On July 29, 2014, Patrick Byrne, CEO of Overstock - one of the world*s largest online retailers - launched a wiki page where he invited open discussion about the best way for a public company to completely bypass entities like NASDAQ and the New York Stock Exchange and issue its securities on a decentralized platform similar to Bitcoin.
The timing could not have been more comical.
That same Tuesday, a number of Wall Street suits, including representatives of Visa, Citigroup and other financial institutions, gathered for the one-day Digital Currencies conference, organized by American Banker.
Just as the masters of money were struggling to wrap their heads around the cryptocurrency revolution, Byrne, was setting the wheels in motion on what seems to be an ambitious plan to pull the rug out from under their feet.
Reporting from the Digital Currencies conference, Bloomberg's Olga Kharif wrote:
The professionals there were by no means bitcoin faithful. Most bankers' views on the digital currency - or virtual commodity, depending on who you ask - ranged from puzzled to noncommittal. Lester Joseph, manager of the global financial crimes intelligence group at Wells Fargo, said the bank doesn't have a grand plan for bitcoin.
Planning to fail
The aloof attitude of the bankers in charge at Wall Street today would sound rather familiar to Steve J. Sasson. He was the Eastman Kodak engineer who invented the digital camera in 1975.
It's just a bit too bulky to take on holiday.
Talking about the experience, Sasson said:
"My prototype was big as a toaster, but the technical people loved it. But it was filmless photography, so management's reaction was, 'thats cute - but don't tell anyone about it.' "
We all know how digital cameras brought decentralization to photography and gave everyone the ability to produce and print their photos at home. More interesting is the parallel story of the demise of household-name film, paper and photographic chemical companies like Kodak.
Back in 1981, Kodak was already commissioning detailed research on how digital photography would impact their business. They would then ignore the result of those studies for years on end as their business went into decline.
When the company decided to roll up its sleeves and embrace the digital revolution, it was a classic case of too little, too late. Kodak filed for bankruptcy in 2012 and emerged in 2013, a shadow of its former self.
A monumental plan for Bitcoin
While the top Wall Street bankers hem and haw and drag their feet, others have seen the future and are already working hard to make it happen.
Back in January 2014, Overstock became the first major online retailer to accept bitcoin. Now, CEO Patrick Byrne looks like he might have his sights on another first. He is studying the feasibility of issuing securities on a decentralized trading platform such Counterparty, Mastercoin or NXT and is said to be in talks with developers as he considers these three and others among possible options.
Such distributed trading platforms allow anyone with an internet connection to securely create and trade digital tokens, which can represent anything, from gaming chips or a stake in a crowdfunding project, to actual company stock and other securities.
Ownership of these tokens is recorded in a blockchain ledger that is secured by strong cryptographic means, with copies distributed to a network of computers around the world. In the case of Counterparty and Mastercoin, the data is indeed stored on and secured by the Bitcoin blockchain, encoded into tiny bitcoin transactions, while other platforms like NXT use their own blockchain for this purpose.
One of the key innovations of these platforms, currently in various stages of development, is a decentralized peer-to-peer exchange, where the software itself controls and oversees the trading of tokens according to pre-agreed rules that are built into the protocol. This essentially eliminates the need for brokers or escrow services and cuts out the middleman, which is at the heart of what Byrne is trying to do.
Back at the Digital Currencies conference, Lester Joseph from Wells Fargo said during a panel called the Nexus Between Banking and Bitcoin Companies, "We dont really have a strategy. We just try to understand [Bitcoin] and try to manage the risk."
The biggest risk of all
Trying to manage risk and being smug about the whole Bitcoin affair could very well turn out to be a recipe for disaster. In fact, the biggest risk to Wall Street may be their own inaction and failure to embrace disruptive technology.
Looking for the real reason behind Kodak's downfall, John Kotter writes in Forbes:
The organization overflowed with complacency. I saw it, maybe in the late 1980s. Kodak was failing to keep up even before the digital revolution when Fuji started doing a better job with the old technology, the roll-film business. With the complacency so rock-solid, and no one at the top even devoting their priorities toward turning that problem into a huge urgency around a huge opportunity, of course they went nowhere. Of course strategy sessions with the BIG CEO went nowhere. Of course all the people buried in the hierarchy who saw the oncoming problems and had ideas for solutions made no progress. Their bosses and peers ignored them.
This Italian ad from 1987 shows Kodak confident of its universal appeal.
A similar scenario now seems to be playing out on Wall Street. There indeed is an interest in Bitcoin at some levels, with hedge funds trying to acquire bitcoin and launching Bitcoin investment funds, and venture capital is pouring in to finance a variety of bitcoin startups. However, so far, the reaction of those on top seems to be very much in line with Warren Buffett's call to "stay away".
Compared to Wall Street, Bitcoin is still but a drop in the ocean. Critics rightfully point at the lack of user-friendliness and the general immaturity of Bitcoin and the related technologies Patrick Byrne thinks will one day change the world. However, before they laugh too hard, they would do well to think back to Steven J. Sasson and his 8-pound digital camera that took 23 seconds to record its first 0.01 megapixel black-and-white photo to magnetic tape.
Who would ever go through all that trouble to look at a photo?
Overstock's CEO will likely face an uphill battle with regulators should he end up pushing full speed ahead with his apparent plan to issue securities on a peer-to-peer decentrlized exchange. But Patrick Byrne is a tough character who is not easily fased and who has taken on Wall Street against the odds in the past.
In any case, is relying on regulation to perpetually keep out the competition the best business strategy for Wall Street? It looks like we may be about to find out. One can only hope the bankers took a few selfies at the Digital Currencies conference, just in case they were having a Kodak moment.
They will not know before it is too late.
Photo credit: Eastman Kodak
DISCLOSURE: The author holds investments in Counterparty's cryptocurrency at the time of writing this article.
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