Yesterday Paxos announced that ABN Amro Clearing has joined the Paxos Settlement Service that uses blockchain to settle listed US equity trades. Other members include Bank of America, Credit Suisse, Instinet, Societe Generale and Wedbush.
The service uses a permissioned version of the Ethereum blockchain to enable two parties to settle transactions directly with each other. Currently, the solution is operating as a pilot under a No-Action relief latter from the SEC. The exemption was issued in late October 2019, providing a 24-month window that only leaves another six weeks. It also limited the platform to seven participants and there are now six.
“Paxos has demonstrated an ability to innovate and deliver compelling enterprise-grade solutions in a complex and high-value market,” said Greg Lee, Managing Director of Paxos. “By working closely with our industry clients, we’ve been able to streamline back office processes, offer scalable same-day net settlement and enable opportunities for business development.”
Paxos’ same-day service has significant advantages over the DTCC Same-Day Settlement offering, which only operates for trades completed before 11.30 am.
However, Paxos now has competition from the DTCC. Last week the DTCC outlined a roadmap to launch Project Ion, a blockchain solution aiming to shorten settlement times. It is designed for netted same-day settlement but also supports one-day and two-day settlement.
The Paxos service tokenizes stocks. The current owner will transfer stock from their DTC account to the Paxos DTC account, where it is tokenized. As a regulated Trust bank, the cash is transferred to Paxos, which holds it in trust where it is digitized to enable cash-on-ledger.
In the announcement, Paxos said it is applying for a full clearing agency registration from the SEC. It also said it would run multilateral netting processes. In April, the company raised $300 million at a $2.4 billion valuation and said it was interested in becoming a Financial Market Infrastructure. In July, the Series D was extended to include Bank of America, Coinbase Ventures, Peter Thiel’s Founders Fund and FTX.
Given the SEC’s interest in shortening settlement cycles to reduce risks, having an organization willing to compete with the DTCC would make sense, as the competition will spur innovation.
However, Paxos has an unusual product mix of cryptocurrency and institutional offerings. These include its itBit institutional cryptocurrency exchange and its stablecoin USDP (formerly Paxos Dollar). The SEC has been saying that cryptocurrency exchanges offer securities and stablecoins are securities, and hence both need to come under SEC oversight. It remains to be seen whether that’s something that Paxos will embrace, but in terms of its stablecoin, it’s by far the most conservative when it comes to stablecoin asset backing.