Today, the worldwide financial securities industry is worth over $101 trillion. However, $1.7 trillion is already out on loan. Sometimes, traders borrow funds to buy stock and sell after a short time to make profits. The mutual and hedge funds also need loans at some point. According to DataLend, $954 billion is on loan in the United States and its in form of securities.
This market is rarely discussed, but it is definitely a profitable one. Borrowers make money and the same happens to security lenders, which includes retirement funds and big stock holders. Even the middlemen are able to get their hands on something. Prime brokers like Morgan Stanley and Goldman Sachs and agent lenders such as State Street and BNY Mellon also get their share of the cut. It is estimated that agent lenders make $19.2 million daily by assisting organizations in lending out stock.
This lucrative market is controlled by a small but powerful group, mostly composed of prime brokers. According to Josh Galper, a financial consultant, the lending of securities has always been an enclosed network, where only the known market players can borrow and lend securities.
However, one Patrick Byrne, who is the CEO of Overstock.com and a strong libertarian voice constantly fighting Wall Street, is ready to do what it takes to open this market and make it transparent.
He wants to use Bitcoin’s blockchain technology to make stock loan available to everyone, allowing small players to make money like the prime brokers and lenders. Byrne believes this market is still in the dark and needs to be strategically changed, enabling everyone to participate.
Byrne launched his Bitcoin-based system to be used in stock loan at a a cocktail party held at the NASDAQ stock exchange. The system, called TØ.com, is supported by Overstock and uses the blockchain to make system available online. Byrne aims to eventually replace the current stock market, including massive platforms like NASDAQ and the New York Stock Exchange. According to the entrepreneur, the system is awaiting approval from the Securities Exchange Commission (SEC).
The main goal of TØ.com is to shed light on the financial market and enable verification of every transaction to know who owns a particular share. This will limit the role played by brokers and big Wall Street players thanks to the blockchain, a huge online ledger free from any centralized power. The role of banks and governments is limited because people can access the system anywhere and at any time. Money is, literally, in their hands.
Some still wonder whether Byrne will succeed in his quest despite having strong technology, but the truth is that even Wall Street is beginning to realize that the blockchain can help the financial markets to function properly. NASDAQ is one of the names experimenting with Bitcoin’s core technology: the trading platform will be driving a blockchain-based private stock market in early 2016.
PATs are Pre-Borrow Assurance Tokens and they help stockholders to track loan stock transactions. Byrne’s system is one of a kind, but it is easy to undertsand in theory. Stock owners using the platform will use digital tokens similar to Bitcoins. They will attach them to their stock and traders will bid to get the right of borrowing shares.
This system can be described as an idea that grew from experiences that Byrne has had in Wall Street. He believes it will prevent financial crashes like the one experienced in 2008.
Financial expert Josh Galper believes the system is quite interesting, but has doubts regarding its usability especially because people are used to trade in the financial stock market. Many lenders and borrowers won’t be willing to use the new system, Galper says, because they can’t insure the shares given on a loan.
Byrne says TØ.com has a way to prevent counterparty risk. He suggests that users can still keep their huge shares with prime brokers as they begin to use the system. The earnings of the broker may decrease, but they will still be a part of the process.
TØ.com is the new middleman
Those with small hedge funds are at an advantage if they use Byrne’s new system. They can borrow cheaply and also eliminate the costs of dealing with prime brokers. In this case, Wall Street’s new middlemen are TØ.com and Bryne, but with less profit and more transparency.
Byrne promises low charges because of the system’s advanced technology and points out the new platform will boost transparency in the financial market.
TØ.com may fail to completely replace the big players for now, but it will drive Wall Street in an open and transparent direction.
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