This is sort of the idea I've been waiting to come out of the bitcoin universe for some time now. A decentralized stock exchange seems like an obvious killer application for bitcoin. Though, the only thing I don't like about it is counterpart. Was never a fan of them, nor open transactions...
Why go to the SEC? I feel like the advantage of doing something like this would be the ability to build a trading exchange without any authority over looking it.. I'd say that's what's wrong with the current system (NYSE,NASDAQ,etc).
The obvious answer is that wall street has never been in a state of no regulation; at least, not for a very long time.
When you have a bunch of poorly thought out regulation, much of it designed to exclude competition, that's when things go bad.
The cool thing about the internet is that regardless of what you or the SEC or John Q. Public thinks is a bad idea or improper, people are free to experiment with it anyway. Technology has outpaced the ability of governments to proscribe voluntary interaction.
The counterargument is that regulation hurts small players more than large ones. Citibank can afford an army of compliance officers; most of us can't.
I'm generally pro-regulation, if the details are sensible, but regulatory capture is a real problem, and it is not an unreasonable stance that the cure is sometimes worse than the disease.
That isn't really a counterargument; it's just a factoid. A counterargument would be something along the lines of "Regulation hurts small players more than large ones, and the scarcity of small players has been the biggest problem with Wall Street over the past decade because _____, therefore the problem with Wall Street is too much oversight."
Regulatory capture's a real issue, but it's not a given. For those interested in the topic, I highly recommend Shelia Bair's "Bull By The Horns", which is her account of running the FDIC up to and during the financial crisis. It left me with quite a bit of respect for the FDIC's approach, and for what solid regulation takes.
Why should people on wall street be forbidden from doing whatever investments they want to, insofar as they are contractually allowed? If you don't like how someone is investing, don't invest with them. If you think certain banks are behaving riskilly, don't give them your money. What are some counter-arguments to this? I.e. why is it a) moral and b) desirable to regulate the activity of wall street traders in addition to the laws they are automatically subject to (like anti-fraud laws)?
The argument is actually fairly simple: behaviors that have been known to cause fraudulent or deceptive activity in the past are placed under more scrutiny or outright banned.
For example, it becomes quite easy to hide fraud when a single entity is both an investment bank and a mortgage lender.
In my layman's opinion, a lot of the problem comes from the fact that accounting is not an exact science. For a large company with many revenue, expenditure and investment streams spread over the course of a year, accountants have a lot of leeway to massage the numbers as they see fit. Until the house of cards comes crashing down ala 2008 it can be very hard to pick apart what is actually going on from the outside.
I would imagine most of the laws and regulations are anti-fraud in nature. Outside of that, limiting the risk exposure of banks that carry FDIC insurance, or some other government backing, is in the interest in of all taxpayers. From my laymen's understanding, if you want to start a hedge fund, take some rich people's money, and gamble it all away, nothing is really stopping you. In fact people do it all the time.
imo its the fact that we're so reliant on 3-4 big banks as opposed to 100 banks. if it were more decentralized, US could afford less regulation and just let companies succeed/fail on their own. can't do that in the current climate
I don't think it would look the way you imagine. There are lots of computer software vendors, but if you wiped out Apple, Microsoft and a few core Linux contributors, you'd pretty much wreck the computer world, even for people who directly use other vendors. The existence of smaller players does not negate the influence of the larger ones.
People come away concluding that, because the problem with Wall Street is not deregulation, despite all the propaganda to the contrary. The problem was selective regulation or deregulation, whatever benefited Wall Street, as well as selective enforcement and interpretation of law. In a nut shell, Wall Street is in control and reconfigures the legal apparatus to their advantage; they don't randomly dismantle it.
I think people like to simplify regulation as either good or bad and fail to consider how biased it can be. Unbiased software rules that can be openly analyzed and force everyone to play fair are good. Selective regulation written by those with money is terrible.
Because there is a tremendous amount of regulation surrounding finance - look at how it is impossible to make a backer liable Kickstarter. You cannot make your own stock market, and you cannot sell ownership in a company through anything but a public stock exchange.
I imagine there is also tremendous regulation surrounding venture capital, but I have never engaged in it much so I'm unaware of the complexities.
Too bad that, by nature of the fact the finance industry inherently has all the money, that money lets them buy the politicians to then use regulation to prevent competition and line their own pockets, while leaving them impervious to persecution when their greed fucks everything up.
I do not see how even the best intentioned regulation can work in finance. It is the proverbial tightening the fist while the actors slip through your fingers - if you try to restrict the flow of money, really big money, like drug money, then all you will find is you suffering for it.
Protip: If you start by saying "I do not see how", the problem may be that you are just not seeing it.
One of the reasons that foreign companies list on US markets is that we have some of the strongest financial regulations in the world.
A simple analogy: San Francisco has a vigorous health department, and food safety scores are posted visibly in every restaurant. Does this reduce the vibrancy of the restaurant scene? No, it enhances it. Because I know when a place is likely safe to eat at, I spend more money in restaurants and I'm more willing to try new places. That increases the effectiveness of the market because newer restaurants compete on a more even footing with established ones.
> Because I know when a place is likely safe to eat at, I spend more money in restaurants and I'm more willing to try new places.
And the inverse of this, is that if a restaurant listed food safety scores irrespective of state mandate, you would visit those restaurants more, and if most people agreed, those restaurants would prosper and those not adopting food safety scores would suffer.
Except in that situation there was no violence of the state to compel the individual restaurants to do something - the market naturally lead to that conclusion. It is not like there is any limit on your ability to learn information about a restaurant - I would say I am surprised that there is not some popular national database of website safety ratings made up of user reviews, but considering I have never searched for such a service - I just go by general user reviews, under the assumption that an unsafe food service locale would get trashed in criticism - I guess it makes sense not to exist.
> That increases the effectiveness of the market because newer restaurants compete on a more even footing with established ones.
Or it would be a competitive advantage if the markets truly benefited from food safety scores for newer restaurants to advertise them where their entrenched competition does no such thing.
That is such an incredibly naive view, it's hard to know what to begin with.
Voluntary food safety postings are useless, because they allow fraudulent posting. Sure, it'll come out pretty soon - but by that time people are ill or dead due to food poisoning, and the person in question is likely long gone.
"The market" doesn't give a shit if actors are fraudulent or working with good intentions, and it has no way to prevent turning an iterated situation into a one-off situation. "The market" has no idea which reviews are genuine. If you'd like to see unregulated reviews in action, look at the direction yelp is turning lately. "The market" does not guarantee that consumers are fully (or even somewhat) informed, a condition that is necessary to a market actually working properly.
> Or it would be a competitive advantage if the markets truly benefited from food safety scores for newer restaurants to advertise them where their entrenched competition does no such thing.
No, it wouldn't, because you'd have no idea if you could trust the reviews. So you'd wait a while. Sooner or later, you have a bunch of restaurants that post reviews. And then new restaurants pop up, also posting their reviews. Do you still know which ones are trustworthy and which ones aren't?
Sure, you could ask your friends. Until you travel. At which point you're at the mercy of complete strangers.
"The market" is not an almighty force for good. It allows efficient exchange of goods. If a cost is externalized - say, the hospital bill of people eating at restaurants - the market does exactly nothing about it. Because the cost is externalized.
That's the whole point of regulations. Not to be a pain in the neck, but to ensure costs are not externalized. The only way to achieve that without enforcement is a society of entirely benevolent actors. That does not exist.
That's a fine hypothetical, but a) I know of no city where restaurants voluntarily put together such a system, and b) if each restaurant gets to pick who evaluates it, there's no particular reason for customers to trust the scores.
I also don't buy your view that the magic sparkle ponies of the market will always take care of everything. I think your approach works in theory, with infinitely smart and well informed humans. But given that we're dealing with a bunch of hairless monkeys, I think cognitive limits make it relatively easy for bad actors to push market solutions away from optimum.
Regulation done by math is infinitely better than the regulation done by easily corruptible talking heads.
HSBC got caught laundering billions of drug cartel and Iranian money. Do you know how many of the bankers went to jail? Zero. They had to pay a tiny fine equal to less than a month of their revenue.
How many bankers or Wall st guys went to jail for the largest freaking financial crisis they had caused?
Regulation in finance just doesn't work. Look at who the regulators are and who is in charge of the regulators. Half of t these folks are from Goldman.
Overstock is already a publicly traded company - anything that remotely hints at trying to circumvent the regulations they're already subject to would be a very bad idea
It's already been trading on CMFX (one of the most reputable Forex markets around, on par with BATS or CME) against the USD for a while now. This is nothing new.
This is great. Patrick Byrne is doing a great service here. Development of crypto-security tools being pushed by an already successful publicly traded company adds instant credibility to the project and will lead many more successful business leaders to give it closer inspection, sooner.
So what happens when somebody doesn't secure the private keys to their Overstock shares well enough? A hacker steals your Overstock shares, and now they own them? What happens if someone steals the shares from the CEO? Obviously the hacker could never make use of those shares or else they would get caught. In a system like this, it can't be truly decentralized, can it?
From a technical perspective, it can. See http://counterparty.io/ for a decentralized exchange in action.
Do you mean you don't think people can be trusted to keep their own shares safe? Securing a large value of cryptocurrency is challenging right now. But if you don't trust yourself to do it, you can hire a third party that you do trust to hold your shares for you.
"Do you mean you don't think people can be trusted to keep their own shares safe?" Well, to a degree, yeah. Most people don't know how to properly keep them safe.
The main thing I'm trying to say is that it's potentially easier to steal shares, and there is really no way of reversing it if it's decentralized. If you know some shares are stolen, can you invalidate them, or reissue shares? It's not really completely decentralized if you can. There is probably still a central authority for creating and issuing shares, but they will allow you to trade the shares in a peer-to-peer way.
It my understanding that the decentralized part refers to the networked validation.
I.e couldn't you imagine a setup where the network collectively invalidates a set of shares and re-issue them back to the original owner. A kind of distributed jury system.
Now the problem of course is that the jury could be wrong and I have no idea about the actual implementation but it seems to me like a potential solution in the future.
You could make the same argument with paper money and I think the result would be similar. Theft might be a big issue, but that doesn't mean the system won't work.
A veritable explosion of innovation is coming our way. This decentralized stock exchange is just a hint of what is to come. Technologies using bitcoin, and technologies built on bitcoin, are the next thing that will change the world. Don't get me wrong, I'm happy we're also democratizing taxi services, but democratizing finance makes me so much more excited.
It's an exciting prospect to trade financial assets on a decentralized, trustless network. Definitely the right direction.
But I'm not psyched about having to think about Counterparty's internal XCP currency, even if it isn't used for most purposes. It's an annoying barrier to have to transact in an altcoin to access certain functionality.
Other implementations use pure Bitcoin only, and are much less overwrought with complexity than Counterparty: https://coins.assembly.com
Quite generally, Counterparty functionality that requires the use of XCP simply can't exist on platforms without their own currency. That's why it's there.
The issue I see is there's no avoiding putting your trust in the centralized issuer. You can issue and trade inherently centralized assets on a global ledger, but why? What is the advantage for the common man?
I guess the benefit is that you only have to trust the issuer one time. Once the stock has been issued on the blockchain it cannot be manipulated. With a centralized system you'd have to trust the issuer/exchange on an ongoing basis. Whether this difference matters is kind of a philosophical litmus test that divides the blockchain and non-blockchain (i.e. Ripple/Stellar/OpenTransactions) camps.
The exchange would be based on the counterparty protocol, which allows anyone with a BTC address to issue and back assets in a decentralized manner. We'll have to see how this decentralization leaks into what it means to be a stock exchange.
Can anyone knowledgeable (especially those that do not like bitcoin) weigh in as to why this would be a bad idea ?
I'm asking this sincerely, and not being sarcasm, as I don't know enough about either Bitcoin or stock market to make a judgement. And this seems ... different enough that I'm not sure my reaction should be "damn the future is here", or "what a bunch of craps".
As somebody who did tech work for traders who dealt with a number of exchanges, I am hugely skeptical that an exchange can be fully automated.
A real exchange has an enormous team of well-paid people whose job it is to make sure things run smoothly. They also have incredible power: they can freeze the exchange, limit price movements, undo transactions, kick people out of the market, and who knows what else. They use this power rarely, but when they do market participants are generally glad they did.
I'm sure somebody can automate 90% of the cases, or 99%, or even 99.9%. Most trading is routine. But will this work when there's a war? A financial panic? A major fraud or theft? An exploitation of a previously unsuspected bug?
The New York Stock Exchange has been working this stuff out since 1817 (or 1792 depending on how you count). And we still have things like Black Monday [1] and the 2010 Flash Crash [2].
This will be an interesting experiment, but I will not be surprised at all if it's something most investors avoid for decades because it's a) novel and therefore risky, and b) lacking a lot of the regulatory protections of a real exchange.
As the company issuing shares, unless you get the approval of the SEC (i.e. you're regulated to sell shares to the general public) you will be fined and prosecuted.
It you are a non U.S. based company you will be chased by the SEC for issuing shares to U.S. citizens, which brings you under their jurisdiction(so says them).
Unregulated financial marketplace, what could possibly go wrong?
I'm a big Bitcoin supporter mainly because of the interesting tech opportunities, but I don't like the extremist proponents to deregulation that come with Bitcoin in droves. Take a look at the posts from people who lost their families inheritance when the price drops.
Now I know it's not a level playing field, and I can spend my inheritance on forex in a few hours. I'm not saying that's a good thing, but the fact it's not a level playing field does not mean it's a green light to let these things run without any regulation at all.
People who advocate freedom from all regulation generally are in my experience wholly unsympathetic to those who suffer as a result of it, and are unable to recognise that the theory behind it all is flawed.
There are a lot of ways to abuse information asymmetry in stock markets. Decentralizing and removing oversight makes things more readily abused by creating more forms of information asymmetry.
One easy solution is to force key holders to de-anonymize themselves if they want to take any shareholder actions, such as voting. This wouldn't be an issue for 99% of us - just because I own a few TSLA shares doesn't mean I'm ever going to pound my fist on Elon Musk' desk and demand something - But if someone does buy up a large portion of the corporation and tries to use it to vote - they would have to declare "Hi, I am Carl Icahn, I own the following private keys XYZ and I'm demanding that we liquidate our assets and build a giant statue to the sky" or whatever. This prevents the Taliban or Chinese hackers from seizing control of a US corporation.
Why go to the SEC? I feel like the advantage of doing something like this would be the ability to build a trading exchange without any authority over looking it.. I'd say that's what's wrong with the current system (NYSE,NASDAQ,etc).