Crypto-securities & Crypto-trading: a Fintech revolution with P2P ingredients

By Efi Pylarinou

In mid June, I recommended adding to your watch list, the To-Be-Issued Digital Bearer bonds of Overstock that were structured as a TIGRcub certificates and were going to be cleared on the TØ.com platform, one of the first cryptotrading software platforms (The Overstock crypto-currency bond: a TIGRcub to settle and clear on TØ.com).

In an initial symbolic “skin in the game” move, Patrick Byrne (CEO of Overstock) bought $500k of his own bond offering and subsequently focused on the task of convincing “accredited investors” to invest in these bonds (total size up to $25mil).

Just recently, the first $5 million of the cryptobond were sold to First New York, an independent NY based trading firm. The 5 yr bonds offer an annual interest of 7%, they are unsecured and have no covenants, except provisions of both puts (right of FNY) and calls (right of Overstock). These are bearer securities, whose ownership and transfer is recorded on a cryptographically secured distributed ledger system using technology similar to the distributed ledger technology used for trading digital currencies. As mentioned in a press release, “this is as an additional proof-of-concept of the safety and efficiency of exchanging financial instruments via a cryptographically secured, public ledger”.

The strategic partnership that is initiated through this symbolic transaction (bonds placed in some FNY managed account) brings together, First New York’s proprietary front end, HYDRATrade, and Overstock’s tØ.com cryptosecurities trading platform to offer the first fully integrated CryptoTrading software suite.

Patrick Byrne is not the only entrepreneur backing projects that are applications of distributed ledger technology in securities trading procedures. Nasdaq itself has announced that it will use the blockchain to drive a private stock market through a partnership with Chain, with a focus on the secure issuance and transfer of shares of privately-held companies. Digital Asset Holdings and Symbiont, are two other companies developing their own blockchain-based systems for securities trading. Digital Asset Holdings, is looking to apply the technology to the Treasury repo market (extremely liquid market segment), to syndicated loans (complicated market, heavy documentation and not standardized), to private equities (highly customized with different clauses), and derivatives (who isn’t scared of those contracts?).

Symbiont is heavily concentrated in “smart securities” from issuance to “following” any “complex financial legal structure” through its life. Imagine pools of collateral behind MBS securities and being able to instantly see all possible data and multiple party but consistent collateral valuations. Imagine automated disbursements of complicated asset backed securities with ZERO errors. Symbiont recently launched their first smart security (smart contract in Bitcoin Block 368396), representing a(private) equity security owned by investor SenaHill Partners LP. This private security is essentially associated with the funding of Symbiont from merchant bank SenaHill that is investing in Fintech startups.

Byrne has also added to his TØ.com cryptosecurities trading platform, a stock loan system that openly disrupts the short selling process (mentioned in a recent Wired article). It is based on blockchain-like technology from a startup called Peer Nova and it will allow pension funds and other stock holders to lend shares directly to hedge funds and other traders, essentially removing middlemen such as agent lenders and prime brokers from the process.

This is P2P borrowing and lending in equities using XBRL technology.

Will these disruptions that aspire to improve inefficiencies in cross border settlement and payment issues, counterparty failure risks, and naked short selling blowups, succeed and become the standard in issuing, settling, clearing, and monitoring securities? I think that the success is most probable first in the private markets and in areas that involve cross border issues, simply because these are real pain points in the market.

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