Bitcoin Stock Exchange Could Be "More Valuable than Alibaba"
Currencies / Bitcoin Oct 22, 2014 - 06:02 PM GMTBy: Money_Morning
David Zeiler writes: When Overstock.com Inc. (Nasdaq: OSTK) Chief Executive Officer Patrick Byrne launched a wiki page to explore the possibility of a Bitcoin stock exchange, it was hard to imagine the project getting past the idea stage.
But Patrick Byrne is a man on a mission.
Driven by a deep mistrust of Wall Street, Byrne has announced the creation of a division within his company charged with making this dream a reality.
He's calling it "Medici" after the legendary family of Renaissance-era Italian bankers that pioneered the double-entry system of accounting.
"This could be as big, or bigger, than the Internet," the eccentric chief executive gushed to Wired earlier this month.
The basic idea is to create a stock trading system that uses Bitcoin's public ledger of transactions, the blockchain, to bypass Wall Street's institutions.
The wiki page helped Byrne find 13 groups already working on similar ideas. Byrne and his team quickly determined CounterParty was the best of the lot. So he hired two of the three co-founders.
That pair, along with several others, will become part of a new division within Overstock funded with 5% to 10% of Overstock's cash flow.
"We have, essentially, an open checkbook for them to build the crypto alternative to Wall Street," Byrne said in a speech given at the Inside Bitcoins Conference on October 6.
To navigate the many thorny legal and regulatory issues, Byrne said he has enlisted the services of blue chip legal firm Perkins Coie.
How far he gets is another question, but make no mistake – this man is serious.
"The Most Hated Man on Wall Street"
The roots of Byrne's crusade go back to the 2002 Overstock IPO, when he became aware of some unsettling practices on Wall Street.
By 2005 he became notorious for accusing Wall Street of "naked short selling." In naked short selling, a trader doesn't borrow shares to sell on the market – they simply sell shares they don't have. Those doing it, Byrne said, were manipulating stock prices for their own gain.
Byrne also accused Wall Street of corruption and of having ties to organized crime. His persistent attacks soon made him "the most hated man on Wall Street," a title he still wears with pride.
Byrne has taken it upon himself to purge the bad actors from the system. Or as he puts it, "drag Wall Street behind the barn and kill it with an ax."
While a Bitcoin stock market is a certainly a long shot, investors would reap several benefits if Byrne somehow pulls it off.
Here's what you can expect…
Why We Need the Medici Bitcoin Stock Exchange
To understand what Byrne hopes to achieve with the Medici Bitcoin stock exchange, you need to know something about what he's trying to fix.
In his speech, Byrne gave a little history lesson about how stock ownership is recorded.
In the old days, shares of stock were represented by paper certificates. But by the late 1960s, as volume reached ever-higher levels, the paper system became unwieldy.
So in 1973, the big investment banks of Wall Street got together and created the Depository Trust & Clearing Corp. (DTCC). The DTCC's electronic settlement system solved the problem of rising trading volume.
But it created a system in which the actual ownership of stock became a much fuzzier affair. "You think you own stock, but you don't," Byrne said in an interview on the Let's Talk Bitcoin podcast. "What you own are contractual rights against contractual rights against contractual rights. Someone somewhere down the line has the property rights."
Byrne maintains this system is not trustworthy and is subject to Wall Street manipulation.
"I believe the settlement system has been compromised and some bad people have figured out how to use that," he said. "Regulators don't understand that there's a lot of market-rigging going on. What Bitcoin presents – what the blockchain presents – is a way to have a peer-to-peer, one-to-one settlement system that doesn't run through any centralized institution that the bad folks can hijack."
Byrne has little faith in government regulators to protect investors. "The regulators are shoeshine boys for the people who benefit from the corruption," he said. A Bitcoin stock system, based on mathematics, would be incorruptible.
"That's why the crypto revolution is so necessary," Byrne said.
The First Step Is the Hardest
Byrne does not – at this point, anyway – envision a system that would supplant the New York Stock Exchange and Nasdaq. Instead, he sees Medici as a parallel stock trading system.
In other words, if a company wants to allow trading of its stock on Medici, it will not have to withdraw its listing from the exchange it's on now.
It's hard to say how many stocks already on the major exchanges may opt to list on an upstart exchange like Medici. But Byrne does know who would – startups who want to go public without the hassle and expense of dealing with Wall Street. He intends for Medici to undercut Wall Street's fees for bringing a company public by about 20%.
"Startups get a lot less of the money than they otherwise could because there are so many middle men," Byrne told Wired. "We hope to really increase the efficiency of the market."
As time goes on, the transparency of a Bitcoin stock system – and its immunity to much of Wall Street's monkey business – could also attract companies listed on the major exchanges.
Whether Byrne can get Medici off the ground mostly depends on the skill of his Perkins Coie legal team to resolve the regulatory issues. But a new Bitcoin stock exchange would clearly disrupt the financial status quo.
And for retail investors, there's actually a way to play this. Since Medici is part of Overstock.com, OSTK shares will benefit from the stock system's success. And down the road Byrne said he plans to spin off Medici from Overstock, which would further enrich shareholders.
"Building this – and being the company that owns this – can be more valuable than Overstock," Byrne told Wired. "It can be more valuable than Alibaba."
Everything you wanted to know about Bitcoin: Earlier this month a new documentary on Bitcoin was released. "The Rise and Rise of Bitcoin" tells the history of the digital currency and offer's a layman's explanation of how it works. It's way more than a geeky currency story…
Follow me on Twitter ;@DavidGZeiler.
Source : http://moneymorning.com/2014/10/20/this-bear-market-indicator-is-off-the-mark/
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