Patrick Byrne, the CEO of e-commerce company Overstock, has long been a proponent of blockchain and cryptocurrency, and he’s putting his money where his mouth is. A bevy of blockchain-supported projects has investors looking twice at Overstock’s growth potential, following its more than 200 percent jump in value during the last half of 2017. This growth has largely come on the back of announcements regarding the company’s plans – and they are big plans, indeed.
Overstock’s transition from e-commerce to cryptocurrency and blockchain has been years in the making. In 2014, the company became the first major U.S. retailer to accept Bitcoin. Overstock became the first publicly traded company to trade more than 126,000 shares using blockchain technology over the internet starting in 2016. Not only did Overstock facilitate its trades over the blockchain, but it also accepts digital currency as payment. They started with accepting Bitcoin, and in August, the company announced it would also begin accepting more than 40 other kinds of cryptocurrency with the support of Swiss crypto-processing company ShapeShift. The company also retained half of all Bitcoins transacted on Overstock as investments.
These projects proved promising for Overstock, which has seen a steady increase in its stock price – growing from $24.60 per share on September 1 to $75.80 per share, at its peak, on Dec. 18 – through the last quarter of the year, largely on the back of news about its blockchain and crypto-based projects.
And as it turns out, this was just the beginning. Byrne is reportedly considering selling Overstock’s e-commerce division to solely focus on the company’s blockchain endeavors. The most recent, an initial coin offering (ICO) for subsidiary tZero, sets the foundation for a new type of digital securities exchange, the first of its kind regulated by the U.S. Securities and Exchange Commission (SEC).
What is tZero?
The platform, tZero is the first fully licensed, blockchain-based alternative trading system. The company serves as a type of securities exchange known as a “dark pool,” which directly connects buyers and sellers without the intermediary of a broker. This stands in contrast with the way conventional securities trading operates on Wall Street.
As a “modular, adaptable platform,” tZero will bring participants together in real-time to trade coins on a blockchain-based exchange. After three years of work, tZero emerged as the only licensed platform for trading digital securities, fully compliant with SEC regulations and the Financial Industry Regulatory Authority’s (FINRA) guidelines. Such a platform became a necessity after ICOs raised more than $2.27 billion in 2017, a 2,170 percent increase from 2016. The platform is intended to serve as a trusted place to buy and sell, which is in high demand since the SEC warned investors of fraudulent or disingenuous ICOs.
“We built a blockchain version of Wall Street,” Byrne told TheStreet. “As these tokens become available… they’re going to be trading on our system. No one else has such a system at the moment.”
tZero leverages “Digital Locate Receipts” (DLRs), which capture all inventory and audit trail information, storing it permanently in the company’s proprietary blockchain. Any user on the network can view and bid on DLRs because of blockchains transparent and distributed nature. All purchases are registered to the blockchain to create a permanent record of transactions. Not only does this simplify regulatory oversight, but it cuts out middlemen and traditional Wall Street institutions.
Byrne added that the majority of the “mischief” occurring on Wall Street is because the trade and settlement of securities are separated by a broker-dealer. However, on the blockchain, the trade and settlement are unified, eliminating illicit activity.
In other words, the buyer and seller trade directly, without handing off the securities deal to a third party. Unifying buyer and seller results in lower transaction costs, such as fees, and increasing transparency into the way the capital market operates.
Investors responded to the idea enthusiastically. Last week, tZero launched its own ICO and raised more than $100 million from accredited investors in its first 12 hours.
But it’s not just a licensed exchange for digital securities that’s attracting so much attention. There is a larger vision at work that Byrne hopes will expand access to capital around the world, and it has the potential to be highly lucrative.
Some investment experts anticipate even further growth for Overstock in the wake of the tZero ICO. According to Evelyn Cheng’s article on CNBC, Independent investor and longtime Overstock critic Mark Cohodes predicted in October the stock would reach $100 per share. Some investors are even more bullish, but DA Davidson analyst Tom Forte told CNBC to expect some volatility, like the kind “historically limited to when the company reported earnings.”
However, tZero’s selling point – its licensing and the regulation that comes along with it – could also be a potential downside compared with other exchanges. Because it is subject to the U.S. SEC oversight, the typical red tape and bureaucratic hold ups will likely apply.
How does Byrne plan to use tZero to “democratize capital” in developing markets and what are the potential payoffs? Could this project be the thing that sends Overstock’s share price skyrocketing? The answers might surprise you, and it involves a partnership with a well-known economist. Keep reading to find out more.
A Partnership Aimed at Developing Markets
In partnership with a new Overstock subsidiary called De Soto Inc., Byrne is setting tZero’s sights specifically on developing capital markets. Operated along with economist Hernando de Soto, De Soto Inc. serves as a type of blockchain-based property registry system.
De Soto Inc. is rooted in building a system that can track local property records, authenticate them, and even enable the transfer of rights directly on the blockchain. The ultimate goal is to avail these properties as collateral for loans, which until now has been impossible.
In many developing economies, systems of recording ownership are often informal or even non-existent. Rather than using titles and deeds, people will use local ledgers or turn to local organizations to enforce de facto property rights systems. Registering these properties on the blockchain, however, alleviates this problem and enables financiers to lend against those properties.
As an SEC-regulated securities exchange, tZero is uniquely positioned to offer liquidity to the owners of those newly registered properties in the form of cryptocurrency. And since both De Soto Inc. and tZero are blockchain-based companies that are tied together by Overstock’s blockchain-focused subsidiary Medici Ventures, the hope is that there is a seamless connection between the two.
“About 80 percent of the world’s population is unable to enter into the modern global economy due to lack of visible and standardized property records,” de Soto told Yahoo Finance. “Billions of people have resources that cannot easily be transformed into productive capital. Blockchain is a powerful tool to solve these structural issues, which are some of the principal causes of poverty and conflict.”
De Soto has a long track record of advocating for property rights and influencing economic reforms in Peru. As the founder and president of the Institute for Liberty and Democracy (ILD,) De Soto has helped push dramatic changes to economic policy in his native country of Peru. He’s also been pivotal in enacting reforms throughout Africa, Asia, Latin America, the Middle East and the former Soviet bloc.
How Big is the Global Property Management Market?
The size of the global property management market is uncertain, but it’s likely huge. Solely concerning real estate, it’s estimated that poor people in developing economies own roughly $14 trillion in assets considered “dead capital,” or assets not legally recognized as owned.
In fact, in just 12 Latin American countries, dead capital totals $1.2 trillion. In those countries, 92 percent of businesses, 76 percent of rural properties, and 65 percent of dwellings are part of the informal, extralegal sector. That means no titles and registrations, but blockchain has the potential to change all of that. In de Soto’s home nation of Peru alone, roughly $74 billion in real estate value cannot be used to establish credit or as collateral for loans.
“Hernando’s work has demonstrated that secure ownership of property is a catalyst that sets into motion the engine of progress, creating enormous wealth in the process,” Byrne told Yahoo Finance. “From my first public talks on blockchain, I emphasized that blockchain’s application to property could lift billions out of poverty. Hernando and I intend to use blockchain technology to empower and enfranchize the five billion people who live outside formal economies within five years.”
Capitalizing on Dead Real Estate in Latin America With tZero and Virtually No Competition
As the first partnership of its kind, tZero and De Soto Inc. have the opportunity to make the first foray into a massive world of dead capital. For perspective, the total size of global investment capital markets was $101.1 trillion in 2014, meaning global dead real estate is about 14 percent the size of the world’s invested money. tZero and De Soto Inc. are pursuing that wealth with virtually no existing competition.
In the case of the twelve Latin American countries, 92 percent of businesses were operating in the extralegal sector. These entrepreneurs have a huge incentive to lean on their assets for greater (or any) access to capital. Business owners who want to obtain additional working capital or are ready to invest in the growth of their business would benefit greatly from registering the properties in a more formal way. De Soto Inc. offers that opportunity, and tZero follows up with the promise of capital.
For those who are not yet entrepreneurs, De Soto Inc.’s registry system enables them to take out loans to start a business if they so choose. This group encompasses the 76 percent of rural properties and 65 percent of dwellings that are informally owned. That is what is meant by harnessing dead capital for wealth creation. Formal property ownership is also one of de Soto’s key tenets when it comes to developing young markets.
The partnership between tZero and De Soto Inc. is underpinned by another Byrne-led company called Medici Ventures, a wholly-owned Overstock subsidiary that specializes in blockchain-based solutions.
Synthesizing both De Soto Inc.’s property registry system and tZero’s exchange platform is the final step, and that’s where Medici Ventures comes in. For Jonathon Johnson, president of Medici Ventures, the opportunity is immense and near-term, with the potential to revolutionize the way the developing world conceives of finance and commerce.
“One of our main missions is to democratize capital – to help the poorest members of society participate in global markets,” Johnson told Yahoo Finance. “Blockchain can solve this problem.”
The De Soto Inc. and tZero partnership advances two of Medici Ventures’ six major focuses: capital markets and land financing. In addition, the company is leveraging blockchain to develop solutions in money and banking, identity, voting, and underlying technologies.
Grounding Cryptocurrency in Real Value and Real World Applications
Byrne and de Soto’s partnership could also serve to ground cryptocurrencies in real assets. Many economists and financial elite have expressed concern about cryptocurrencies staying power. Jamie Dimon, CEO of JP Morgan Chase, lamented “currencies have legal support. [Cryptocurrency] will blow up.”
Nobel Laureate Joseph Stiglitz criticized cryptocurrency saying, “Bitcoin is successful only because of its potential for circumvention. It doesn’t serve any socially useful function.”
However, if Byrne and de Soto succeed in expanding capital markets via blockchain, cryptocurrencies will be serving a socially useful function for those in developing economies, and in turn, will be grounded in real assets. It is likely not enough to stabilize entire cryptocurrencies, but it is a first step toward tethering cryptocurrencies to real-world applications.
The ideas of cryptocurrency experts support the notion that this evolution is possible. Ryan Taylor, a former McKinsey analyst, and CEO of Dash, a major cryptocurrency, told Business Insider that finding new ways to employ cryptocurrencies is just a part of crypto growing up; it won’t be about speculative investment forever.
“There is certainly some speculation,” Taylor told Business Insider, “but it’s being driven by the belief that future use-cases will come to fruition.”
As tZero’s ICO continues, it will be interesting to see how much more buzz it generates amongst investors. Currently, it is slated to proceed through two rounds of accredited funding until February 16, 2018.
The early results suggest enthusiasm around the platform; but in terms of the partnership with De Soto Inc., the duo will have to prove the effectiveness of their rollout into developing economies. Where there is demand, there is the opportunity for wealth creation, and Byrne and de Soto have identified $14 trillion worth of potential demand in an industry of one.
Crypto$umer are not financial advisors and the reporting above is not intended to be taken as financial advice.
Dennis Consorte has an appetite for news and information about cryptocurrencies, blockchain, IoT, fintech, adtech, martech and other technologies. He also has over 20 years’ experience in digital marketing and content strategy.
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