Can tZERO and BOX Digital Markets change the face of capital markets?

Jim Kharouf

Jim Kharouf


It would not be an understatement to say that Patrick Byrne thinks big – really big – like a quadrillion dollar market.

The Overstock founder and CEO has been building the firm’s tZERO subsidiary, a distributed ledger platform, since 2016 in an attempt to disrupt today’s capital market structure. Last week’s announced deal with BOX Digital Markets, a sister company to BOX Options Exchange, to create a Securities and Exchange Commission regulated market that lists and trades security tokens may do just that. The partnership could dramatically change how capital is raised across multiple asset classes and kickstart the clear rules from the SEC that govern so-called security tokens.  

Much has been made about how this partnership will leverage BOX’s equity market medallion to offer security tokens using tZERO’s decentralized ledger trading platform. But this stands to be one of the most groundbreaking moves in the digital asset space to date. Let’s start with the potential Byrne sees with tZERO’s platform.

The way Byrne figures, the whole crypto security market is about $400 billion in capitalization. If you can securitize stocks through securities tokens, “that is an $80 trillion opportunity.” Bonds are a $100 trillion market. Real estate is about $300 trillion globally, he says. Add in the art market, patent markets and so on, and you’re starting to talk about a quadrillion dollars all combined.

“You’re talking about $1 quadrillion worth of assets that conceivably can be securitized,” Byrne said.

If that sounds nuts to you, Byrne said it’s already been talked about at established exchanges like Nasdaq. The chairman of Nasdaq, Bob Greifeld, told Forbes in 2016 that “Blockchain will bring levels of efficiency to the financial markets that we’ve never seen before.” Nasdaq is already using blockchain on its Nasdaq Private Market, and it’s not the only exchange using the technology. It is also working on a project with Citi using blockchain to allow trading of securities internationally.

Byrne also sees great potential in the “second market” for private securities or investments. Think about early investors in companies like Uber and others that have bought stakes in the company but would like to resell those shares on a private market. That, he said, “could revolutionize the VC world.”

In another potential use case, he said currently listed companies could issue shares in this new token-based market. Byrne said companies will be incentivized to do that because issuing security tokens may be 80 to 90 percent lower than current share issuance models.

He said the goal is to design securities tokens that are “reg aware,” or will be customized exactly to qualified investors or others to meet regulatory requirements. He said this means “regulators get a perfect view into the atomic level of every trade in the market.”

“It allows for much more configurable securities that are not just reg aware but are based off the bottom line of common stock,” he said. “There may be whole new ways to raise capital with smart tokens. Tie them to the top line. Tie them to events. And what that means is, it is possible for entrepreneurs to raise money using deals that have never been done before and may allow for a more accurate allocation of capital for society.”

Byrne told the story of Elio Motors in Shreveport, La., a start-up automaker that needs about $200 million to get its plant up and running. The company aims to produce a $7,500 car that gets 84 miles per gallon. Today’s normal capital raising process involves venture capital firms and investment banks. Elio announced this month it will raise capital with a security token sale. Overstock is one of the investors in this company, with an announced $2.5 million stake, and will also back its security token sale. But Byrne said this is capital raising with a twist, all enabled by the flexibility of security tokens. Rather than just selling one car per investor who puts up the cash, the company could take one car out of every eight and move those into an auction process using “Elio coins.”

“This is a proxy for the question, ‘Is there a market and how much can he get?’ by selling those coins,” Byrne said. “If this works, because we’re not selling a stock, it could open a whole new world for entrepreneurs. If he sells the coin, he can sell the car. If he cannot sell the car, he cannot sell the coin. That’s why it is a good proxy.”

Byrne believes the process could be used to generate investment in everything from real estate to new drug research.

“Security tokens are going to create much more interesting ways of raising money, instead of saying, ‘here is some common stock and you get to share in my bottom line,'” he said. “And I think ways like this will allow society to have a much better capital allocation process.”

Bringing regulation to ICOs

Beyond coming up with new innovations for securities, this effort effectively pushes the SEC to clearly define the rules of securities tokens. Byrne and BOX Digital Markets CEO Lisa Fall are going to Washington DC to work with the SEC on just how to structure this market. Given the potential use cases for the market, this could fundamentally change the way securities are regulated in the US and perhaps elsewhere. Byrne, for one, is anxious to bring regulation to this market.

“I think 90 percent of the ICO market is as crooked as a dog’s hind leg,” Byrne said. “They bent and contorted themselves into illogical pretzels so they can claim these are not securities. But in my book, if you are out there raising money from the public to build a business, you are raising capital to build a business and that’s security. I think the whole ICO market has been kidding themselves that these are not securities.”

Fall, who also serves as the CEO of BOX Options, believes they will find a willing partner in the SEC. Jay Clayton, chairman of the SEC, has said often that he has not seen an ICO that is not a security.

“It has been like the Wild West,” Fall said. “And security tokens were going to end up on a regulated exchange. We think BOX, as an SRO, can bring its reputation and best practices, and we’re going to regulate the security token market just like we regulate the options market, hopefully with the SEC.”

Assuming the SEC approves the joint venture and develops clear security token rules and guidelines, this could open this market dramatically. One of the major impediments for institutions such as hedge funds, pension funds and others has been the lack of regulatory clarity. That could truly change the composition of participants in the sector and perhaps open the door to new innovations.

Byrne does not intend to stop here, however. He has shopped the tZERO platform around the world and believes there will be other markets interested in partnering as well.

“Everybody gets this, all over the world,” he said. “They all get the idea, that in the next several years, capital markets as we know them are going to move to this whole new model. The economics are so compelling.”


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