Patrick Byrne: Blockchains Will Replace Stock Markets and Investment Banks
At the 3rd Global Blockchain Summit hosted by Wanxiang Group, Patrick Byrne, the CEO of a major retail company Overstock, discussed the potential of blockchain technology in the traditional finance sector and stock markets.
Last year, Overstock launched T0, a blockchain-based platform with which companies can distribute shares and sell equity within a transparent ecosystem. The T0 platform was first introduced as an alternative to stock markets, by using cryptographically secured distributed ledgers to reduce settlement time and costs. Through increased transparency and the utilization of blockchain technology, the development team behind T0 vowed to increase efficiency and auditability, preventing fraudulent operations and unnecessary fees resulted by the involvement of mediators.
In 2002, Overstock became a public company through its initial public offering (IPO). But Byrne and the Overstock team had faced a decade long dispute with financial institutions and Wall Street companies including Goldman Sachs, which led to $35 million in legal costs, due to the opaque and confined operations of stock markets and investment banks.
“I used to work for Mr Warren Buffett, and he taught me that, the reason The Wall Street likes things being traded over the counter rather than on exchanges is that because when things are taken to an exchange, about 80% of their profit margin goes away.”
The process of initiating an IPO is inefficient and expensive, particularly for young technology companies. It involves investment banks like Goldman Sachs and JPMorgan, and millions of dollars in fees and legal costs. As a result, an increasing number of technology and software companies have begun to avoid the IPO market and distribute shares through private channels and investment communities.
Most recently, Spotify, the world’s most widely used streaming service, secured a $16 billion valuation in its private equity offering. Over the past few years, Spotify has hinted the possibility of conducting an IPO but the company instead has selected private equity offering and debt financing to raise funds and expand its operations.
Essentially, the Overstock development team and T0 have created a blockchain-based platform that can serve companies like Spotify which are refraining to conduct IPOs and willing to distribute equity to private investors through regulated channels.
“So we have created a blockchain solution in the market five weeks ago - where it’s like this, T0 takes that stock and we run an auction and we auction it off”, Byrne explained. “I used to work for Mr Warren Buffett, and he taught me, the reason The Wall Street likes things being traded over the counter rather than on exchanges - over the counter being the short sellers calling two or three people - because when things are taken to an exchange, about 80% of their profit margin goes away. We now have a system where the short seller is the person that owns the stock. We get the stock, we run an overnight auction and we auction a digital locate receipt. Because it is a much better system, the prices are standardized.”
The Emergence of Blockchain Platforms
Already, Byrne revealed that the Overstock T0 platform has listed 120 billion in securities and registered 8,000 investors in the past two weeks. He noted that 120 billion will quickly evolve to half a trillion dollars worth of securities, and explained that the emergence of blockchain platforms that have the capability of replacing stock markets and investment banks would render the operations of financial institutions such as Goldman Sachs irrelevant.
“I don’t think that Goldman Sachs are going to like me anymore, because we are going after that piece of their business - that 75 percent of their revenue.”
“In the last two weeks, we’ve had 8,000 people sign up for this. And we provided 120 billion - we were hoping for 1 billion dollars of securities, that’s what we were hoping for. We think we can make one percent on everything we are given. Well, we got our first five a couple days ago. We have 120 billion dollars worth of securities and we think that it will quickly be, it may be half a trillion dollars worth of securities. So I don’t think that Goldman Sachs are going to like me anymore, because we are going after that piece of their business - that 75 percent of their revenue and the whole market is loving it, they have been waiting for this to happen,” said Byrne.
Most developers, analysts and researchers in the cryptocurrency sector have criticized the usage of permissioned ledgers and blockchain networks. But, as of current, public blockchain networks such as Ethereum cannot be used in a commercial scale because of their underlying scalability issues. Hence, for a platform T0 that has to settle thousands of data points and transactions per second, permissioned ledgers can be particularly beneficial and advantageous.
Patrick McCorry, a researcher at the prestigious University College London, explained that permissioned blockchain networks can be implemented commercially with high security measures and privacy if a consensus protocol is appropriately integrated.
“Traditionally, if I want to leverage a trusted third party to run a protocol on my behalf, I have to blindly trust that party to run the protocol correctly. From what I can see with permissioned blockchains, their goal is to still allow a trusted third party (i.e. a party that all participants can agree upon) to run the protocol, but allow participants involved in the protocol to verify that it was run correctly (i.e. a public verifiability property). In this sense - the blockchain provides a mechanism to detect whether the trusted third party is honest or not - and to make it easier for various protocols (i.e. smart contracts) to agree upon a single global state in order to facilitate interaction with each other,” McCorry explained.
Wall Street wolves arr slowly but surely starting to accept that blockchain is a game-changer. However, they're still a little hesitant. Cognizant, a US- based digital consulting firm, surveyed over 1,500 executives from over 570 financial services companies early this year. They found that 91% of companies recognize the importance of the technology, yet only a small number are actively integrating it. Love doesn’t necessarily mean marriage, right?
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