US retail giant Overstock.com has been waiting for the US Securities and Exchange Commission (SEC) to tell the world exactly when a crypto token is a security.
Since 2014, the company has been building a regulated, blockchain-powered stock exchange to sell tokenized, compliant securities, and it even sold the first SEC regulated crypto-securities last December.
It was a historic moment, but one that was perhaps just a bit ahead of its time. Since raising $1.9m in a sale of its own shares on the platform, not a peep has been heard on the potential for others to follow suit.
What the tØ founders had hoped would be the dawn of a new era of blockchain securities was cut short by a burgeoning new concept called an initial coin offering (ICO).
Instead of companies raising funds under the watchful gaze of the SEC, ICOs initially promised to cut out platform providers like tØ and regulators altogether. In short, a potential disruption was itself disrupted by an unforeseen technological leap.
TØ president Joseph Cammarata told CoinDesk:
"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."
Then, 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.
It's at this point in the report that Cammarata said tØ expects to find the opportunity it has been waiting for.
From the SEC report:
"Any entity or person engaging in the activities of an exchange ... must register as a national securities exchange or operate pursuant to an exemption from such registration."
A blockchain ATS
Unveiled at Nasdaq in August 2015, tØ is Overstock.com founder Patrick Byrne's concerted effort to get even with Wall Street.
Long a detractor of a practice called "naked short selling" – where traders methodically bid down the price of stock by selling shares they haven't first procured, Byrne set about using blockchain to cut out everyone who stood in the way of buyers and sellers.
But as a subsidiary of the publicly traded Overstock.com, which was itself the victim of an alleged naked short selling scheme, Byrne would have to beat the system from within.
Following on a series of acquisitions by Overstock, tØ had obtained a coveted ATS license along with a number of potentially valuable connections with national securities exchanges, sell-side management systems, and more.
So it was, that way back in December 2015, the same regulatory body that published its guidance earlier this week approved Byrne's plan to issue legally compliant blockchain securities.
"We're uniquely positioned in that we're already approved for the ATS," said Cammarata, who joined the company after his equity order routing company, SpeedRoute, was acquired by Overstock.
"We're also integrated in every single US equities exchange. So if they want to trade on a national exchange we're already interconnected."
Since Overstock sold the first ever SEC-regulated blockchain shares, the idea of removing middlemen from within the existing financial paradigm has gained momentum, even if slowly.
In March 2017, Blockchain Capital announced its own compliant ICO built using the same JOBS Act exemptions mentioned in the SEC report, eventually raising $10 million of a $50 million fund selling its tokenized securities.
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."
Multiple sources have confirmed there are "dozens" of ICOs in the works looking to run compliant projects, but that the time to market with such an investment is between six months and one year.
For companies looking to host such capital raises, Cammarata said tØ is ready with its own ICO technology, so long as they're willing to put in the leg work.
"We are prepared to take them on today," he said, concluding:
"If they've gone through the proper regulatory channels."
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