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Paxos Gets SEC Nod to Use Blockchain to Settle Stock Trades

Matthew Leising and Matthew Monks

(Bloomberg) -- Paxos Trust Co., a blockchain company that caters to financial institutions, has been given the green light to settle stock trades in near real-time in a direct threat to the Depository Trust & Clearing Corp.’s half-century equity market dominance.

The U.S. Securities and Exchange Commission granted the company permission today to begin a small-scale program with at least two broker dealers to use blockchain technology to transfer shares and money once the trades are complete, Paxos said in a statement Monday.

Credit Suisse Group AG and Societe Generale SA are among the first broker dealers to use the service, Paxos said.

"This is really a completely different way for the securities to be settled," Paxos Chief Executive Officer Charles Cascarilla said in an interview. "It can potentially be as fast as instantaneous, but it won’t be initially."

While using blockchain to improve the speed and efficiency of financial markets has been tested, the Paxos system will be the first to settle real trades, Cascarilla said.

"This process is a really big deal because I don’t think you’ve had any good examples of real assets using blockchain," he said.

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Paperwork Crisis

The U.S. system of stock-certificate ownership and trade settlement dates to the late 1960s “paperwork crisis,” when Wall Street brokerages were drowning in securities certificates.

Before the advent of electronic trading, shares bought and sold by investors had to be hand-delivered by messengers. That would lead to routine shutdowns of the stock market so record keeping could catch up.

The DTCC was created as an industrywide clearinghouse to modernize the system by tracking and settling ownership.

The current stock settlement time is two days, which means money to sellers from buyers is stuck in the market’s plumbing for 48 hours after a transaction. That’s a relative eternity in markets where trades can happen in milliseconds and cash transfers can happen almost instantly.

The Paxos system connects investors directly so trades are settled between them without the need for a central counterparty like the DTCC. In the DTCC system, each side of the trade must reconcile its books, recording the assets bought and sold. In the Paxos plan, no third party is involved, which greatly reduces the time it takes to settle trades.

Cash could be freed up almost instantly, which could result in an 80 percent to 90 percent reduction in capital costs, Cascarilla said.

Paxos doesn’t want to change the way stocks trade, he said.

If two broker dealers agree to a trade on a dark pool, for example, they would send the trade confirmations to Paxos instead of the DTCC for settlement, he said. While there has been an enormous amount of change with how equities trade over the past few decades, settlements haven’t evolved, he said.

"That’s why we think blockchain can offer a new process," Cascarilla said.

To contact the reporters on this story: Matthew Monks in New York at mmonks1@bloomberg.net;Matthew Leising in Los Angeles at mleising@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, ;Liana Baker at lbaker75@bloomberg.net, Matthew Monks, Michael Hytha

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