Who here owns any stock in any publicly traded company in America? Raise your hand…
That was Patrick Byrne speaking at a Mises Institute event back in 2015.
Every single one of you with your hand up is incorrect. None of you owns any stock. That’s not how the system works…
Market manipulation has become a regular feature of our markets. It cannot be fixed, nor does it need to be fixed. Wall Street needs to be taken out behind the barn and killed with an axe.
At the time, Byrne was the eccentric Chief Executive Officer (CEO) of Overstock.com. But his focus had moved beyond basic retail and ecommerce. Byrne had his eyes set on disrupting Wall Street and the entire capital market structure.
To do this, Byrne created a subsidiary company called Medici Ventures.
Medici’s purpose was to invest in and incubate promising start-ups that were advancing blockchain technology, especially those using the technology to disintermediate entrenched middlemen.
As we know, the equity markets are swarming with sharks who play all kinds of manipulative games to rig the system to their benefit.
Whether it’s high-frequency trading (HFT) algorithms or naked short-selling – selling a stock short without first ensuring the availability of the shares – much of the daily transactional volume in the markets is not the result of deliberate, self-directed investment.
I think this is largely well-understood at this point. For example, we know that Citadel has cut deals with brokerages like Robinhood so that it gets order flow to front-run every transaction that takes place – effectively skimming roughly $2 billion a year as a result.
And thanks to Wall Street Bets and the meme stock saga of 2021, we know the shenanigans that take place with naked short-selling.
Forum users from the online Reddit forum r/wallstreetbets started buying GameStop stocks, driving up the price and “squeezing out” hedge funds that had been short selling GameStop.
These hedge funds then had to buy back the shares they borrowed at a higher price to staunch the bleeding, pushing GameStop’s price even higher. This created a sort of domino effect that pushed the stock price up 1,500% in two weeks.
At the height of the GameStop madness, nearly 138% of the company’s available shares were being sold short. Meaning, more shares were being sold short than actually existed for trading. How is that even possible?
What’s less known – and far more concerning – is the very nature of “ownership” within the equity markets. This is what Patrick Byrne was so fired up about.
Most investors believe that when they buy shares of a company, they become the legal owners of those shares.
But that’s not the case for the vast majority of shareholders.
Instead, nearly all publicly traded stocks in the U.S. are registered in the name of Cede & Company (Cede & Co.), which is a nominee entity affiliated with the Depository Trust Company (DTC)… which is a subsidiary of the Depository Trust & Clearing Corporation (DTCC).
That’s a deep rabbit hole. But if you go down it, you’ll find that the “plumbing” underlying the equity markets is incredibly murky.
When we purchase a stock in our brokerage account, our broker lists us as the “beneficial owner” and maintains records showing how many shares we purchased. However, that stock is held in what’s called “street name” and remains registered to Cede & Co.
In other words, Cede & Co. is the official legal owner of our stocks. Our broker simply serves as an intermediary that keeps records of who bought how many shares.
This system has worked okay up to this point. But it forces us to rely on the integrity and the competency of our broker and the centralized clearing firms… because the stock shares we purchased are just entries in multiple layers of ledgers controlled and maintained by these third parties.
This hasn’t been a major problem. Not yet, anyway. But it could become catastrophic should a major brokerage fail or experience a massive cyberattack.
Such events could lead to a scenario where we lost the stocks that we thought we owned directly, but instead owned in “street name” only.
If a large brokerage firm were to collapse – whether through insolvency, massive fraud, or operational collapse – the path to recovering our stocks could become complicated.
If the brokers’ records were corrupted or lost, it could take months or years to prove how many shares of which stocks each client was entitled to.
There’s also the risk of a shortfall. In case of missing shares or record mismatches, investors might not get all of their assets back.
While the Securities Investor Protection Corporation (SIPC) provides some protection (generally up to $500,000), it does not guarantee full recovery, especially if records are inaccurate or tampered with.
And what if there were a targeted cyberattack directed at the DTCC itself? That could wipe out investor claims to stock shares held in street name. It would also open the door for cyber criminals to reassign “ownership” entries at their own discretion.
Worse, a major failure or breach at one firm would send shockwaves through the entire system because every brokerage is interconnected through this murky plumbing.
And that’s not just theoretical. When Lehman Brothers collapsed in 2008, it took 14 years to untangle customer assets and distribute them appropriately.
This caused major disruption and caused some clients to take big losses because they could not sell their stocks until the process was complete.
The good news is that a solution is on the way…
As we discussed at length last week, we’re witnessing a monumental transformation in the underpinnings of the global financial system.
The rise of stablecoins represents the next generation of the dollar-based monetary system, with this version anchored by the blockchain and perfectly suited for our digital-first world today. As this new system unfolds, the logical next step will be the tokenization of assets.
Where stablecoins are digitizing the dollar and bringing it to the blockchain, tokenization is poised to bring the building blocks of the global financial system – stocks, bonds, real estate, commodities, and other assets – into the digital realm. We’re talking about a fundamental reshaping of how value is stored, transferred, and managed.
Tokenization refers to the process of representing real-world assets as digital tokens on a blockchain. Each token acts as a claim on the underlying asset or its economic value. Just as stablecoins are digital stand-ins for dollars, tokenized assets are digital stand-ins for virtually anything else of value.
Tokenizing the financial system would clean up Wall Street and disintermediate the giant mess at the heart of the current settlement system. By moving equity ownership and trading activity to the blockchain, tokenization could:
The result would be a transparent, universally accessible market where merit, not manipulation, decides outcomes. But the benefits don’t stop there…
Tokenization will blow open the barriers to asset ownership – both in the U .S. and worldwide. By bringing real-world assets into the digital age, tokenization can:
In short, tokenization could provide a massive upgrade to the global financial system. And it won’t stop with traditional financial assets like stocks and bonds. Virtually anything of value could trade on the blockchain:
By bringing all these asset classes to blockchain-based marketplaces, tokenization could dramatically expand the investment universe. Suddenly, our entire concept of asset allocation would expand accordingly.
That’s the financial renaissance that we’re staring at right now. But this isn’t a new idea…
The push to digitize stocks, bonds, and other assets picked up steam back in 2018. Numerous “security token” projects sprouted up with the promise of disintermediating Wall Street and democratizing access to world-class assets.
Jeff and I went to a security token conference in Manhattan back in 2018 to keep our thumb on the pulse of this nascent market. We listened to talks from industry thought leaders like Erik Vorhees and Bruce Fenton, as well as several Wall Street veterans who could see the writing on the wall.
I remember there being a lot of excitement at that conference, and I expected that we would start to see big innovations coming in 2019 and beyond. But then, progress came to a screeching halt… because the regulatory climate became overtly hostile.
Innovators suddenly ran into a maze of barriers and intentional uncertainty, as agencies like the Securities and Exchange Commission (SEC) muddied the waters and even initiated lawsuits against some of the most visible blockchain projects.
We now know that this was intentional. The powers-that-be called their frontal assault on the blockchain industry Operation Choke Point 2.0, and it was wildly successful at grinding tokenization efforts to a halt.
That era is over.
With the GENIUS Act already signed and the CLARITY Act poised to become law, the United States is removing the single greatest roadblock that has held tokenization back.
Specifically, the CLARITY Act defines how digital financial assets can be issued, traded, taxed, and protected. It will turn the U.S. from a “no-go zone” into the world’s biggest hotbed for tokenization projects.
Just as the GENIUS Act opened the floodgates for stablecoin growth – fueling demand for U.S. Treasurys and the dollar – the CLARITY Act is set to unleash a new wave of tokenization innovation across equities, debt, real estate, commodities, and even alternative assets.
With regulatory handcuffs finally coming off, tokenization is poised to transform how we own, trade, and interact with assets of all kinds, from blue-chip stocks to Manhattan skyscrapers and rare collectibles. We’re at the cusp of a creative explosion that will dwarf the financial innovations that have come before.
Just as early internet days were filled with competing protocols and daring startups, today’s security token landscape is wide open. We can’t know in advance who the big winners in this space will be. But a couple of projects are already making waves and offering a glimpse into the future.
tZERO has long been recognized as a trailblazer in the security token space. It was founded in 2014 by the same Patrick Byrne as mentioned above as a subsidiary of Overstock.com.
tZERO set out to modernize Wall Street by merging regulatory compliance with blockchain technology and bringing greater transparency to the financial system. It aims to streamline trading, settlement, and ownership of digital securities so as to eliminate the friction, delays, and opacity of traditional financial markets.
Over the past decade, tZERO has built and operates an alternative trading system (ATS) that’s regulated by the SEC. It’s one of the few platforms purpose-built for digital securities in the United States, and a handful of security tokens already trade on it.
Through the tZERO platform, investors can trade security tokens with same-day settlement, enhanced transparency, and reduced counterparty risk. Notably, tZERO launched its own security token, TZROP, which allows investors to gain direct exposure to the company’s growth and revenue – a novel model in digital finance.
While mainstream adoption is still in its early stages, tZERO’s infrastructure, regulatory partnerships, and tenacity make it a project to watch. When we start to see the pace of new token launches pick up, that’s when we’ll know the trend is accelerating.
On the other end of the spectrum is a project called Zano. While tZERO focuses on a fully compliant, transparent window into tokenized markets, Zano seeks to tokenize real-world assets on a privacy-centric blockchain.
Zano’s blockchain allows individuals, companies, and institutions to tokenize assets on a permissionless yet confidential network. This is especially valuable for clients who need privacy or who want to shield sensitive ownership and transaction data, such as in private equity or confidential real estate offerings.
The privacy-by-design approach differentiates Zano from the vast majority of tokenization efforts, which typically operate on public blockchains where all transactions are visible.
As privacy becomes a bigger concern in Web3 and digital finance, Zano’s technology could see rising demand, especially among users and enterprises seeking control over their data without sacrificing the benefits of blockchain-based digital assets. Investors can buy Zano’s cryptocurrency (ZANO) to gain exposure to the project.
As the regulatory cloud finally lifts, expect to see a wave of new entrants – both established financial powerhouses and nimble startups – rushing to seize opportunities in security tokens.
Projects like tZERO and Zano represent just two ends of an expansive spectrum: one betting on open, regulated access, and the other on confidentiality and data sovereignty.
For self-directed investors, watching these projects provides front-row seats to the next chapter in the evolution of capital markets.
Regards,
Joe Withrow
Senior Analyst, The Bleeding Edge
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
