TIGRcub is a crytobond by Patrick Byrne – a disrupter with a mission.
If you watched the Social Network movie five years ago, you were left with the impression that it all started because Zuckerberg reacted to personal issue-conflict with a girl. This past week, the headlines have repeatedly announced the creation of the first cryptocurrency based private bond from Patrick Byrne, CEO of Overstock. The personal thread behind this maybe that his company stock suffered from a naked short selling attack a decade ago and has since fought back publicly (also through his media project Deep Capture).
The facts are that Patrick Byrne during his keynote address at the Bitcoin2014 conference in Amsterdam announced the backing of the Medici project that includes a mission of creating a national decentralized cryptocurrency based exchange for settlement and clearing.
This vision was seen as promise and has been covered in the press; WSJ late last year. Now, we are seeing real evidence of it.
The first circular offering (official as of June 1) of a private bond issued by Overstock (Nasdaq: OSTK) that is a TIGRcub bond and will be settled and cleared on the TØ.com platform; is reality.
Using blockchain technology, this private bond will trade globally with SAME DAY SETTLEMENT instead of T+2 or T+3, which is the standard today. This is what the TØ.com platform translates to.
A TIGRcub bond is a form of a securitized structure. It stands for Top-Line Income Generation Rights Certificate. It offers investors a base interest rate and a % of future gross revenues. It is appropriate for private and public debt financings of mid-sized corporate and is structured in a way to circumvent equity dilution.
This bond will be issued as 25 one-million-dollar digital tokens, and will trade over an alternative trading system (ATS).
In a symbolic “skin in the game” move, Patrick Byrne bought $500k of his own bond offering and is now focusing on the task of convincing “accredited investors” to invest a total of $25 million of these bonds.
These are not bitcoin linked bonds. Such structures have been issued and are derivatives of the cryptocurrency. Overstock bond offering is not at all tied to the performance of any cryptocurrency. It is using the cryptographically-protected distributed ledger of blockchain to settle same day and mitigate the Failures to Deliver (FTDs – borrowed shares that aren’t delivered) linked to aggressive naked short selling, with its quick settlement times and traceability.
In other words, Patrick Byrne is using blockchain technology to solve a very real problem, a problem that he and his company have personally suffered from. The best innovations are like this – solving a real problem from an entrepreneur who feels the need deeply.
The significance of same day settlement instead of 2 or 3 days (depending on the continent) is not only simply speed per se. It reduces the loopholes created during these days that frequently result in failures and costs. It reduces (maybe eliminates) the possibility of naked short selling (which is totally different from short selling which is a benign trading strategy). Even though this specific security is not the typical candidate for short selling (a private bond of very small issue size by bond market standards and of an issuer that doesn’t have a rich outstanding debt structure) it is leading the way for the future issuance of other digital bearer bonds.
The “other” significance of this offering is that once it is issued it will be the lowest denomination bond ever issued ($1 tokens can trade). It can be viewed as a structured form of cash that is kept in a digital vault (I mean we have to use the “old” terms, until we all make the transition into the new world and when we say “blockchain” we all understand the same thing).
This “fine divisibility” of this security along with the fast transferability ownership, can lead to an extremely liquid instrument. Even though I don’t know the details of the offering (maturity, coupon + % of revenues, callability etc), I can envision that the issuer may start accepting these certificates as a means of payment for retail purchases of Overstock items, enhancing further the importance of this offering.
Overstock, as a company, is strategically positioned in the digital transfomation happening in capital markets (issuance, settlement, clearing, trading) by:
- A partnership with Counterparty, one of the peer-to-peer decentralized exchanges using blockchain technology
- Backing of the Medici project to works towards a national decentralized cryptocurrency based exchange with a legal peer-to-peer exchange that will reduce settlement and clearing costs down to 1/5 of the current.
- Ownership of a 25% stake in an Alternative Trading System called PRO Securities. It is a SEC regulated system acting as an alternative to NYSE and NASDAQ. It recently amended its charter to be able to handle trades using blockchain related technology. This is the entity that Overstock calls TØ.com in its offering.
To be continued in the next episode…as they say on the screen. We will be watching closely how the placement, issuance, and trading of the Overstock TIGRcub bond evolves. The regulators have more issues to deal with and fiduciaries will have more homework but the incumbents that will be directly disrupted are those entities that operate behind the scenes and settle, and clear every single transaction that each of us implements. For the US it is DTCC, the Depository Trust and Clearing Corporation, who clears trillions of transactions annually. In a recent report they blow their trumpet stating that they process in only 2 single days, the equivalent of the annual US GDP!
Add to your watch list the To-be-issued Digital Bearer bonds of Overstock; structured as TIGRcub certificates and clearing on the TØ.com platform. Note that issuance of bearer bonds was banned in the US in 1982!