After the launch of Overstock’s cryptobond, which is a security based on blockchain technology, CEO Patrick Byrne shed light on Wall Street’s security loans. He pointed to research from DataLend indicating that about $954 billion in securities is typically on loan to some fund or another.
In other words, hedge funds and large investment firms don’t just buy and sell securities. They also borrow these from each other, possibly in order to short sell or to hedge other positions. Byrne said that this activity incurs a lot of profits for middlemen and costs for smaller traders.
Cyrptobond as Solution?
In using blockchain technology to verify exchanges for a financial security, a cryptobond could reduce these transactions costs and even speed up settlement. This could wipe out several players seeking to make cuts from these security loans, including prime brokers or lending houses.
“Securities lending has historically been a closed network,” explained Josh Galper of financial consulting firm Finadium. “In order to lend or borrow securities, you need to be one of the players in this market.”
With a cryptobond, this stock loan market could be moved to the internet or a decentralized database that would put power in the hands of the people in the entire network. Bryne aims to funnel the money that’s usually pocketed by middlemen into financial gains for traders and stockholders. “We’re taking a market that’s in the dark and we’re putting it on an exchange,” said Byrne.
Byrne is also moving closer to creating a decentralized trading system after the launch of the cryptobond and is seeking approval from the SEC. Bryne also announced his bitcoin-based stock-loan system under Overstock subsidiary TØ.com, which has also used the blockchain to create an online system that can replace the primary stock markets like the New York Stock Exchange and the Nasdaq.