Blockchain Revolution

THE BLOCKCHAIN IPO
The week of August 17, 2015, was an ugly one: The Chinese stock market crashed,
the S&P 500 had its worst performance in four years, and financial pundits
everywhere were talking about another global economic slowdown and possible
crisis. Traditional IPOs were pulled from the market, mergers were stalled, and
Silicon Valley was getting antsy about the overinflated valuation of its cherished
unicorns, private companies valued at more than $1 billion.
Amid the carnage, an enterprise called Augur launched one of the most successful
crowdfunding campaigns in history. In the first week, more than 3,500 people from
the United States, China, Japan, France, Germany, Spain, the United Kingdom, Korea,
Brazil, South Africa, Kenya, and Uganda contributed a total of $4 million. There was
no brokerage, no investment bank, no stock exchange, no mandatory filings, no
regulator, and no lawyers. There wasn’t even a Kickstarter or Indiegogo. Ladies and
gentlemen, welcome to the blockchain IPO.
Matching investors with entrepreneurs is one of the eight functions of the
financial services industry most likely to be disrupted. The process of raising equity
capital—through private placements, initial public offerings, secondary offerings, and
private investments in public equities (PIPEs)—has not changed significantly since
the 1930s.
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Thanks to new crowdfunding platforms, small companies can access capital using
the Internet. The Oculus Rift and the Pebble Watch were early successes of this
model. Still, participants couldn’t buy equity directly. Today, the U.S. Jumpstart Our
Business Startups Act allows small investors to make direct investments in
crowdfunding campaigns, but investors and entrepreneurs still need intermediaries
such as Kickstarter or Indiegogo, and a conventional payment method, typically credit
cards and PayPal, to participate. The intermediary is the ultimate arbiter of
everything, including who owns what.

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The blockchain IPO takes the concept further. Now, companies can raise funds
“on the blockchain” by issuing tokens, or cryptosecurities, of some value in the
company. They can represent equity, bonds, or, in the case of Augur, market-maker
seats on the platform, granting owners the right to decide which prediction markets
the company will open. Ethereum was an even greater success than Augur, funding
the development of a whole new blockchain through a crowd sale of its native token,
ether. Today Ethereum is the second-longest and fastest-growing public blockchain.
The average investment in the Augur crowdfunding was $750, but one can easily
imagine minimum subscriptions of a dollar or even ten cents. Anyone in the world—
even the poorest and most remote people—could become stock market investors.
Overstock, the e-retailer, is launching perhaps the most ambitious cryptosecurity
initiative yet. Overstock’s forward-thinking founder, Patrick Byrne, believes
blockchain “can do for the capital markets what the Internet has done for consumers.”
The project, dubbed Medici, enables companies to issue securities on the blockchain
and recently received the support of the Securities and Exchange Commission.
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The
company began issuing its first blockchain-based securities, such as the $5 million
cryptobond for an affiliate of FNY Capital, in 2015.
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Overstock claims many
financial services firms and other companies are lining up to use the platform. Surely,
the tacit approval of the SEC will give Overstock a head start on what is sure to be a
long journey.
Should blockchain IPOs continue to gain traction, they will ultimately disrupt
many of the roles in the global financial system—brokers, investment bankers, and
securities lawyers—and change the nature of investment. By integrating blockchain
IPOs with new platforms for value exchange such as Circle, Coinbase (the most well-
funded bitcoin exchange start-up), Smartwallet (a global asset exchange for all forms
of value), and other emerging companies, we expect a distributed virtual exchange to
emerge. The old guard is taking notice. The NYSE invested in Coinbase and
NASDAQ is integrating blockchain technology into its private market. Bob Greifeld,
CEO of NASDAQ, is starting small, using blockchain to “streamline financial record
keeping while making it cheaper and more accurate,”
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but evidently NASDAQ and
other incumbents have bigger plans.