Stocks

This ICO Looks an Awful Lot Like a Share Offering

Overstock.com is so over the regular stock exchange.

Sometimes the new way of doing things isn’t so new.

Photographer: Dan Kitwood/Getty Images
This post originally appeared in Money Stuff

Ugh, how do you spell the name of Overstock.com Inc.'s blockchain subsidiary? Bloomberg News uses "tZero", while Overstock seems to use mostly "t0," but with a slash through the zero. (Or that is the effect that I assume they're going for, though in normal text fonts, it's really "tO" with a slash through the "O," "tØ.") You can also see "tZERO" out there. I wish Overstock's blockchain project was a little better at building consensus.

Anyway the big news out of Overstock/tZeR0 is that it is planning an initial coin offering to fund its development of a new exchange to trade tokens, one that will be licensed by the Securities and Exchange Commission as a securities exchange (and so might be an appealing place to trade ICO tokens that are probably securities). What is interesting about tZero's ICO is that it is -- shhh -- pretty much a regular stock offering:

But sometimes the new way of doing things looks a lot like the old way. Overstock.com CEO Patrick Byrne is chairman of a trading platform for ICO tokens called tZERO. Now, the electronic venue is planning its own ICO, which it expects will be regulated as a security in the US (unlike some other token offerings). It will raise the money through a private placement for accredited investors, and the token will trade on the company’s own platform. Most notably, it will pay holders a percentage of tZERO’s eventual profits, distributed quarterly. In other words, a regular old stock dividend.

There are two fundamentally different ways to think about "the blockchain" in finance. One way emphasizes the qualities that originally made bitcoin interesting: its trustless, decentralized nature, in which no one owns or controls the system as a whole. This is of course the philosophy behind bitcoin and Ethereum, but it is also the philosophy behind some of the more interesting and successful initial coin offerings. "The point of an ICO, done right," I wrote recently, "is that you are not building a business; you're building an unowned system for everyone to use."

The other way to think about "the blockchain" ignores those philosophical ideas and just treats blockchain as a technology improvement. This is the thinking behind most blockchain projects at banks, or clearinghouses, or central banks. Some centralized intermediary has some list of who owns what securities. It is a pain to manually update that list, and the systems it uses are outdated and don't sync up well with its customers' systems. "What about the blockchain?," someone asks, and then everyone nods reverently and says "yes the blockchain, that will make things more efficient." It probably even will! 

Even outside of banks, though, a lot of ICOs are closer to this line of thinking than the other one. A token offering, in this view, is not a way to fund the development of an unowned protocol that exists for the benefit of its users. It's just a way to fund a regular business with a regular stock offering (or securitization, or whatever), only "tokenized." "Tokenized" means that the stock in the business trades on a blockchain instead of on a regular stock exchange. But it is still basically stock -- though it might be stock with weak governance rights and few legal protections.

That seems to be tZero's approach. Overstock Chief Executive Officer Patrick Byrne does want to disintermediate the banks, but not out of some philosophical commitment to unowned general protocols. He just doesn't trust the banks; he thinks they're inefficient and ignore small companies (and facilitate naked short-selling):

He thinks all stock securities will eventually become tokens, trading on the distributed-ledger blockchain technology that underpins cryptoassets like bitcoin. In an interview with Quartz earlier this month, Byrne said blockchain can eliminate about 90% of the current costs of trading, by removing the need for Wall Street’s back-office plumbing.

"All stock securities will eventually become tokens" sounds ambitious, and in a way it is. If it's true, then the opportunity for blockchainy stock exchanges like tZero's to displace incumbent banks and exchanges is enormous. But in another way it is a retreat from the more interesting ambitions of blockchain proponents. It's not a new form of business organization, a new way to build decentralized protocols to displace corporations as the engine of technological innovation. It's just the regular old form of business organization, through public stock corporations, but on the blockchain.

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    To contact the author of this story:
    Matt Levine at mlevine51@bloomberg.net

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