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As Some Firms Defy SEC, Overstock Is Set To Cash In On "Wild West" ICOs

The Securities and Exchange Commission roiled the blockchain industry last week when it announced that so-called Initial Coin Offerings are considered securities offerings. While some firms are embracing a strategy of open defiance, vowing to push ahead with their planned ICOs without registering them, at least one former innovator in the blockchain arena sees the new rulings as a boon for its nascent cryptoasset trading platform, according to CoinDesk.

Overstock.com, one of the first major US companies to embrace blockchain technology, believes the regulations could drive business to its cryptoasset trading platform known as T-0. Overstock cemented its status as a blockchain innovator back in December 2015 when it raised $2 million by offering a small tranche of Overstock corporate bonds on its platform. The offering, which received approval from regulators, created the first blockchain-based financial securities to trade in the US.

Overstock CEO Patrick Byrne

Since then, the company has been quietly building out its platform while waiting for US regulators to create a framework for legally offering and trading blockchain securities. And now the day it has long been waiting for has finally arrived, according to CoinDesk.

…earlier this week, tØ got the news it had been waiting for when the SEC finally published the results of a landmark report in which it clearly laid out its rationale for why some tokens are still securities.

 

Moreover, the report clarified that, once a token issued in an ICO has been deemed a security, only national securities exchanges like Nasdaq and some alternative trading systems (ATSs) are permitted to be involved in the trading.”

Overstock.com started building its T-0 blockchain-based trading platform in the spring of 2015, when it purchased a stake in an alternative trading system. Now, the company believes its system is ready for the mass market, and hopes to receive permission from the SEC to traffic in ICOs in the coming months.

“Moreover, the report clarified that, once a token issued in an ICO has been deemed a security, only national securities exchanges like Nasdaq and some alternative trading systems (ATSs) are permitted to be involved in the trading.”    

According to CoinDesk, Overstock CEO Patrick Byrne has long hoped to build a platform that would allow trading in stocks and bonds backed by the blockchain. The platform’s name, T-0, is derived from Byrne’s claim that blockchain-backed transactions are inherently superior to the current system because, in theory, these trades will settle instantly, instead of taking up to three days to clear.

However, many competitors, including some of the world’s largest financial institutions, are quickly catching. Earlier this month, Goldman Sachs was awarded a patent for its own crypto trading system called “SETLCoin.”  

Those who are only now becoming acquainted with Byrne’s story might wonder: What inspired a guy who built a billion-dollar business selling furniture and other household goods to try and revolutionize how financial securities are traded?

Byrne was initially inspired to try and disrupt the world of high finance after Overstock was nearly destroyed by “naked” short sellers, or speculators who sell a company’s shares short without first procuring the securities. The incident inspired Byrne to use the blockchain to cut out everyone who stood in the way of buyers and sellers, as CoinDesk explains.
Still, the question of whether it’s legal to trade blockchain-based stocks and bonds remains murky. However, there’s been at least one important breakthrough recently. Last month, the Delaware legislature passed a landmark amendment that opened the door to blockchain-backed stock trading on a massive scale – a decision that could significantly impact Overstock’s business.

“One possible explanation for the relatively few compliant blockchain capital raises is uncertainty about the legality of recording stock ownership on a distributed ledger, according to Andrea Tinianow, founder and director of the state-run Delaware Blockchain Initiative.

 

Using technology that tØ's parent company invested in last week, made by New York-based Symbiont, Delaware has just signed into law a series of amendments that Tinianow has said will remove much of that uncertainly for firms incorporated in her state.

 

"We've got the regulatory framework for blockchain shares," said Tinianow. "Now the SEC is coming in with federal guidance and it’s a natural fit."

In another major regulatory accomplishment, the Commodity Futures Trading Commission recently approved the creation of the first clearinghouse for cryptocurrency options, a decision that could entice sophisticated investors like hedge funds and CTAs to increase their exposure to bitcoin, as we reported earlier this month.

US regulators aren’t yet comfortable with bitcoin ETFs (although a quad-levered S&P ETF is just fine for mom and pop), but apparently options and swaps are another story. This week, the CFTC took a bold step forward in terms of granting institutional investors access to the bitcoin market, approving the creation of the first SEF or Swap Execution Facility. Previously, traders who wished to place bets in bitcoin derivatives markets were forced to operate in markets that were strictly OTC. But now the agency has issued a registration order to LedgerX, granting it status with the CFTC as a Swap Execution Facility, in the process approving bitcoin options trading.”

While Overstock has a long history of working with regulators, some companies are effectively choosing to rebel against the SEC’s ruling that all ICOs marketed in the US must be registered, according to Reuters.

“Technology companies looking to raise money by issuing digital coins are moving forward with their plans despite a U.S. regulator's decision that their offerings may be subject to tough securities laws.

 

On Tuesday, the SEC decided that tokens issued through the ICOs can be considered securities, meaning they would fall under laws that require disclosures and are subject to regulatory scrutiny to protect investors, unless a "valid exemption" applies.

 

Some industry participants and analysts had thought such a decision would have a chilling effect on the ICO market. But 20 new ICOs were announced since the SEC's decision, with more than 120 scheduled to launch this year, according to ICO tracker tokendata.io.

 

Representatives of Rivetz and ICOBox, which plan to launch tokens over the next few weeks, told Reuters they are pushing through with their offerings.”

According to Reuters, ICOs have raised more than $1 billion in capital this year as companies launched more than 900 new coins.

"We were kind of annoyed when these ICOs started taking off. They weren't getting approval, it was the Wild West. We thought long and hard about doing our own ICO ... But we held off, going down the regulatory road," T-0 President Joseph Cammarata told CoinDesk.

ICOs are similar in principal to stock offerings in that investors bid up the price of tokens associated with companies they believe will grow profits. However, the paucity of information about many of these companies – some of which have been unmitigated frauds that essentially took investors’ money and ran - makes valuing them nearly impossible.

Hackers have plagued the cryptocurrency investment community since its early days, so it’s little surprise that they’re already started looting ICOs – a security problem that could potentially drive more customers to OverStock’s platform if it can provide enhanced security. As we reported earlier this month, hackers stole $7 million in investors’ funds from CoinDash, a blockchain startup focusing on "cryptocurrency social trading and portfolio management platforms.” Bloomberg notes that hackers have stolen more than $40 million from ICOs.