Overstock.com, Inc. may be the first company in the United States to offer digital securities.
The online retailer recently filed a prospectus with the Securities and Exchange Commission (SEC) that details its plans to offer uncertificated securities that would be purchased and transferred using technology similar to that used for Bitcoin digital currency.
In 2014, Overstock became the first major retailer to accept payments in Bitcoin. The company is now poised to test the viability of digital securities, which pose similar regulatory, technological, and security concerns.
Digital currency only exists electronically as a computer file. A network tracks the transfer of the computer files from purchaser to seller, but does not record the nature of the transaction. While an estimated market capitalization in excess of $10 billion in Bitcoin is now in circulation, concerns about security and reliability are two key reasons why virtual currency is not yet a mainstream form of payment.
According to Overstock’s prospectus filed with the SEC, the company’s digital securities will be “uncertificated securities, the ownership and transfer of which are recorded on a cryptographically-secured distributed ledger system using technology similar to (or the same as) the distributed ledger technology used for trading digital currencies.” The digital securities will not be listed for trading on any stock exchange or through any other national trading platform. Rather, they will be issued, available for purchase and traded exclusively on a specific trading system that is registered with the SEC as an alternative trading system, or ATS.
Digital securities are attractive because they enable trades to settle immediately or nearly immediately, unlike traditional securities that settle on the third day following the day the money is exchanged. In addition, because they do not involve certificates, securities holders are able to hold their securities directly without the use of a middleman, such as a brokerage firm.
Due to the novel nature of the digital securities offering, Overstock acknowledges that it comes with certain risks. The company specifically highlights the following risks of digital securities:
A rapidly-evolving regulatory landscape focused on digital currencies and, potentially, on the technology underlying distributed ledgers, which might include security, privacy or other regulatory concerns that could require the ATS to implement changes to its digital securities trading system that could disrupt trading in our digital securities;
The possibility of undiscovered technical flaws, including in the process by which system participants come to agreement on the state of the distributed ledger and the ownership of the digital securities recorded on the ledger;
The possibility that cryptographic security measures that authenticate transactions and the distributed ledger could be compromised, which could allow an attacker to alter the distributed ledger and the ownership of digital securities recorded on the ledger; and
The possibility of breakdowns and trading halts as a result of undiscovered flaws in the ATS that could prevent trades for a period of time
The prospect of digital securities has the potential to significantly shake-up how corporate securities are publicly offered and traded. However, it remains to be seen how willing regulators and investors will be to gamble on this new, and largely untested, technology.
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