author: Vitalik Buterin
published: 2011-05-11 03:16:21 UTC
The Global Bitcoin Stock Exchange is now, as of May 5, up and running. The stated intent of the exchange is to allow people to "issue shares to raise capital, pay dividends to shareholders, put resolutions to shareholders and get their vote, issue and sell bonds, borrow and lend to the market, make and receive loan payments, issue futures contracts, meta-trade on non listed companies and trade all of the above with other traders on the market". There are currently two legitimate assets being traded: UBX (Ubitex), an in-person Bitcoin exchange, and DISHWARA, a mining company. The presence of a stock exchange shows the maturity of the Bitcoin economy, and highlights the advantages of Bitcoin itself.
But first I will discuss the principles behind the Bitcoin stock exchange. The GLBSE is run by Bitcoin Global, a Bitcoin-based corporation that "will be (in the near future) operating from within cypherspace, beyond the reach of any terrestrial government entity." The intent behind the GLBSE is to allow people to exchange stocks, bonds, futures, loans and other types of securities. The key realization here is that all of these are contracts rather than distinct types of assets - a stock is a contract to pay dividends and give voting rights, a future is a contract to make a trade at a future time, etc, and the GLBSE intends to sell all of these indiscriminately. According to an interview on the Cypherpunkd podcast, the project arose from the realization that people were trying to make these kinds of contracts on the forum, so it made sense for a centralized system to manage them. There are already businesses trying to start up now in the Bitcoin economy, which require starting capital to get running, and the stock exchange allows individual investors with relatively small amounts of Bitcoin to participate. As Nefario describes it, "In January or February, someone set up a mining coop, so you can say it's the first Bitcoin company. I tried to get in on that, but the only thing I could offer was Bitcoin, but they didn't need Bitcoin, they wanted someone to host the mining machines... there's Bitcoin, there's capital, we need a way to organize it."
Conventional stock exchanges are highly bureaucratized, so that individual investors are required to go through brokers, which themselves turn away a considerable number of casual investors due to trading fees. This is just another instance of the microtransaction problem that I have written about that plagues the conventional financial system: the market of casual users, those who do not have large amounts of money to work with, is completely locked out. The GLBSE, in contrast, is very easy to participate in - it requires little more than downloading a very easy-to-use command line client, with other interfaces on the way. Anyone can trade stocks and bonds, and it is as anonymous as you want it to be.
Another feature of the GLBSE is that it empowers small shareholders. Now, in theory, stock owners have the right to exercise control over businesses by voting, but bureaucracy and inefficiency limit this right in two ways: first of all, voting is done at annual or special meetings, so only decisions such as electing directors are left to shareholders - an inefficient representative democracy rather than a direct one. Secondly, voting is done usually by postal mail or telephone, with some companies offering internet voting, but many are not even notified of upcoming resolutions and the process is too cumbersome to be worth the trouble for an investor with a $50 share; the shareholder voter turnout is often as low as 5-10%.
One of the intents of the GLBSE, however, is to make it much easier for businesses to put resolutions to a shareholder vote, and allow even the smallest shareholders to be contacted. It is important to point out that this is not a possibility limited to Bitcoin; easy access internet voting has had some success in the conventional financial system, but the GLBSE is far more ambitious than these: while the Moxy Vote service described in the linked article allows proxy voting to a physical shareholder meeting, the GLBSE would have the entire process take place on the internet. Thus, while the Moxy Vote service does not change the fact that having a vote is itself a cumbersome process, the GLBSE reduces the effort required to virtually zero. Also, the GLBSE's shareholder voting system is built right into the exchange itself, so if the GLBSE takes off it will have a strong shareholder voting platform that all traded businesses work through right from the start.
Conventional stock exchanges do not only turn away small investors, they turn away small businesses. Stock exchanges like NASDAQ, NYSE and TSX have minimum income or market capitalization requirements in the millions, regulations can eat up 3-7% of the proceeds of an initial public offering. The GLBSE, on the other hand, does not; one business that has listed itself on the GLBSE has done so in order to acquire 1000 BTC capital to get the business started! I will discuss the economic and social consequences of these differences in the next article; if Bitcoin, and with it the GLBSE, become mainstream, it just might change the face of capitalism as we know it.
Another advantage of the GLBSE is that it will operate 24/7, as opposed to conventional stock exchanges, which shut down at night and on the weekends. This is an advantage shared by MtGox, a Bitcoin currency exchange. The internet never sleeps, and for good reason: the value of Bitcoin can swing by nearly 100% over the course of a single weekend. MtGox and the GLBSE are not confined by outdated 20th century norms kept in place by the slow place of government regulation; Bitcoin is an economy created de novo. MtGox and the GLBSE are truly exchanges made by the internet, for the internet.
The presence of two assets actively being traded on the BTC shows that there exist individuals that are interested in getting Bitcoin-based businesses started that need to raise capital, showing that the Bitcoin economy is rapidly maturing. There is a substantial number of businesses operating through Bitcoin right now. It is no longer a toy, and people are raising thousands of dollars to run a significant part of their economic livelihoods on it.
I will finish off this article with case studies of the two shares being traded now on the Bitcoin market:
Ubitex is an in-person bitcoin exchange. The idea is for users to enter their locations, as well as a buy or sell order for bitcoins and a maximum distance. If two users have compatible orders and are close enough to each other, Ubitex connects the two together, taking in a 0.5 BTC fee from the seller. I discussed briefly in a previous article the idea that as Bitcoin expands more and more local services would become available, and if Ubitex is successful, then it would show that there might already be a critical mass in some cities for highly local applications to emerge. Ubitex can serve to bring local communities of bitcoin users together, and significantly speed up the progress of bitcoin to more local uses.
Dishwara is issuing shares as a means of raising capital to buy computers for a bitcoin mining operation. Originally, he wanted a 1000 BTC loan to start the operation, but one potential loaner pointed out: "I might be willing to put in as many as 100 BTC, but I doubt you're going to find someone willing to sponsor the entire 1000 BTC loan by themselves." He then switched over to releasing shares on the GLBSE, and has raised 55 BTC as of May 6, 3 days after making his announcement.
The GLBSE is still in its infancy, so as the bitcoin economy continues to grow we will hopefully see more businesses use the GLBSE to seek out initial capital, to distribute profit to their owners and for other purposes which we cannot yet fully imagine. Even if Bitcoin never comes to dominate the mainstream economy, experiments like the GLBSE and Bitcoin itself show us what is possible, and serve as a mirror to allow us to understand the economic system our world runs on now.
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