SEC Warms To Blockchain With No Action Letter to Paxos
The floodgates haven't opened, but cracks are starting to show.
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The SEC has issued yet another ‘no action‘ letter. Was it Congressman Tom Emmers’ denunciation of the regulator, or was it simply a hat tip to the need to move forward to a more efficient future? Either way, the SEC has granted approval for equities trades to be settled using a Paxos-run blockchain.
The U.S. Securities and Exchange Commission’s no action letter, issued to Paxos on Monday, agreed it would take no action against the New York State Department of Financial Services-regulated company during the feasibility study phase of its blockchain-settlement service, which will initially involve participation by Credit Suisse and Société Générale.
According to the company’s written request to the regulator on the 25th, the Paxos Settlement Service is a “private and permissioned distributed ledger system developed… to record changes in ownership of securities and cash resulting from settlement of securities transactions between participants (“Participants”) of the Paxos Settlement Service.”
Paxos Settlement Service a Step in the Right Direction
The intention of the Paxos Settlement Service is to deploy blockchain technology to settle securities transactions more efficiently than the two days it takes the Depository Trust & Clearing Corporation to clear trades.
The service will initially only be used by the two major brokerages for a fraction of their trades of equities in major U.S. companies. As a limited feasibility study, the no enforcement guarantee does not represent a sudden Claytonian about-face in the SEC’s stance on cryptocurrencies, ICOs, or even blockchain in general.
It is a baby step for a financial regulator steeped in tradition and conservatism and bound to uphold rigorous decades-old securities regulations.
Howey still rules the roost for the commission. Paxos has been granted 24 months to trial distributed ledger cleared trading services for major brokerages for a tiny portion of their trades of major publicly listed companies. The no action letter does not seem to represent a dramatic shift in U.S. regulatory sentiment.
Potential Efficiency Benefits Are Enormous
According to a representative of one of the brokerages speaking on the condition of anonymity, the costs of the two-day clearance lags are substantial. “Each of us has to hold significant amounts of capital against the risk of a bad scenario like what happened to Lehman Brothers,” he told Fortune, adding that “You might be holding $5 to $6 billion on your balance sheet and if you can accelerate to same-day settlement, you can reduce that amount significantly.”
Paxos told the SEC that “access to shortened settlement cycles mitigates the risk of financial losses due to either party becoming unable to meet the financial obligations of the agreed-upon trade due to intervening causes between the trade date and settlement date, and provide market participants more efficient access to securities and cash proceeds.”
Paxos CEO Charles Cascarilla predicts that the move to blockchain-based trade clearances and settlements in the long term would reduce record-keeping expenses and slash the amounts of cash-on-hand banks currently needed to allocate to clear trades.
Equity trades, once recorded and settled by mountains of paperwork, went mainly digital in the last decade or so, and few stock exchanges rely on manually handled trades on frantic trading floors anymore.
The New York Stock Exchange remains one of the few broker-staffed physical trading floors in the world, and much of the reason why relates to tradition and a quaint acknowledgment of the way things used to be. This week’s decision by the SEC is one more step toward a more efficient securities trading sector.