Monday morning, Wired reported on an Overstock.com filing with the Security and Exchange Commission (SEC) that indicates the company will be releasing its stock on a cryptographically secure distributed ledger system. The implication seems to be that the distributed ledger system will be either Bitcoin’s blockchain or a similar technology, possibly Overstock’s own or one of the existing cryptocurrency platforms. This likely is related in some way to Overstock’s Medici project, announced back in October 6th.
Wired did a fine job of reporting, and this is not meant to be an attack on their journalistic chops. But they are a general tech site, and we are a bitcoin specific site. We should be digging deeper. I noticed a few quotes in the filing that they didn’t mention and that I feel give us a deeper look into what kind of system these securities could be offered on.
First, what Wired did cover: Overstock will be offering “up to $500 million” worth of securities on a “distributed ledger system”. The offering will be available through what it calls an alternative trading system (ATS), essentially a stock market alternative. There are a number of platforms in the cryptocurrency space that could fit that description, including CounterParty, but none of them have official approval from the SEC and Overstock indicates that they will use one or several that are.
We also know that Overstock CEO Patrick Bryne has talked about selling ownership of his company through a blockchain many times in the past, and that the company hired some CounterParty developers before deciding to move on without them.
For people hoping Patrick Bryne will go rogue and release a security in the wild west of the Bitcoin 2.0 space without SEC approval, you can forget it, Overstock isn’t taking that path. There will be some integration and co-operation with financial authorities.
That doesn’t completely rule out the current platforms like NXT and CounterParty, but they would have to get some SEC approval first. Some wording in the filing also suggests that multiple ATS could be utilized. Medici is most likely involved, but what exactly Medici is remains unknown. It could be a platform built on top of Bitcoin’s blockchain, it could be a system with its own blockchain, or it could use a lesser blockchain, like NXT’s. There is also the possibility that it could float across multiple blockchains, something that past comments from the company matches up with.
Combining what we already know about the system with the three facts below, the picture that begins to form is one of a a slow evolution from a traditionally traded platform to something closer to what the Bitcoin community is accustomed to.
Now, onto what the filing can tell us:
1) The System Will Be Centralized, At First
This idea may be a deal breaker for some. But it is important to note again that Overstock seems focused on starting with a more traditional, SEC-friendly approach and then transitioning to something more decentralized, as customers become more knowledgeable about private key security and similar practices. While this seemingly eliminates the decentralized aspect of Overstock’s plans, it seems that Overstock is open to that changing in the future.
To make the system more user-friendly, at least initially, either the ATS trading our digital securities or each broker-dealer participating on that ATS is expected to hold the private keys on behalf of securities holders. This will enable securities holders to manage their digital securities account with a simple login and password, similar to traditional online brokerage accounts. As such, initially, our digital securities may be as vulnerable to cyber theft as a traditional online brokerage account would be. If the repository is hacked and private keys are stolen, the thief could transfer affected digital securities to its own account and sell the digital securities. Each broker-dealer with access to the ATS trading our digital securities is expected to know its customers[.]
This could be describing something similar to an all-encompassing Circle or it could be a system where brokers hold keys for clients, or a hybrid of the two depending on each user’s experience. Overstock openly admits that this centralization results in some security concerns, so it seems that they are eager to evolve it to a more decentralized system.
2) Multisignature Will Be Included, But Maybe Not In The Way You Would Like
One way Overstock could evolve the system to something more decentralized and secure, without going full “QT-client” on their investors, would be by implementing multisignature technology. The filing indicates that it is something they are looking into, but it also comes with a potential dark side.
“There can be multiple private keys, any number of which may be required in order to authorize a transfer of ownership of the digital securities. One or more of a digital security holder’s private keys may be held by the issuer of the digital securities, by the ATS and/or by the holder’s broker-dealer. Depending on the security protocols used for the digital securities, which will be described in more detail in the prospectus supplement for the applicable offering, the ATS and/or the holder’s broker-dealer may be able to transfer ownership of the digital securities on behalf of the holder. In addition, the issuer of the digital securities may be able to block further transfers of the digital securities to the extent it holds one of the private keys.” [Emphasis added]
We could potentially see a system where multisignature increases the control the investor has, or alternatively, one where the security issuer has the power to block any trade. That is, as far as I am aware, a new implementation of multisignature technology, but not one that is likely to attract cryptocurrency users accustomed to the idea of complete control over their wealth.
On the other hand, a feature like that would likely please regulators concerned about investors losing their keys to thieves.
3) The ATS Will Use a ‘Payment Mechanic’ That is ‘Novel and Untested’
The filing never once mentioned “Bitcoin” or “cryptocurrencies” but it came close a few times. This was one of those times. Whatever ATS Overstock uses, it apparently will (or does) use a payment mechanic that is new and untested.
“While we intend to allow our digital securities to trade only on an ATS that has adopted payment mechanics that match the speed and irrevocability associated with immediate or nearly immediate settlement of digital securities, the payment mechanics of the ATS are novel and untested.”
Unless Overstock wants to sell stock using Apple Pay, cryptocurrencies seem like the only logical fit here. The existing platforms that could arguably be described as a ATS platform with a distributed ledger all accept Bitcoin or another digital currency, and it would stand to reason that any Overstock developed platform would as well.
Whatever this turns into, one thing is certain: Overstock.com is determined to show how Bitcoin and blockchain technologies can be used to change ecommerce. It should make for an interesting rest of 2015.