Overstock.com has purchased a 25-percent stake in government-regulated trading company PRO Securities, advancing its plan to offer a "digital security"—company stock overseen by the type of technology that underpins the bitcoin digital currency.

Based in New Jersey, PRO Securities is what's known as an alternative trading system, an alternative to central stock exchanges—such as the NASDAQ, the New York Stock Exchange, and others—that's regulated by the Securities and Exchange Commission. Overstock purchased its stake in the company last fall, and in a government filing earlier this year, PRO Securities amended its charter to say it may handle trades in digital securities overseen by technology related to the "blockchain," the online public ledger that tracks the movement of bitcoin.

According to Overstock CEO Patrick Byrne, his company has built blockchain-related technology atop the electronic system operated by PRO Securities and is ready to demonstrate this technology to regulators. Earlier this month, Overstock filed a prospectus with the SEC saying it may issue a digital security through an alternative trading system. But it did not specify PRO Securities.

The hope is that blockchain technology can provide a truly independent, more reliable, and more transparent way of managing trades.

Considering that PRO Securities is registered with the SEC and plugged into the National Market System—the network of exchanges and other organizations that oversee equity trading in the US—the news indicates Overstock is wholly prepared to offer a digital security should it receive SEC approval. It could also use the system to offer private securities without that approval—an echo of what Nasdaq OMX is hoping to do with bitcoin technology inside its Nasdaq Private Market.

Overstock and Nasdaq OMX are part of a growing effort to reinvent financial markets using the blockchain and blockchain-like technology. A company called Digital Asset Holdings is developing a blockchain-based system for the trading of securities, as is Symbiont, an outfit that includes coders who previously worked on Overstock's project.

Transparency Versus Efficiency

The hope is that blockchain technology can provide a truly independent, more reliable, and more transparent way of managing trades. The blockchain runs across a worldwide network of independent machines that mathematically validate each bitcoin payment, and though those who use bitcoin can choose to remain anonymous, this online ledger is public. Developers can apply this same system to securities.

Through PRO Securities, Overstock aims to reinvent the public stock market using blockchain-like technology. According to an SEC filing, it could issue as much as $500 million in Overstock shares on the public market.

Adam Krellenstein, a founder of Symbiont, which is addressing financial trading outside of the public equity markets, argues the blockchain is ill-suited to these markets, saying its highly distributed technology couldn't keep up with the demands of today's high-speed public-equity trading. "Distributed systems—because they are distributed—trade efficiency and speed for transparency and security," he says.

But although trades can happen nearly instantly on today's public equities markets, the current system doesn't officially settle these trades for as many as three days. This can tie up market dollars for long stretches, and Byrne claims the delay creates a loophole in the market that can be exploited by traders. Using bitcoin technology, Overstock aims to close this loophole.

The rub, says James Angel, a professor of finance at Georgetown University, is that investors may have little incentive to adopt Overstock cryptosecurity. They are likely to remain on more traditional systems because that's where they have always done their trading. But with so many others pushing in the same direction as Overstock, this inertia may eventually give way.