Derek Edward Schloss (TDW): Patrick, great to have you on The Digital Wrapper. Let’s start off with your background. You’ve had a storied career building the retail giant Overstock, but you’ve made it clear in the press that you’re looking to sell the retail arm and move your entire business into blockchain. What led to this decision?

Patrick Byrne (Overstock): I’ve spent 19 years building Overstock’s retail, and we have a Porsche of a technology. It’s become very clear to me that there are some very large retailers who, if they owned Overstock, could really up their game technologically. At the end of the day, I think in ten years, there’s going to be three major retail companies in America, maybe two. And what we have built would be of great advantage to one of them.

Derek Edward Schloss: Overstock has been known as a digital marketing and tech pioneer — what are some of the macro lessons you’ve learned at Overstock that will benefit your team’s transition into the blockchain space?

Patrick Byrne: We have a lot of experience with technology, in building tech, and integrating tech into business. But I think more importantly, it’s the lessons I’ve learned about people — it’s getting the right people in to the right seats. Bill Gates once said, “one great engineer is worth a thousand good engineers.” That’s how I’m feeling about the people we look for and hire. I’m also bringing a coherent vision of how the different pieces of our blockchain technology are going to snap together.

Derek Edward Schloss: This snapping together is something you’ve spoken about before which I find interesting — I’ve heard you call it The Blockchain Tech Stack for Civilization. You’ve laid out six different pillars required to build civilization from the ground up — identity, land titling, currency/central banking, capital markets, supply chain, and voting. Why these six? And why is Overstock, and its blockchain subsidiary Medici Ventures, best positioned to create value in this stack?

The Blockchain Tech Stack for Civilization

Patrick Byrne: I think there’s a new age coming to mankind riding on the blockchain, and I wanted the six most fundamental processes of that new age that we could invest in, and nurture, and try to accelerate. The first is, of course, the integration of blockchain and humans. If the world is going to run on blockchain, there will have to be a blockchain identity solution. Next is land titling¹ — Aristotle said that capital just means potential. When you have rule of law, all kinds of potential is unleashed. Rule of law helps us determine the line between us — this land is mine, and that land is yours. Once you have that, all kinds of potential starts getting unleashed. People can take their piece of paper that says they own this piece of land and take it to a bank and borrow money against it.

Derek Edward Schloss: What pillar is required once we can organize property correctly?

Patrick Byrne: Humans need a way to communicate information about value and scarcity. Price is just a packet of information about value and scarcity. I send my packets into the world, and you send your packets, and everybody sends their packets, and the market is a big machine that grinds through those packets and prices start to emerge in equilibrium. Well, you need a measure of account to do this with — so blockchain needs currency. At the moment we’re talking about Fiat² currency — national money and creating a blockchain version of that money. But the day may come when people realize they don’t need Fiat currencies on top of the underlying infrastructure.

Derek Edward Schloss: I want to pivot to one of your portfolio companies, Medici Land Governance (MLG), which has been making headlines with their blockchain land titling efforts in Africa. That team has blockchain-titled over 50,000 homes in Zambia — with 300,000 more approved for the same process. MLG recently announced a new partnership with Rwanda, and another in Mexico. Can you speak about the land titling work being done by MLG?

Patrick Byrne: We’re completing different projects for different needs. The project in Rwanda is different than the one in Zambia — and there’s others coming, like the one in Tulum. We’re building different modules for each. Rwanda, for example, wants a government platform that the citizens can interact through. If I want to sell you my piece of land, instead of having to walk two days to go to an office and wait a month — now you can go online and sell your piece of land to me through a government platform online. We’re building that.

Derek Edward Schloss: The platform you’re describing transitions into another one of your pillars — capital markets³. Former NASDAQ chairman Robert Greifeld recently said, “100% of the stocks and bonds trading on Wall Street today will be tokenized in five years, and 100% of the stocks and bonds on Wall Street will be tokenized.” Do you subscribe to this belief, Patrick?

Patrick Byrne: Yes, I do — I would say that Bob has maybe overstated it slightly. I think that all new issuances will be tokenized five years from now. I wouldn’t be surprised if that happens more quickly. Perhaps in three years, every new stock, bond, anything being sold…is actually a token. But there would still be the legacy instruments out there — probably ten years from now it will all have been rolled over. So, I think that probably the correct way to say it. Within three to five years, all new instruments will be coming out as tokens, and by ten years all instruments will have rolled over to be tokens. I would imagine that’s the truth.

Medici Ventures Portfolio Companies — March 2019

Derek Edward Schloss: I’d like to talk about another one of Medici’s portfolio companies — tZERO, the security token trading platform. Overstock is known for being fairly capital efficient as an e-commerce platform. At the same time, you’ve mentioned that your team has spent over $100 million building out the tZERO platform, which recently launched for trading earlier this year. What’s going on under the tZERO hood? That’s a lot of zeros on the project.

Patrick Byrne: That is a lot of zeros. One of the first things to realize is over half of it really was buying and building a company that was in the legacy financial business. It’s a routing company that routes up to 75 million shares a day on Wall Street.

Derek Edward Schloss: SpeedRoute?

Patrick Byrne: That’s SpeedRoute. The reason we bought SpeedRoute was that once we built out tZERO, we would be connected to everybody ⁴. Through SpeedRoute, we’re already connected to 150 brokers across Wall Street. We want tZERO to run for several months to get it robust. But we now have the technical capacity potentially to leverage relationships with the 150 brokers, who themselves have millions of clients, to drive tZERO strategy. And the whole market, and especially the whole institutional market, will be connected into our tZERO platform.

Derek Edward Schloss: The target addressable market here is fairly large. At the North American Bitcoin Conference, you walked through a breakdown of how you would value this market you’re going after. I want to make sure I’ve got these numbers right. You said historically, if an exchange has $100 worth of value trading on it — that’s aggregate market cap of all the instruments trading — the value of that underlying exchange is on average about 18 cents.

Patrick Byrne: That’s correct.

Derek Edward Schloss: In that same presentation, you mentioned that there’s around $500 trillion worth of equities, debt, and real estate in the world. Under this logic, assuming all of these instruments get tokenized, will this mean tZERO is going after a global exchange market presumably valued around $900 billion?

Patrick Byrne: Yes.

Derek Edward Schloss: What are tZERO’s biggest obstacles here?

Patrick Byrne: tZERO has to continue to stay ahead of everybody in terms of what we’re building, and our regulatory compliance. We’ve said from day one that we’re going to do everything right down the middle of the fairway, up to the front steps of the SEC. Our exchange with BOX needs to get up and go live. Now that we have the tZERO trading platform solid, we’ll focus more on the issuance platform. We have people developing different kinds of security tokens — security tokens for funding real estate, which will disrupt REITs, security tokens for funding Hollywood movies, security tokens for doing this and that. Another project at the center of tZERO is Digital Locate Receipts (DLR). DLR is something that goes after the center of gravity of Goldman Sachs’s earnings. That’s really the next project that we’re spending a bunch of time flushing out.

Derek Edward Schloss: There’s a lot I want to unpack in there — can you tell me what problems DLR solve?

Patrick Byrne: Yes, I’m a fanatic about what’s called settlement⁵. With settlement, you and I go on to an exchange, and we agree on a trade. Three days later, the actual money and stock moves back and forth between the brokers. This delay happens for reasons that are just historical. The US system in the 1960’s broke, and in 1971, they adopted a new temporary system for settlement. You know, Milton Friedman once said, “Nothing is so permanent as a temporary government solution.”

Derek Edward Schloss: [Laughs] Great quote.

Patrick Byrne: So in 1978 they made it permanent, and it is a real pig’s breakfast of a system. If you’ve ever seen my speeches, I often stand up in front of audiences and say, “Raise your hand if you own any publicly traded stock in America.” And of course everybody raises their hands. And I say everyone with their hand up is incorrect, you don’t own anything.

Derek Edward Schloss: It’s true. I actually wrote about this stack recently — DTCC and Cede run the show.

Patrick Byrne: It’s amazing. Legally, they don’t just store that stock, they own that stock. They own all of corporate America, and then they have IOU’s to us.

Derek Edward Schloss: Right, we’re just beneficiary owners of these publicly traded instruments.

Patrick Byrne: It’s mind blowing. One time I gave a speech on Wall Street, and after the speech a big guy in a trench coat came out of the crowd. As I was coming off the stage, he just kind of brushed by me, and he muttered under his breath — swear to God — he says, “There are two things you don’t talk about on Wall Street: religion…and Cede and Company.”

Derek Edward Schloss: Incredible.

Patrick Byrne: What caused you to write about that, Derek?

Derek Edward Schloss: Our public markets and private markets are organized very differently, both legally and logistically. Security tokens offer both of these markets different benefits. When I first started diving in to how our public markets are structured in the US, I realized fairly quickly that these securities were trading in a patched-up machine, ripe with some larger inefficiencies. I knew it was a topic I wanted to spend more time researching and thinking about.

Patrick Byrne: Well, are you familiar with the fight I got into 15 years ago with Wall Street?

Derek Edward Schloss: I have a question here in my notes about it — I’d love to hear a recap.

Patrick Byrne: We went public in 2002, and when you’re a public company’s CEO, you’re out there in the mix. You’re mixing it up with brokers and hedge funds and analysts and regulators. And I pretty quickly smelled skunk. I figured out that there was an enormous fault tolerance allowed in the settlement system, and that some bad guys had figured out how to manipulate the market. So, I did what I thought anyone would do in my position — expose it to the authorities. You know, if most people saw an old lady getting mugged down the alley, 99% of people are not going to walk by. You got to do something about it, I figured. So, I went to expose it, thinking that all the honest folks on Wall Street would rush to my aid. You know, like Julia Roberts in The Pelican Brief — once she has whatever scheme it was all figured out, she just writes about it, puts it out there, and the forces of good rush to her aid and take it from there. It turned into this crazy fight between ’04 and’ 07. My own father came out and trashed me publicly. My mom was different — she called me up after my father did that and asked me: “Are you sure you’re right about this? Do you really think that ‘somewhere in America grandmothers are eating dog food for dinner because Wall Street is ripping them off?’” — I had said this in an interview. I said, “Ma, I’m sure of it.” So she said, “Then don’t you dare back out of this — I don’t give you permission to stop fighting. Don’t consider yourself a member of my family if you back out of this fight.” She’d never spoken like that to me in her life. So I stayed in the fight. Then, in 2008, it all melted down. Greenspan got up in front of Congress and told them the truth: the settlement system had broken — just as I had been warning about for four years.

Derek Edward Schloss: That’s a story — I’m sure the experience has helped provide insights as your team builds out tZERO.

Patrick Byrne: Yes. With security tokens, all of these shenanigans go away. What it’s really all about is that historically we’ve split trading from settlement. Today, we have this process where you and I trade, and then the settlement is this other thing that happens three days later. In that divorce is the room for the different kinds of mischief and systemic risk. But if you reunite them, and that’s really the magic of tZERO, all sorts of opportunities for mischief dissolve. That’s why the tagline for tZERO is: The trade is the settlement.

Derek Edward Schloss: Earlier this year, tZERO was granted a patent for a Crypto Integration Platform. It sounds like the patent is for a system that provides an interface between legacy trading platforms and crypto exchanges. Can you talk a bit about the technology and how this works? And how you’re hoping tZERO may be able to incorporate this with outside firms?

Patrick Byrne: Yes. The internet speaks HTTP to itself — all the sites, that’s what they speak. The financial system has its own language called FIX⁶. FIX is the HTTP of the financial industry. We built a bridge between FIX and crypto, such that people will be able to come through SpeedRoute and trade crypto, and institutions will be able to come through us into the crypto market.

Derek Edward Schloss: This seems like a strong moat — a patent for the technology bridge linking legacy trade and crypto markets.

Patrick Byrne: I think it’s a wonderful moat. We got here years ago, and we put our back into it, and we got this stuff designed and built. So I think that’s a heck of a moat, frankly.

Derek Edward Schloss: You’ve also announced a partnership with Boston Options Exchange (BOX), which might end up being the first time we see security tokens trading on a National Securities Exchange (NSE) in the US, as opposed to what we’re seeing today which are Alternative Trading Systems (ATS). How is an NSE different than an ATS in terms of securities trade?

Patrick Byrne: When you have an ATS, there’s certain things you can and can’t do in terms of how securities can trade — there are some barricades. They are for accredited investors, for offshore investors. There’s restrictions. A national securities exchange is also a trading platform, but it’s a legal entity that can take new listings, take IPOs.

Derek Edward Schloss: What has it been like working with BOX on the partnership?

Patrick Byrne: It’s a superb group of people we’ve gotten into business with — BOX, the Boston Options Exchange. It’s run by a wonderful woman named Lisa Fall, it’s on good terms with the SEC, and we thought they would be the right partner for us. I’m actually having a great time working with them. And in particular, I’m finding the SEC super professional. I couldn’t be more pleased at how responsive and professional they are to work with. I wish some of the corporations with which I interact were as crisp and professional as they are. I never expected to say that about anyone in government, but there it is.

Derek Edward Schloss: I had a chance to interview Tron Black, principal developer for Medici Ventures and lead developer on the open-source project Ravencoin. How do open-source blockchain projects like Ravencoin, and others like it, fit within the vision you have for a tokenized world?

Patrick Byrne: Ravencoin is a fork of Bitcoin, but it’s really been optimized to handle assets and securities. We have twenty different blockchain companies within Medici Ventures — what we are doing, where possible, is leveraging and integrating Ravencoin into these different projects. So for example, we’re invested in an Israeli company that’s doing a blockchain supply chain system for wineries. Ravencoin is the preferred solution for that company. We’re in the same process now with tZERO. tZERO is blockchain agnostic, and Ravencoin won’t be the only chain underlying tZERO, but people will be able to issue security tokens on Ravencoin. You may see it emerge in a number of our projects, like ConsenSys did with Ethereum.

Derek Edward Schloss: What does the rest of 2019 look like for tZERO and security tokens?

Patrick Byrne: You’ll see us introducing other tokens, and we’ll start expanding our model. We’ll start using Overstock to market tZERO and get adoption of wallets and things like that — we have 50 million customers at Overstock. We’re looking for the right issuers. We have a solid pipeline of issuers who could issue tokens. We’re also looking for established companies who want to issue a security token of some classic stock they already have. There’s a focused team working on DLR’s. DLR’s, designed in compliance with regulatory requirements, solve the whole settlement problems associated with short selling that I was on about a decade ago. You’ll see that develop, and you’ll see a bigger issuance platform get introduced. And then we’re really off to the races.

Derek Edward Schloss: Patrick, on behalf of The Digital Wrapper, thanks for your time.