Paxos is seeking to modernize the equities settlement process using a regulator-approved blockchain process.
The U.S. Securities and Exchange Commission (SEC) granted Paxos Trust Company no-action relief Monday to settle equity securities trades on a blockchain platform for broker-dealers. Paxos announced that Credit Suisse and Société Générale would be the first two companies to utilize the new Paxos Settlement Service, which would operate on a private and permissioned network.
As envisioned, the service will let two parties bilaterally settle securities trades directly with each other. Monday’s announcement marks the first regulated platform for such trades, and should be more efficient than the existing legacy system.
Paxos has been working on the service for more than two years, said Melayna Ingram, Paxos’ head of securities products and the product director for the service.
While Paxos has similarly been working with the SEC for some 18 months, the company only began working on the no-action letter itself about six months ago, she told CoinDesk. The no-action relief will allow Paxos to operate its service within strict limitations so as to protect other market participants.
“Paxos is using this no-action relief [as an] opportunity to launch this product [and] as a chance to both validate our understanding of the way that the product works and what the participants will need from us as well as the market appetite,” Ingram said.
The new service provides companies a method for settling equities “in a space where there’s been nothing new for close to 50 years,” Ingram said. The long-term vision for the company is to modernize the settlement process, she explained, adding:
“The front office and trading has had a ton of improvements in speed and the level of sophistication and the back office has largely gotten left by the wayside and so this is really this is I think a very meaningful step for the industry in … making the back office aligned with the front office and then ultimately driving a path for firms to perform digital transformation of their back office and operations.”
The company will begin by settling U.S.-listed equities, said Paxos CEO and co-founder Charles Cascarilla. He added in a statement that the equities space is facing “unprecedented consolidation and economic pressures,” forcing the overall market infrastructure to modernize.
Ingram told CoinDesk that the company had been working with Credit Suisse and Société Générale through most of the past two years to design the product and determine how best to bring it live.
“They had given us lots of meaningful feedback, and they were able to step forward and work with us to become the first [few] early adopters,” she said.
Paxos has also reached out to a number of other companies. Now that Paxos has secured its no-action relief, Ingram expects that other potential participants will finalize their own decision-making processes on whether to sign on.
Credit Suisse head of digital asset markets Emmanuel Aidoo said in a statement that his company was “committed” to looking into new applications for blockchain technology to improve both Credit Suisse’s business as well as the customer experience.
SocGen COO Jeffrey Rosen added that by acting as an early adopter, “we will be able to tailor the system to our needs and introduce a technology that can positively impact our cost structure in both the immediate and long-term.”
“We believe the process of securities settlement can be greatly optimized using blockchain, and with Paxos Settlement Service we will benefit from these efficiencies first hand. We see this as a significant and important milestone in our Digital Asset Markets strategy and foresee opportunities to leverage this product across numerous asset classes in the future.”
Launching the Paxos Settlement Service allows the company to demonstrate how the company can combine digital assets with the securities space.
What’s more, “we’re doing so in a regulated way,” she said. “It was very important to us and it obviously took a lot of time and energy but it’s very meaningful for us and and we can work with the SEC’s approval.”
Indeed, the SEC may be looking for “meaningful improvements” from technologies in the U.S. securities market, she said. That being said, the SEC is still a government agency with a process that it needs to follow.
“So long as we see that validation we will pursue steps to … put ourselves under a regulatory status to do this business without the restrictions that the no-action letter presents,” she said.
Monday’s letter is the third granted by the SEC this year to a crypto company, and the first approving equities settlement. The regulator has previously granted Turnkey Jets and Pocketful of Quarters no-action relief to initiate token sales, provided those companies abided by stringent restrictions.
Charles Cascarilla image via CoinDesk archives