Overstock's Evolution From Furniture To Cryptocurrency

Fad - or future? JL

Ellen Rosen reports in the New York Times:

The company, created almost 20 years ago, has been a pioneer in cryptocurrency. It was the first major retailer to accept Bitcoin and it’s trying very hard right now to make an even bigger bet by selling off its retail arm and concentrating on blockchain technology. It was the first step in seeing what was possible with blockchain technology. Five years later, the company generates from $68,000 to $120,000 in cryptocurrency revenues weekly.

If you know Overstock.com only from its pop-up ads, internet searches or even its television commercials, you might think it’s just an online retailer selling some cool-looking furniture.

But you’d be wrong. That description is as outdated as a chintz sofa.

The company, created almost 20 years ago, has been a pioneer in the mysterious world of cryptocurrency. It was the first major retailer to accept Bitcoin and it’s trying very hard right now to make an even bigger bet by selling off its retail arm and concentrating on the blockchain technology that not only supports cryptocurrency but could revolutionize an array of business sectors.

Its founder and chief executive, Patrick Byrne, thinks there’s a bigger future in using the blockchain for trading in capital markets, voting, protecting property rights and more.

The plan is a bold one that is not without risks. The stock, which has risen steadily, dropped sharply earlier this year in the midst of overall uncertainty about the valuation of cryptocurrency. But it has stabilized and is now trading at nearly double its price last June.

Mr. Byrne seems undaunted despite the gyrations. “When we started off we were proud of saying we’re not a tech company, we’re a lemonade stand with a computer in it,” he said.

But now, “it’s a logical time to sell our e-commerce business — to cash in my chips and do this crypto stuff on my own. I want to share the upside with my shareholders.” Mr. Byrne, along with his extended family, owns roughly 30 percent of Overstock.

The evolution of Overstock has been both deliberate and serendipitous. The company initially relied on third-party technology for its sales, but more than 10 years ago it began building its own. A turning point came in late 2013 when Mr. Byrne gathered together a group of Overstock programmers to figure out how to accept Bitcoin for purchases. They moved quickly; within a month, Overstock became the first major retailer to accept theBitcoin was never the end goal, he said; instead, it was only the first step in seeing what was possible with the nascent blockchain technology. Nearly five years later, the company generates from $68,000 to $120,000 in cryptocurrency revenues weekly. That translates to roughly “0.2 percent of our revenue,” Mr. Byrne said, adding that Overstock “converts a lot of that into dollars.”

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Patrick Byrne, the founder and chief executive of Overstock.com, has led the company in its embrace of cryptocurrency and blockchain technology.CreditGeorge Frey/Bloomberg

The handful of programmers and developers who came up with the initial Bitcoin capability has grown into a corps of about 65, based at the company’s new headquarters, which was built on a former Superfund site about 12 miles from Salt Lake City.

In 2014, the company created a subsidiary, Medici Ventures, to manage and oversee its investments in blockchain-related firms. It was named for the Medici Bank of Florence — a pioneer of the double entry bookkeeping that revolutionized money and banking in the Renaissance.

One of the investment results was tZero, described in the company’s most recent quarterly report, as comprising a “financial technology company, two related registered broker dealers, a registered investment adviser and an accredited investor verification company.” More colloquially, Mr. Byrne describes tZero as the place where “blockchain meets capital markets.”

The name tZero stems from the initial goal — to trade securities that settle immediately, rather than after the three-day waiting period that existed under federal securities rules. (That time period was shortened to two days last September.) After several years of working with the

Securities and Exchange Commission to create the system, tZero got the regulatory go-ahead in December 2016, and a small class of Overstock equity is trading via that technology.

But that platform was itself upended by last year’s proliferation of initial coin offerings, or I.C.O.s, which have created an alternative way to raise capital. Responding to the turnabout, tZero began focusing on the technology needed to develop a platform to trade the so-called coins or tokens created in offerings. And to raise capital, tZero itself designed what Mr. Byrne calls a security token offering — as opposed to an I.C.O. — saying that it complies with federal securities law.

Whether the S.E.C. agrees with that characterization is an open question. Earlier this year, the commission escalated its oversight of I.C.O.s, asserting that many were really equity offerings in disguise. TZero is among those under investigation, Mr. Byrne acknowledged. But he called the heightened S.E.C. oversight “long overdue” for a market he viewed as rife with fraud and he expressed confidence that tZero’s offering was properly done.

He said he was looking forward to meeting with the S.E.C. again — a not-so-veiled reference to the agency’s investigations into Overstock following several earnings restatements roughly a decade ago. No action has been taken against Overstock in the past.

The S.E.C.’s current investigation, on which the agency has declined to comment, hasn’t slowed tZero’s expansion efforts. Mr. Byrne recently met with potential investors overseas but hasn’t yet disclosed how much money has been raised. In addition to technology under development, in May, tZero and Box Digital Markets announced a joint venture to create what they say is the “industry’s first regulated security token exchange.”

Medici Ventures has backed other companies as well. With its president, Jonathan Johnson, a former Overstock board chairman from 2014 to 2017, Medici has so far invested an undisclosed amount in 13 blockchain companies.

Among those is Bitt, a Barbados-based start-up that aims to serve people without bank accounts by creating digital wallets that would circumvent the need for the accounts or for credit cards. The market could be a large one. The World Bank recently found that 1.7 billion adults do not have bank accounts, although two-thirds of those own mobile phones.

The company recently invested in Finclusive, which seeks to serve the estimated 7 percent of households in the United States without banking accounts as well as the approximately 20 percent of households that have a checking or savings account, but no other financial products through the banking system. The company, according to its website, connects financial service professionals with those currently underserved by the finance industry.

Medici’s portfolio extends beyond the financial technology sector, including start-ups such as Voatz, a Boston-based company that seeks to secure voting via smartphones and blockchain. According to Mr. Johnson, colleges, unions and some municipalities, have tested the technology, which, he said, provided privacy and security through the use of biometrics and an ability to confirm that one’s vote had been counted.

Most recently, West Virginia became the first state to test the technology in its recent primary election, allowing overseas members of the military to cast their votes. Michael Queen, a spokesman for the West Virginia secretary of state, said in an email that “a comprehensive audit is being conducted to evaluate the security of the blockchain used for the mobile application.”

Six ago, Mr. Byrne and Medici formed a joint venture with the Peruvian economist Hernando de Soto Polar, a longtime proponent of protecting property rights — especially for people in developing nations, where the rights are often exploited.

Mr. Byrne said he sought out Mr. De Soto, cultivating a friendship that resulted in De Soto Inc., a so-called social benefit company that would use blockchain to record property ownership.

Even with the prospect of selling its retail arm, Overstock continues to invest in its e-commerce efforts, including working on efficiency in its supply chain and adding a new distribution center to improve its two-day shipping.

Although it’s clear from interviews and earnings calls that Mr. Byrne’s sights are set on cryptocurrency and the underlying blockchain technology, he cautions this is not an asset class for the general public.

“While I wax enthusiastic, and while there’s a pony in there somewhere, the public should stay away from cryptocurrency. At least until the S.E.C. gets its arms around it,” he said.