The Cato Institute yesterday held a cryptocurrency conference whose keynote speaker was Patrick Byrne (see here for his Mises Institute profile), the CEO of Overstock.com. His speech came in the wake of his announcement that he is stepping down as CEO for an indefinite leave of absence due to health reasons. Byrne looked a little disheveled, had a noticeable cough at times, and mentioned that this speech marked the end of his professional career. It would be a shame, because his talk focused on settlement systems, an important aspect of any sort of trading. It isn’t the sexiest topic, but it has relevance to money and banking.
Byrne became a thorn in the side of Wall Street due to, among other things, his allegations of severe wrongdoing on Wall Street and his strong opposition to naked short selling. His experiences on Wall Street are perhaps one reason why Byrne has become a prominent proponent of blockchain, the technology that undergirds Bitcoin. According to Byrne, share in stocks of publicly-traded companies are actually owned by a company called Cede & Co, which is contracted by the government-created Depository Trust Clearing Corporation (DTCC) to hold shares and issue claims to those shares. Those claims are then issued back to DTCC who then distributes them to broker-dealers to deliver to other broker-dealers or to customers who purchase them. According to Byrne, the number of claims exceeds the actual number of shares. This is essentially fractional reserve banking but with securities rather than money. The money paid for claims to securities that don’t actually exist would accrue to Wall Street firms, however, and would be incredibly lucrative.
Byrne’s solution is to overcome the trust issue inherent in having a centralized holding and settlement authority by creating a blockchain-based peer to peer (P2P) settlement system. Byrne points to the Wall Street paperwork crisis of 1971 and how the industry initially wanted a P2P system from the get-go, but the government created the DTCC as a temporary solution. Like most temporary government creations it became permanent. Byrne’s system would use blockchain technology to issue company stock and trade them among individuals, eschewing a centralized clearinghouse such as DTCC in favor of a decentralized blockchain-type ledger.
Proposals of this sort will undoubtedly become a more popular use of the blockchain, especially if ideas such as Byrne’s are able to demonstrate their success in the marketplace. Given Byrne’s comments about his future, it will remain to be seen how much involvement he will have with this project in the future and whether it dies with his stepping down. If the proposal were to succeed, it would open up interesting possibilities for gold-backed blockchain-based monetary systems that might otherwise be subject to problems related to trust.
*For those looking to read more about the DTCC and the Wall Street paperwork crisis, they make for fascinating reading. Wikipedia’s entry on DTCC is a good starting point, as well as the Harvard Business School’s article on the remaking of Wall Street.
