.

In 2015, tZERO, Overstock.com’s fintech subsidiary, issued the first SEC-compliant blockchain security. The deal was for $5 million and is currently trading under the ticker OSTKP.

Byrne’s aim with these investments was to create a blockchain version of Wall Street. He believes the existing settlement system is slow, broken, and open to mischief. Incorporating blockchain would not only cut down on costs and increase security, but also remove rent-seeking middlemen who provide no value to the overall ecosystem. His is focused on creating an SEC-compliant system for security token trading.

The 2008 Financial Crisis + Lowering the Boom on Tokens

Byrne explained the evolution of the settlement system, from the SEC acknowledging that the world wasn’t ready for P2P settlements (in 1960s) among the brokers to shifting the onus of settlement to a central party called DTCC (Depository Trust & Clearing Corporation). On 15 September 2008, this system froze and resulted in the worst breakdown of the central pillar of capital markets. Giving importance to the integration of the trading system with cryptology, Byrne believes that the only solution to put an end to fraudulent activities in the settlement and securitization system is tZERO. The financial crisis created the grounds to replace the whole system with a ledger that cryptographically provides protection and transparency.

Byrne trusts that the SEC is soon going to come down heavily on utility tokens. He thinks that the boom in issuance of utility tokens would end sooner than later and regulators have no incentive to let utility tokens flourish. The future belongs to SEC-compliant security tokens. He predicts that after five years, no corporation will be issuing shares; they will all be creating tokens.

tZERO is again among the pioneers in the field. It has raised over $100 million in its coin offering and is looking to raise a total of $250 million. It has filed this fundraising under REG S and D and got a big shot in the arm when George Soros, the titan of finance, invested a stupendous $100 million in the parent company. The company will look to list the token within 90 days of the completion of the regulatory processes.

Byrne also considers those looking to raise less than $50 million should look at Reg A+ for fundraising. He is obsessed about helping small businesses grow. He shared the impact small businesses have had across the American business ecosystem and how they are the real employment generators. His platform would allow them to raise funding at a fraction of the cost of around 5 percent, less than the current 15 percent on average. This will be a game changer and allow entrepreneurship to flourish across the United States. Critically, this will all be regulated with no chance of the SEC shutting down the whole thing arbitrarily (as has happened in China and India). In his multiple discussions with SEC officials, Byrne believes the SEC and other regulators want to make sure that any fundraising is compliant. They are not out to stop blockchain, but want to ensure the integrity of the markets.

Hacking and Cybersecurity Issues

Byrne also weighed in on the Coincheck hacking case that took place in Japan. He is leveraging Overstock.com’s cyber security team to ensure that tZERO has the most secure system. He has former NSA engineers on his team with decades of experience who are leading the efforts. He is also in final discussions with a top tier firm for custodian services.

The company aims to bring transparency and liquidity to capital markets and wants to work towards introducing a flawless trading system. By May 2018, tZERO will wrap up the development and present itself to the world. All eyes in the financial and crypto world are on Patrick Byrne and Overstock.com. tZERO has serious backing and is standing on solid ground with a real threat to Wall Street.

The opportunity size is massive for tZERO. Bob Greifeld, the former chairman and CEO of Nasdaq, publicly declared that blockchain is the biggest opportunity for the exchange in the coming decade and sees every security being tokenized in the next five years. This could lead to a fundamental reshaping of Wall Street with players like tZERO, having more than three years of tokenizing development already in place, taking the front lead.

Author:

stephanie vaughanStephanie Vaughan is vice president at Block X Ventures. She is an experienced capital markets professional with a background encompassing crowdfunding, venture capital, and investment banking. She served as director of capital markets and development at StreetShares, a marketplace lender focused on providing small business loans to veteran-owned companies  funded by Institutional, Regulation A and Regulation D investors.  At StreetShares, she led all strategic initiatives for investor products. She also played a key role in raising the company’s $23 million Series B financing. Previously, she was a senior associate executing venture debt transactions for LunaCap Ventures and was an investment banking associate with Houlihan Lokey. A former captain in the United States Marine Corps, she served as communications and operations officer and held strategic roles assisting in re-designing the USMC Force and overseeing anti-terrorism efforts for U.S. Central Command in Afghanistan. She holds an MBA in Finance from Columbia Business School and a BA in Quantitative Economics from the United States Naval Academy.

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