Insider trading and naked short selling took advantage of a settlement system that has barely changed since the 1960s.  Blockchain-based capital markets could make such practices impossible. Photo: Wikimedia Commons
Insider trading and naked short selling took advantage of a settlement system that has barely changed since the 1960s. Blockchain-based capital markets could make such practices impossible. Photo: Wikimedia Commons

In recent testimony to a US Senate hearing on digital currencies, economist Nouriel Roubini voiced valid concerns about the cryptocurrency sector, even though the premises behind many of his arguments were years out of date.

While labeling industry players as “scammers, swindlers, and criminals” he failed to mention all the actors within the space with financial and technological pedigrees far beyond his own. Whatsmore, he also seemingly did not understand the breakthrough technology that underscores the industry, describing blockchain as “no better than a spreadsheet database”.

In reality, before 2009, computer scientists deemed it impossible to have a database/ledger that was simultaneously distributed and immutable. However, the advent of blockchain has solved this and has offered an effective solution to one of the most pressing issues of our increasingly data-driven world: the need for central ownership of stored information.

The outlaw phase has passed. Enter the mavericks

We have already crossed that murky threshold in blockchain where its early use attracted conmen and people intent on circumventing the law. Now it is attracting the best and the brightest of the legacy markets – mavericks with unique perspectives and “veteran” credentials.

Some are big Wall St. names like Mike Novogratz and Tim Draper, but more exciting is the involvement of internet entrepreneurs and innovators such as Patrick Byrne, CEO of Nasdaq-listed; Jeff Pulver, pioneer of the voice-over-internet protocol (VOIP), and even the creator of the World Wide Web himself, Tim Berners-Lee. These are the alchemists of technology – people who can take a base technology and refine it into a wildly successful product.

I agree with Roubini’s statement that blockchain is “the most overhyped technology” today, but until a technology delivers a killer app, we don’t know how useful it can really be.

Speaking at this year’s Blockchain South conference, Jeff Pulver highlighted the parallels between today’s blockchain hype and an earlier technology wave, saying: “In 1995, Voice-over IP was the most over-hyped and misunderstood technology, and in 2018 blockchain and bitcoin are the most over-hyped and misunderstood technologies. But the opportunities have never been bigger. For those who are creative and innovative, we’re in a time even more glorious than the Dotcom days.”

Disrupting the status quo

In stark contrast to the ICO swindler headlines that crypto has been associated with, the industry is actually attracting people who led crusades against corruption in legacy financial markets.

During their pioneering careers, Patrick Byrne and Jeff Pulver have both come under federal scrutiny for fighting the status quo. Pulver, for example, was pursued by the Federal Communications Commission (FCC) to give up his VOIP innovations, which the government believed were being used by Al Qaeda. He cooperated, forfeiting his “keys” to the technology to prove, if it was the case, that it wasn’t the intended use. Instead it was an example of an early technology being taken advantage of by unsavory characters.

Pulver has also fought successfully to keep voice over internet independent from telecommunications companies to allow for its continued innovation and expansion. In 2004, the FCC adopted the Pulver Order, which ruled that computer-to-computer VOIP is not a telecommunication service. This has allowed companies, including Facebook and Google, to provide VOIP call services without being considered telecommunications companies.

Overstock founder Patrick Byrne is a maverick in the truest sense: combining Warren Buffett-like business acumen with the mind of a philosopher, he once ran Berkshire Hathaway companies and also holds a PhD in philosophy from Stanford University.

Not long after taking public in 2002, Byrne was being courted by Wall St. bankers and was invited to join them in insider trading schemes. He learned of the practice of naked short selling: creating fake shares to sell and dump prices. He went to the regulators – the US Securities and Exchange Commission (SEC), the Department of Justice, and the Senate – the first CEO to volunteer under oath, but none of them were interested in what he had to say.

He could have profited handsomely from the insider culture but instead took the unprecedented step of accusing the regulators of being in bed with Wall St. This led to many years and tens of millions spent pursuing his own investigation, which resulted in the biggest FBI investigation of Wall Street in history and almost 100 arrests.

Insider trading and naked short selling took advantage of a settlement system that has barely changed since the 1960s. A system that empowers a closed coterie of corporate interests in capital markets: the company executives; the brokers/dealers who trade their equity; the exchanges that facilitate the trades; and the regulators & financial media who are meant to be independent watchdogs, to extract huge financial rewards by “playing the system”.

The beauty of blockchain-based capital markets and the technology’s innate transparency is that all this mischief becomes impossible. Regulators will have a consolidated audit trail to follow that everyone can see, and which will also prevent what Byrne describes as “regulatory capture” – when regulators advance the commercial interests they are meant to monitor. Byrne’s latest venture tZERO, a blockchain-based security exchange, is a first step in the creation of this new world.

Both Pulver and Byrne were at the coal face of technology companies during the Dotcom bubble. They’ve seen the life cycle of manias before, seen the making and breaking of the first tech millionaires and come out the other end. Soon people will not be talking about blockchain, in the same sense that nobody talks about TCP/IP anymore. Instead, as it was with the internet, it will be the ‘killer apps’ that will capture the world’s attention and imagination.

Blockchain’s benefits will eventually extend far beyond the realms of money. But in the world of financial settlements, Pulver believes “it is going to be 1966 meets 2019 very soon.”

Fran Strajnar is CEO of blockchain and Crypto Asset Market Data analysis and research company, Brave New Coin.

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