On October 28, 2019, staff in the SEC’s Division of Trading and Markets provided a no-action letter to Paxos Trust Company, LLC permitting it to pilot a blockchain-based clearance and settlement platform for a limited number of U.S.-listed equity securities for 24 months. The staff’s action enables the further development and commercialization of a blockchain platform for clearing and settling U.S. securities trades.
Without the no-action relief, Paxos would have been required to register with the SEC as a securities clearing agency, an expensive and time-consuming process. Instead, under the no-action letter, activity on the platform is permitted without registration but limited to various “well-defined” parameters, including limits on the number of participants (seven) and on the number of trades (no more than 300 per day between each counterparty pair of the seven participants). In its request for no-action relief, Paxos asserted that its blockchain-based settlement technology and data processing techniques have the potential to provide unique advancements in the clearance and settlement of securities transactions, including facilitation of more efficient settlement (including shorter settlement cycles), immediacy of access to settlement proceeds, greater data accuracy and transparency, advanced security, and increased availability and operational efficiency.
With so much of the SEC staff’s attention devoted to pursuing fraud and unregistered offerings in the cryptocurrency space, it is encouraging to see the staff express a more favorable view of a blockchain application. Clearance and settlement of securities trading in the U.S. is ripe for disruption using new technologies such as blockchain. The current system, which traces its roots to the “paperwork crisis” of the 1960s and early 1970s, is growing increasingly inefficient and anachronistic. Each securities trade requires the input of numerous intermediaries—potentially including banks, brokers, investment advisers, depositaries, nominees, trustees, exchanges, custodians, transfer agents and clearing agencies, among others—each of whom extracts rents during the clearance cycle and contributes to delay in settlement. A blockchain-based clearance and settlement system, such as the one proposed by Paxos, has the potential to streamline the process and eliminate the need for so many middlemen.