[TØ](https://www.t0.com/) is a new blockchain platform built to enable cryptographically secure markets, that can be used for real-time [short sales](http://www.investopedia.com/university/shortselling/shortselling1.asp), in full compliance with SEC regulations. The subsidiary of [Overstock](http://www.overstock.com/) recently completed a [production beta short sale](http://investors.overstock.com/phoenix.zhtml?c=131091&p=irol-newsArticle&ID=2097753), secured by the Bitcoin blockchain.
Overstock CEO and Libertarian philosopher, Patrick Byrne, has long maintained that the opaque systems used on Wall Street create loopholes, that are exploited by financial entities. One of those loopholes involves selling shares and buying them back later for a profit, otherwise know as short selling.
Short selling typically involves the sale of securities that an investor does not own, or has borrowed. By buying these securities back when they are cheaper, a profit can be made on the price difference. In a "naked" short sale, the seller doesn’t borrow the securities in time to make delivery to the buyer within the standard three-day settlement period, resulting in a “failure to deliver.”
Naked short selling is not necessarily a violation of the federal securities laws or the Commission’s rules. The SEC states that, “in certain circumstances, ‘naked’ short selling contributes to market liquidity.” In 2008, the SEC banned what it called "abusive naked short selling” in the United States. The practice has often been linked to price manipulation, driving down share prices.
In the case of Washington Mutual, which met its demise in 2008, Washington Mutual’s stock “failure to deliver” 9 million times. From June 5 to June 19 there were at least 1 million WaMu shares that had failed to deliver, on any given day.
Hedge funds and brokers sold as many as 9 million shares that they did not possess, and they kept the market saturated with at least 1 million phantom shares for more than two weeks. WaMu’s stock price dropped by more than 30% during this period.
Patrick Byrne has accused several banks and hedge funds of colluding to drive down the price of Overstock stock in the past, and recently settled a case with Merrill Lynch. "Despite the appeals court in its decision having found ‘substantial evidence that Goldman Brokerage was itself’ engaged in the fraud, Goldman has covered its retreat from battle with us well enough to escape alive this time," Byrne stated in June.
"That concerns me less than it might, because (as anyone reading the stories regarding our crypto efforts knows), as far as the war goes, we are in the midst of developing ‘The Bomb’."
— – Patrick Byrne
Byrne crypto efforts include “tØ,” which applies Bitcoins blockchain to the world of finance, “making transactions more equitable, transparent and accessible to all market participants,” states the company.
“All tØ technologies are built upon decentralized, cryptographically protected ledgers, which anybody can access and inspect. This ensures fairness to the entire market, without regard for size or geographic location.”
— – tØ
"The main event isn’t bitcoin," says Byrne. "It’s using the blockchain to disrupt other industries and Wall Street." Storing transactions in one automatically shared, tamper-proof database could eliminate the need for complicated procedures and clearinghouses, which are currently used to make sure banks, brokers, and exchanges have their records in sync.
To demonstrate the platform, Byrne bought a US$500,000 bond issued by Overstock in June. The following month, Overstock announced the sale of a US$5 million “cryptobond” to an affiliate of FNY Capital.
Last week Clique Fund, a hedge fund based in New York City, used this system to borrow shares in the 30 stocks that make up the Dow Jones Industrial Average. The deal was worth $10m, all recorded on the blockchain. “This is a real trade,” says John Tabacco, who founded TØ together with Byrne.
According to Tabacco, TØ has been facilitating stock loans for the past two weeks, with five different customers borrowing stock, including Clique Fund. Last week’s transaction is the largest to date, “we’re starting to get critical mass—institutional-sized trades.”
These transaction spearhead a much larger movement towards systems that use the blockchain and its related technologies to facilitate financial trades. Startups such as Symbiont are working on similar systems, as is the company behind the Nasdaq stock exchange. Nasdaq is currently building a system that will use the blockchain to oversee trades in private companies, but believes that the technology can also be applied to the public stock markets.
The promise of the blockchain is that it can streamline the trading process, providing a more reliable record of who owns what and when, a key component in Byrnes battle with naked short selling fought with Merrill Lynch.
On Oct 15, t0 announced that the Clique Fund deal had tested a new crypto asset on the platform, the Pre-borrow Assured Token (PAT). The team has now successfully completed another production beta test, by successfully using the bitcoin blockchain to record evidence of compliance with SEC Regulation SHO, before a trader can engage in a short-sale.
“Our introduction of the Pre-borrow Assured Token will solve a problem for the beneficial owners, by bringing their inventory into a transparent market; it will solve a problem for the short seller, who will be able to borrow in a transparent market; and it will solve a problem for regulators, who for several years have taken a more aggressive stance regarding this mischief than they did a decade ago, I feel obliged to acknowledge. Unfortunately, a few bad apples spoil the barrel. That barrel needs a good scrubbing, and that’s what our Pre-borrow Assured Token will do."
— – Byrne
SEC Regulation SHO was adopted to update regulation in light of numerous market developments since short sale regulation was first adopted, in 1938, and to address concerns regarding persistent failures to deliver and potentially abusive naked short selling. Byrne clearly agrees with the SEC on principal, “I have no objection in principle with short selling when done legally.”
The first short-sale implemented on the blockchain is quite a feat. When fully operational, the team claims that the service will provide unprecedented levels of transparency in an “otherwise opaque world of stock lending.”
"The blockchain is the most important financial development of our lifetimes," said Byrne. "While others theorize about the innovations this new technology can usher in, t0 is taking action and proving the concept daily, including using it to crack open the notoriously inaccessible black box of securities lending."
Byrne has always shown his libertarian thinking and Austrian economics throughout his project ideas, Overstock.com was one of the largest merchants to accept Bitcoin through its e-commerce marketplace.
The tØ platform is the first example of a “Wall Street-like” concept, through the eyes of its Libertarian founder. With the completed short-selling test showing that the system does indeed work, only time will tell how many other traditional finance services will be disrupted.