On October 28, 2019, the SEC's Division of Trading and Markets granted no-action relief for a limited period of time to Paxos Trust Company, LLC from registration as a clearing agency under Section 17A(b)(1) of the Securities Exchange Act of 1934.
Paxos, a participant in the Depository Trust Company ("DTC"), filed for no-action relief to provide clearance and settlement of DVP-RVP transactions through its "Paxos Settlement Service," which, according to the request, is a distributed ledger system that "records changes in ownership of securities and cash resulting from settlement of securities transactions between participants of the Paxos Settlement Service."
According to the no-action relief, clearing participants will deposit an eligible security into their Paxos Settlement Services account ("PSS account") by sending delivery instructions through DTC to transfer the security from the participant's DTC account to Paxos's DTC account. When Paxos receives the security in its DTC account, it will create a digitized security entitlement that will be credited to the participant in its PSS account on Paxos's ledger.
The same process will apply for cash deposits whereby a participant will deposit dollars via a wire transfer from its bank to Paxos's bank account. When Paxos receives the funds in its bank account, it will create a digitized security entitlement representing the cash credited to the participant in its PSS account on the Paxos's ledger.
Division staff granted the no-action relief based on a number of conditions, including:
- The no-action relief will be limited to 24 months (the "Feasibility Study No-Action Phase") with winding down of the clearing activity to begin no later than the 23rd month;
- Participation in the Feasibility Study No-Action Phase will be limited to seven participants who will be required to meet certain criteria;
- Securities eligible for inclusion will include only publicly traded equity securities registered under Section 6 of the Securities Act and Section 12 of the Exchange Act, and that satisfy certain eligibility criteria; and
- Paxos will be required to monitor and maintain ongoing compliance with established procedures, must notify staff of certain events set forth in the no-action request, and provide quarterly and ad hoc reports to staff during the Feasibility Study No-Action Phase.
According to Paxos, the potential benefits of using blockchain in this manner include the ability to settle trades in a shorter timeframe with immediate access to settlement proceeds. In addition, according to Paxos, using the blockchain process for recordkeeping assures the settlements on the Paxos ledger are "accurate and independently confirmed in real time" by participants in the service.
Though the no-action relief is limited in many respects, it is significant because it illustrates the Commission's willingness to move towards a broader acceptance of blockchain technology in routine financial market functions, such as the clearance and settlement of securities transactions. This could be an initial step towards a more expansive use of blockchain in the securities industry.