There is a problem with a lot of cryptocurrency projects out there, particularly ones focused on investments: they aren’t made by investors or for investors. Even tools that are for investors often miss the mark, like how Coinigy (an otherwise great platform) doesn’t default to the correct Fibonacci Ratios, or even ratios traditionally meaningful for investors. Sometimes, it takes someone from the target industry to figure out what that industry needs. Chefs will tell you better than anyone where to get the best knives. A Chef might not have any idea how to make a knife himself, but I would trust his recommendation at least as much if not more than a knife maker’s opinion. It is the results that ultimately matter and that is the only thing a Chef is concerned about.
Bringing equity funding to the masses through bitcoin and the block chain has long been a promise of Bitcoin proponents. It is a logical next step in the evolution of programmable money, the major stock markets cut out all but the biggest players and, it is thought, that Bitcoin could help open that up.
There is already a sort of fiat solution for this: OTC markets provide a way for investors and startups to connect and get public funding long before they would be considered for the New York Stock Exchange. These markets are the old world definition of decentralized, at least compared to NASDAQ and similar markets.
There are issues with these markets, as one might expect and Equibit is setting out to fix them. In many ways, equity funding is already completed on the Block chain. Counterparty, Mastercoin/Omni, NXT, etc. these currencies and bitcoin-based services can already distribute something resembling a stock to hopeful investors. The issue, and I say issue because it is not really a problem, is that they were designed by cryptocurrency programmers for cryptocurrency users.
Equibit is different, it is created with traditional investors in mind, with the hopes of funding traditional businesses as well as cryptocurrency related ones. Those other projects, I don’t think they would object from me saying, are an attempt to bring equity funding to Bitcoin or cryptocurrencies, Equibit is attempting to solve the problems inherent in OTC markets using the blockchain.
The OTC markets operate through dealers that set the price of various stocks by announcing what they will buy and sell that stock at. For many of these stocks, the price is standardized in something known as a pink sheet, these dealers make millions every year for the service of setting a stock’s price and facilitating trades between buyers and sellers.
They act like a drain on the OTC markets. Previously, it was a necessary drain. There are even more decentralized markets known as “dark pools” that exist outside of the pink sheet ledgers and outside of the control of the brokers. The problem is that no one really knows how much these stocks are worth, who else is bidding on them or any of the other advantages that come with a public market. Brokers fill that service for a small number of OTC stocks and are rewarded handsomely for it even while failing to cover most of the available assets.
Equibit is hoping to fix those problems. Stocks are traded on a public, decentralized ledger, so market prices can be set organically and there is a minimum level of transparency by asset issuers: people at least know how much of an asset exists and how many different addresses are bidding on it. There is no need for a broker and virtually no limit to the number of stocks that can be tracked.
Equibit works with its own blockchain and currency. The currency is rewriteable, meaning that any stock traded on the Equibit platform can be “blanked out” and turned back into a regular Equibit, ready to be turned into another asset. It also uses something called a transaction block to record cross blockchain transactions.
Although their whitepaper is fairly extensive, their code isn’t open-sourced yet, which often leads many, including myself, to write off cryptocurrency projects. But, they aren’t asking for public investment and presumably, any private investors will do their homework and check into their code. Keeping things close to their chest is certainly their right, at least until the system goes public. If they do eventually ask for public investment through some sort of crowd funding campaign (which they tell me is unlikely) or before Equibit currency units are made available for purchase, they need to open source their code. I would suggest waiting on any purchase of equibits units until people get a real look at it, as I would with any cryptocurrency project. But as a concept, a crypto-equity market built from the ground up to service the OTC stock economy is fascinating.
I spoke with Chris Horlacher about Equibit, what separates it from the likes of Counterparty, Ethereum and their ilk and how block chain technology can bring a lot of order to the otherwise chaotic off-market investment world.
Ian DeMartino: Do you want to start with an over view of what Equibit is and what you hope to accomplish?
Chris Horlacher: Absolutely. I was working as the CFO of Euro Pacific Canada (Peter Schiff’s Canadian affiliate) when Bitcoin came out. I love technology and was very fascinated by it and the implications of blockchain tech. I quickly realized that it was much, much more than just money and could really be applied to any sort of asset register.
Working in the securities industry gave me a front row seat to all the craziness that is the OTC securities market, a 100 year old business model that has not really changed.
Europac was paying piles of money to a company called Computershare to handle the registration and transfer of OTC securities for their clients, something that I realized can easily be done on a blockchain. So I started thinking about how to take Computershare out of the equation for these business dealings. Stock transfer agents like Computershare rake in billions each year, for very rudimentary services, much in the same manner that central banks provide clearing and settlement services to banks.
[With the advent] of blockchain tech, their business model became obsolete. “You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete”― R. Buckminster Fuller
To me, blockchain technology epitomizes this quote. That was back in 2010-2011, but that’s where it all got started: a system to render Stock Transfer Agents obsolete.
Ian DeMartino: So the plan is to replace these OTC markets with Equibit. Will it work with existing markets somehow or is it a self-contained system? How do you prevent the expected instances of fraud, like double spending or someone claiming they own a part of a company when they don’t?
Chris Horlacher: Equibit is it’s own self-contained market. You’re probably familiar with stock exchanges, however they only represent a small fraction of companies out there. Stocks that trade off-exchange are called OTC stocks. Information on them is very limited and brokers use a service called “pink sheets” to figure out what stocks are out there and what price the last trade was executed at, but this is still very incomplete information, lots of securities never make their way on to pink sheets, they’re limited by jurisdiction and a great many other things.
You also have temporary OTC markets set up called “dark pools,” which are very controversial right now. They’re usually set up for invite-only investors to bid on only one company’s stock, and everyone’s identities are masked.
Ian DeMartino: Those dark pools sound pretty shady.
Chris Horlacher: It’s mostly media hype. Equibit has elements of a dark pool, in the sense that real-world identities of investors are hidden behind their public keys, but everyone on the Equibit network has complete information on the number of issuing companies there are on the system and where all their securities are located. That is something never before achieved in the OTC market.
Ian DeMartino: So Equibit is a brand new OTC market for people to issue assets, separate from the ones that exist today?
Chris Horlacher: Yes, Equibit is the whole enchilada. Companies looking to raise funds can convert blank equibit units in to their company stock and issue it to other equibit users in exchange for pretty much anything.
Equibit seamlessly integrates with bitcoin, so they could raise BTC-capital, but really nothing is stopping people from paying for their equibit-stocks in a state-issued currency.
Ian DeMartino: So, what are the advantages of using it over Counterparty or a system like that?
Chris Horlacher: I’m not that familiar with their system so wouldn’t be able to comment specifically, however, at first glance it looks like Counterparty is still using BTC to track its transactions and create securities, whereas Equibit has that take place on it’s own blockchain.
And, it looks like they’ve tried to add a lot of functionality not related to the securities market, our primary target market will be the brokers themselves and the issuing companies.
They bear the brunt of transfer agent costs and so migrating the issuing companies they represent on to Equibit presents some pretty significant savings for both parties. Being closely integrated with BTC, I’m sure many cryptocurrency companies will be attracted to it, as well as companies looking to raise capital in countries without a sophisticated investment industry.
Ian DeMartino: Right, most “cryptoequity” markets seem to be focused on cryptocurrency companies, or at least the vast majority of the companies that have used bitcoin/cryptocurrencies for funding have been in the field.
Do you think it will be a challenge to get the heads of companies, who may have never heard of bitcoin to use Equibit? Or do you plan to put a focus on crypto-related companies?
Chris Horlacher: It’s uncertain at this point, I think a lot of industry skepticism has to do with the current state of user interfaces in most bitcoin clients, they just aren’t used to interacting with a program in the ways that most BTC clients work. Our client will be very familiar to the industry in terms of layout and workflows. Ideally, the end user won’t even necessarily know it’s even a P2P system, we’re very focused on creating a seamless experience with as little learning curve as possible.
Ian DeMartino: I’m also interested in Equibit’s cross blockchain capabilities, do you want to talk about that?
Chris Horlacher: Certainly, that was one of the most difficult challenges and what makes us very different from Counterparty. Originally, we wanted to use a “single address” concept, where the system would use a single public key to transact on both blockchains. We had something that would work like that, but it created new problems that we didn’t see any resolution for. So back to the drawing board we went, until we came up with the idea for a “routing block.” It’s an incredibly simple and elegant solution to the problem of associating multiple addresses across blockchains, which is what we needed to do in order to build the full functionality of an OTC platform in to the application.
How this is done is demonstrated in the white paper for issuing dividends, but this can be applied to other things as well, and we intend to really maximize the use of this innovation by the time we’re done. We may have an application that ties together 3 or 4 different blockchains to create the whole user experience.
Ian DeMartino: So, I could accept payment for a stock in several different currencies then?
Chris Horlacher: Yes – it will be BTC-compatible on day one, but we fully intend to add more cryptocurrencies further down the line.
Ian DeMartino: What about fiat currencies, you mentioned something about them as well?
Chris Horlacher: It can be done, there’s no requirement for a transfer of equibits to be followed/preceded by a BTC transfer (though we do outline a scenario in the white paper where it is) so someone could transfer equibits after meeting up and exchanging cash, much in the same way many bitcoin purchases are handled today.
If we integrate the application with an existing bank then it would be possible to handle that in-app as well, but that will be a project for another day. Once we start taking customer deposits, it puts us under the scope of financial regulators.
Ian DeMartino: That was another thing I wanted to get to. Do you have any fear of running afoul of regulators? I know some crypto-equity programs moved away from using names like “assets” and “stocks” to “tokens” for that reason. Is that a concern you hold? What is the current regulatory system in the OTC markets?
Chris Horlacher: The media has cultivated this image of OTC markets being a ‘wild west’ but that’s really not the case. There are very strict rules on issuing company securities to a broad base of investors however, Equibit does not participate in this process at all. From a regulatory standpoint, we should be good because we would not fall under the definition of an ‘issuer’ or ‘broker-dealer’ in securities law.
Moving away from those names was not really the problem, Swarm blew up because they were selling stock in their own company without going through the proper procedures.
Ian DeMartino: So, as long as companies go through those procedures for their locale, they should be fine just like they launched it on any other OTC?
Chris Horlacher: Precisely. It will be up to issuing companies and brokers using Equibit to be complying with their local laws and regulations. The Equibit system itself simply replaces paperwork and takes a middleman out of the picture.
Ian DeMartino: Do you want to talk a little more about the advantages your system will have over traditional ones, maybe like the transparency levels it offers investors as opposed to dark pools or more established systems?
Chris Horlacher: Sure! The advantages are legion:
There’s all the pure cash savings we already talked about but in addition, we’ve eliminated the information asymmetry problem that’s plaguing current OTC markets. Nobody has complete information about what’s out there in the OTC markets. Whereas an Equibit user knows precisely how many issuers there are, what addresses their stocks are in, when they authorize new stock for issuance and so much more.
The divisibility of the units themselves also means that share splits and stock dividends are a thing of the past. Those actions only take place because stocks are not divisible – you can’t own 0.75 of a stock.
The securities themselves are also unforgeable, if you try to forge someone’s stock, the users will see that the issuer key does not match the key the unit originated in.
Finally, investors gain some protection as their investments never go to zero since equibit units can always be recycled back in to their blank state to then be signed by some other issuing company, they’ll have a nominal value in and of themselves for their utility.
Ian DeMartino: I saw that in the whitepaper, but couldn’t it be argued that will add a (albeit small) overhead price to the stock?
Chris Horlacher: It does mean that an issuing company would need to acquire some equibits before issuing its stock, however compared to today’s issuance costs it would be negligible. By making the units limited and recyclable, we eliminate a long-term problem of the blockchain filling up with units of dead companies.
Ian DeMartino: What kind of time frame are we looking at for a release?
Chris Horlacher: With the right investment, we could have something ready for public release early next year. For now, it’s mostly a part-time project between me and the team.
Ian DeMartino: Where do you see the OTC Market in five years and is there anything else you would like to say?
Chris Horlacher: If we’re successful we’ll be well on our way to a far more transparent and efficient OTC market. By then, I anticipate that other companies will have build public Equibit exchanges as well, providing better price discovery just like the NYSE or TSX. By introducing the cryptocurrency community to a way of synchronizing an application across multiple blockchains we’ve unlocked a whole new area of development, leading to even more multi-coin apps combining other blockchains together to produce many other kinds of systems we can’t even imagine yet. Hopefully, the struggle to produce a single blockchain that can be all things to all people will wane as I see that as sort of a dead end for the development community.
The future as I see it, is made up of dozens, perhaps hundreds, of purpose-built blockchains handling only a single type of asset each but with applications tying them all together in a seamless UI.