Shearman & Sterling | Fintech 2020 | Paxos Awarded No-Action Letter for Blockchain-Based Equity Securities Settlement Platform
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  • Paxos Awarded No-Action Letter for Blockchain-Based Equity Securities Settlement Platform
    On October 28, 2019, the Securities and Exchange Commission (SEC) awarded a no-action letter to Paxos Trust Company that will allow the company to roll out a blockchain-based equity securities settlement platform for a limited time under certain conditions.  The settlement platform, referred to as the Paxos Settlement Service, is a private and permissioned blockchain network that maintains a distributed ledger to record changes in ownership of securities and cash and is designed to bilaterally settle equity securities transactions on a gross trade-by-trade basis.  Under the no-action relief, Paxos will be able to operate the Paxos Settlement Service for a period of 24 months without being subject to the clearing agency registration requirements of the Securities Act of 1934.

    Under the relief, the SEC has imposed the following parameters for the Paxos Settlement Service:
    • No more than seven participants may use the Paxos Settlement Service for clearance and settlement during the relief period;
    • Securities eligible for the platform include only registered, publicly traded securities that remain eligible at all times for listing and trading on a national securities exchange.  Further, each security must have an average daily volume of not more than 300 trades executed between each counterparty pair on approved trading venues; and
    • Paxos must implement the following daily share volume limits: (i) less than 100,000 shares per security, per counterparty pair; and (ii) aggregate shares per security across all counterparty pairs of less than 1% of the total average daily trading volume of the respective security.

    Paxos will also be required to establish and implement compliance procedures to ensure that these conditions are being met throughout the relief period.

    Paxos confirmed that Credit Suisse and Société Générale will be the first entities to settle securities transactions using the Paxos Settlement Service, which Paxos says will “help clients achieve meaningful reductions in fees and gain access to capital otherwise trapped in the legacy settlement system.”

    The Paxos Settlement Service will be an interesting test of the use of blockchain technology for securities settlement, which, if successful, could provide significant benefits for the financial services industry.  The no-action letter is also an encouraging sign that the SEC is working with companies to promote innovation as it relates to blockchain technology.