Blockchain Trading Gets Green Light, but Also Oversight

 

Tony Chapelle / Senior reporter / Agenda – A Financial Times service / 330 Hudson Street, 7th Floor / New York, NY 10013 / (212) 542-1236

by  Tony Chapelle October 30, 2017

In this first of a two-part series, Agenda looks at how boards will have to respond to the recent regulation and rise of blockchain technology in stock trading. In part two, we look at monitoring stock ownership using blockchain.

Last month, Jamie Dimon, chairman and CEO of JPMorgan Chase, told an investor conference that digital currency Bitcoin is “a fraud” and a mania “worse than tulip bulbs.” He averred that he’d fire any of his traders “in a second” for dealing in the stuff, calling it against his company’s rules, stupid and dangerous.

Dimon’s strong sentiments notwithstanding, he and executives at JPMorgan do believe in blockchain, the distributed online technology that is the foundation of Bitcoin. Indeed, JPMorgan actually built its own blockchain using Ethereum, the international network for another cryptocurrency, Ether.

To be sure, the Securities and Exchange Commission recently announced a no-action letter in which it decided to allow — and thus to regulate — all transactions that are made on a blockchain using Bitcoin, Ether and other virtual currencies. In a July 25 investor alert, the SEC stated that blockchain initial coin offerings and token sales now “are subject to Federal Securities laws.”

The SEC’s action will effectively require that all cryptocurrency securities transactions between U.S. investors be registered. Previously, virtual trades that allow two parties to create a shared ledger and see the same information at the same time for transactions have been unregulated. A spokesman for the SEC declined to comment for this article.

Blockchain as Game Changer?

There could be some benefits to boards’ approving a move to having their shares traded on blockchain.

It’s been said that blockchain technology will become as significant to corporations as the Internet is today. Blockchain was created during the height of the financial crisis as a transparent party-counterparty ledger to replace the use of cash.

In blockchain, a so-called smart contract lets both buyer and seller settle transactions immediately without a middleman by using the same decentralized ledger. That gets rid of time lag and the need to duplicate records for third-party intermediaries such as regulators.

Advocates of blockchain stock trading say it’s a game changer. “The trade is the settlement,” Patrick Byrne, CEO of Overstock.com, tells Agenda.

Blockchain supporters say decentralized distributed ledgers would eliminate the need for stock-transfer agencies, which could save the average issuing company hundreds of thousands, if not millions, of dollars in transfer costs per year. Blockchain could also prevent high-frequency trading, front-running or hidden orders.

Perhaps one of the most important benefits of blockchain trading is that it could potentially cripple naked short-selling of companies’ stock. That practice might be responsible for wiping out hundreds of small public companies every year, says Garland E. Harris, the CEO of cryptocurrency marketing firm Strategic Global Investments. He says his own publicly listed firm was the target of aggressive short-selling.

Naked short sales — in effect, traders’ selling shares without ever having owned them — may have created an artificially high supply of shares for sale that drove down Wall Street bank stock prices during the 2008 financial crisis. It’s called “failure to deliver.” The seller doesn’t produce the borrowed shares for which they ask to be paid, which violates the contract. That’s a civil offense under the SEC’s Regulation SHO.

Harris says that small firms are especially susceptible to short-selling because they don’t have the financial resources to withstand a violent drop in market price. Short sales can force companies to initiate a stock buyback, increase the corporate dividend or make an acquisition to bolster investor confidence. “Some companies are devastated by [short-selling]” Harris says. “But ours was prepared with the blockchain strategy.”

Harris switched SGI’s stock from being traded on a traditional stock exchange to being traded via an open source blockchain. In particular, Strategic Global Investments used a Bitcoin blockchain called the Counterparty Decentralized Exchange Market, or DEX. Other trading blockchains include tZero (also spelled TØ ), a blockchain subsidiary of online retailer Overstock that also allows a company to issue and even borrow securities.

Related Content

One downside is that no regulator can stop trading in a stock over blockchain. A regulatory agency or an exchange could prohibit new shares from being issued. Yet there’s no switch at an exchange that could be tripped or market makers who could be instructed to quit offering prices in a company’s shares. This opens companies up to the risk of market meltups and meltdowns at lightning speeds, similar to what Bitcoin (which operates using blockchain technology) experienced when its prices rocketed from less than $3,000 to more than $4,700 and then fell back below $4,000 in August. Bitcoin has since rebounded and surged to a record of more than $6,000 before falling again below $5,500 in October on rumors of increased government regulation.

Blockchain Innovation

In a way, the advent of blockchain trading didn’t come soon enough for Byrne.

In highly publicized lawsuits beginning in 2005, Byrne accused a hedge fund and an equity research firm of conspiring to short-sell his company’s stock by writing and disseminating false news reports about Overstock, and then in another lawsuit, he charged several investment banks – includingGoldman Sachs Group and Merrill Lynch — with taking illegal naked short-selling positions against his firm.

In the first case, the hedge fund was indeed found to have hired the research firm to allege that Overstock’s financial reports failed to comply withFinancial Accounting Standards Board rules and generally accepted accounting principles, and that several of its directors were not independent. The hedge fund settled with Byrne for $5 million in 2009. The research firm retracted the claims and apologized.

In the second lawsuit, the Wall Street banks that Byrne accused of naked short-selling settled out of court with Overstock for $24.4 million. According to Law360.com, Merrill Lynch Professional Clearing paid $20 million of the total.

To be sure, Byrne is credited in some circles with providing the SEC’s then-chairman Chris Cox and then-Federal Reserve chairman Alan Greenspan with the background to understand how traders had put Fannie MaeFreddie Mac and the major Wall Street banks under short-selling pressure during the financial crisis. In fact, the SEC issued an emergency order in June of 2008 that stopped naked short sales of selected stocks.

Byrne claims that blockchain trading could be a remedy to some of what he and other companies have experienced.

Overstock is a rare U.S. company in that it allows its stock to be traded using cryptocurrency. In fact, in 2015, Byrne’s company launched its tZero blockchain-based trading platform, which can facilitate trades in either private or public equities.

“This puts all traders on a level playing field,” according to Harris. This year, his trading firm was the first company incorporated in Delaware to trade shares on blockchain using the DEX. He says any cryptocurrency can be used for trading and then be tracked on the blockchain. That’s what the Delaware legislature allowed this summer by passing a law that allows corporations there to trade and track who owns shares on the blockchain.

Harris explains that a company that sells its shares using blockchain can do that without stock-transfer agents. “You don’t have to register to do your own stock transfer, but you do to be a third-party transfer agent,” he says.

In addition, crypto-trading could potentially remove the Depository Trust & Clearing Corporation (DTCC) from the settlement process entirely. Peers would trade directly with each other. They could record their own trades using blockchains operated by miners — that is, computer nodes — behind the shared ledgers. Each side would need to open a counterparty wallet and place either stock or currency in it to complete a trade. In 2017, DTCC completed proof-of-concept blockchain transactions on Treasury and other federal agency repurchase agreements. Yet Depository Trust hasn’t taken on stock trading yet.

Harris, whose brokerage firm facilitates companies’ offering shares via blockchain initial coin offerings, says one of the biggest obstacles to adoption of blockchain trading will be that it eliminates the need for brokers for common trades. “So, there will be [Wall Street] people fighting it,” he warns. While he says blockchain trading may not end the need for financial advice, it does do away with the need to use a third party to facilitate a trade for a commission. The blockchain miner charges a small transaction fee ranging from 25 cents to two dollars no matter the size of the transaction.

“Now enter the blockchain where I can sell a million dollars’ worth of stock for a quarter,” says Harris.

Garland E. Harris, President/CEO for Strategic Global Investments, Inc. Regarding Expiration of SEC Temporary Trading Suspension

Garland E. Harris, President/CEO for Strategic Global Investments, Inc. Regarding Expiration of SEC Temporary Trading Suspension

GlobeNewswire

DOVER, Del., Aug. 18, 2017 (GLOBE NEWSWIRE) — Strategic Global Investments, Inc., a Delaware Corporation, (Counterparty DEX:STBV) which had been temporarily suspended from trading on the OTC Market until 11:59 pm EDT on August 17, 2017, has so far seen an expiration of that suspension and no additional suspension has been imposed at this time.

Garland E. Harris says, “We submitted our 8-K https://www.sec.gov/Archives/edgar/data/823187/000117184317005145/0001171843-17-005145-index.htm which included current information and a discussion about the future plans for ICO’s. STBV has not participated in any ICO’s at this time.

“I spoke with officials from the SEC at 1 pm EDT yesterday and was impressed (and surprised) by the desire and determination of the regulators to make sure that the markets are safe and transparent for the investing public. Yes, they are just doing their jobs, and very difficult jobs at that, in the midst of perhaps the fastest paradigm shift in SEC history – decentralized blockchain trading and ICO’s.

“A very timely and well-written article on this subject can be found at http://oracledispatch.com/2017/08/17/strategic-global-investments-inc-otcmktsstbv-sec-targeting-public-companies-ties-icos/

“The author of the article writes, ‘After the SEC Investor Bulletin regarding ICO’s on July 25, 2017 two publically traded OTC stocks were temporarily suspended and thrust into the spotlight.  In their bulletin, they made the argument that if tokens are offered for sale and then can be resold on another virtual currency exchange or platform they may, in fact, be a security and subject to federal security laws. It’s pretty clear from this point forward that the SEC is intent on regulating ICO’s.’

“We are pleased that, so far, the SEC has imposed no further trading suspension and will make sure that we comply with any and all securities laws.”

Mr. Harris states further, “FINRA reached out to the Company regarding the 100 for 1 stock split that went effective today. Unfortunately, we delayed our reply to make sure that we responded in a timely fashion to the SEC. We plan to fully address FINRA information requests by Monday. Every shareholder holding shares as of 08/17/2017 11:59 pm will be positively impacted by the split.

“There is no guarantee that we will ever trade again on the OTC Markets. I am confident that there may be robust trading again, once market makers are properly informed and instructed by FINRA regarding the post split pricing. We have, however, increased staffing to provide instruction and clarity as to trading on the Decentralized Exchange Markets – DEX. Such trading on the Bitcoin blockchain is available 24/7/365 and we believe is the future of all securities markets.”

Mr. Harris finally mentions, “The price of the last trade on the DEX prior to the 100 for 1 split was $0.20, it is up to market makers to determine the post split trading price on the OTC, but on the DEX the new price should start at $0.002. All shareholders will receive the 100 for 1 shares, but those with shares on the DEX have started receiving them as of 08/18/2017. Here is the best link to use to check current prices (valued in XCP) so a little math is required. https://xchain.io/asset/STBV

“Once you have a wallet with your shares in it, the math is done for you, which see a post split example: https://xchain.io/address/1G1dF2bH62xmEUg78HrH3oPzh6XtBphZLm

“The greatest news is that no short selling is allowed on the DEX.”

Shareholders, traders and investors can garner information on acquiring a Counterparty cryptocurrency wallet to trade on the DEX from the following sources:
https://counterparty.io/
https://indiesquare.me/
https://wallet.counterwallet.io/
https://coindaddy.io/

Contact:
Strategic Global Investments, Inc., a Delaware Corporation
A CryptoCurrency ICO Company
1011 Adams St. WPB, FL 33407
407-504-7079

Garland E. Harris, President/CEO
garlandeharris@gmail.com

Garland E. Harris, President and CEO for Strategic Global Investments, Inc. Responds to SEC Temporary Trading Suspension on the OTC Market

Garland E. Harris, President, and CEO for Strategic Global Investments, Inc. Responds to SEC Temporary Trading Suspension on the OTC Market

GlobeNewswire

DOVER, Del., Aug. 04, 2017 (GLOBE NEWSWIRE) — Strategic Global Investments, Inc., a Delaware Corporation (OTC PINK:STBV), has been temporarily suspended from trading on the OTC Market until 11:59 p.m. EDT on August 17, 2017.

https://www.sec.gov/litigation/suspensions/2017/34-81314.pdf

https://www.sec.gov/litigation/suspensions/2017/34-81314-o.pdf

Garland E. Harris says, “We have completed our financials for 2015 and 2016 and had just, that day, received and submitted our CIK and CCC codes to proceed with XBL filing when the suspension occurred. We will provide the SEC with all of the current required to resume trading on the OTC Markets by required date of 8/17/2017.

While we do not anticipate any further delays, we are aware that a growing number of our shareholders, that don’t want to wait, are taking steps to trade their shares, that are unrestricted, fully paid and non-assessable on the – 24/7 – Decentralized Exchange Market (“DEX”) under the asset name: “STBV”. https://xchain.io/asset/STBV

The DEX is not centralized under the auspices of any particular country and operates on the Bitcoin blockchain which is global in scope. The DEX provides peer to peer exchanging of assets and is not controlled by brokers, agencies, high frequency traders or shorters. There are no derivatives, futures or options trading on the DEX at this time. On the DEX, sellers of assets can only sell what they actually own!

The only STBV shares that are possible to be traded on the DEX are shares that have been previously registered or exempted from registration and are unrestricted. These shares must be represented initially by a physical stock certificate requested by the shareholder from a licensed brokerage firm or transfer agent and they must be “free trading”.

The Company cannot offer shares on the DEX at this time. Only shareholders of STBV can offer their shares on the DEX.

The Board of Directors will be executing a forward split of STBV shares in the near future that we anticipate will only be tradable on the DEX due to the need for eight decimal places of accuracy for tracking and trading purposes.”

Shareholders, traders and investors can garner information on acquiring a Counterparty cryptocurrency wallet to trade on the DEX from the following sources:
https://counterparty.io/
https://indiesquare.me/
https://wallet.counterwallet.io/
https://coindaddy.io/

Strategic Global Investments, Inc., a Delaware Corporation
A CryptoCurrency ICO Company
1011 Adams St. WPB, FL 33407
561-252-4540
A CryptoCurrency ICO Company

Garland E. Harris, President/CEO
garlandeharris@gmail.com

James E. Ward, Senior Vice President
jamesward2000@gmail.com

Louis T. Minutello, Chief Business Development Officer
louminutello@gmail.com

Harold Rice, Chief Financial Officer
harold9000@gmail.com

Brad Hacker and Company
Consultants and Accountants
bradhackerco@gmail.com