Yesterday Bloomberg reported that the Bank of America has joined the blockchain stock settlement network from Paxos Trust. It’s the fourth big bank to pilot the solution, following in the footsteps of Nomura’s Instinet, Credit Suisse and Societe Generale.
In April, Instinet and Credit Suisse announced they had executed same-day settlement using the permissioned blockchain solution. Typically with DTCC Same-Day Settlement, the transaction has to happen before 11.30 am, which only accounts for a fraction of trades.
“We then can free up the collateral we’d have to post on an overnight basis,” said Kevin McCarthy, the Head of Financing and Clearing at Bank of America. “The return-on-assets in this business would improve, which has been a challenge.”
In 2019 the SEC gave Paxos a no-action letter to operate the service on a limited basis through to October 2021. It can support up to seven participants that have to have more than $100 million in capital. And a maximum of 100,000 of any one stock can be traded between two parties per day.
If the SEC gives the platform the go-ahead, Paxos plans to offer the option of T+0 or T+2 settlement, including multilateral netting in real-time. Paxos recently raised $300 million at a $2.4 billion valuation. It’s also very active in the crypto-assets sector with its PAX stablecoin and provides services for PayPal’s cryptocurrency offering.
The solution involves tokenizing both the stock and cash. First, the stock has to be transferred from the member’s DTC account to the Paxos DTC account. It’s then tokenized, and once settled, transferred to the buyer’s DTC account. For the cash leg, the bank pays using Fedwire, which Paxos holds on trust and digitizes. There are margin requirements in case the cash doesn’t arrive on time.
Numerous post-trade blockchain solutions are being developed for stock settlement around the world. The first and most high profile is from the Australian Securities Exchange (ASX). But it’s likely to be pipped to the post by the Hong Kong Exchanges and Clearing (HKEX), which plans to launch a blockchain in 2022 for its Northbound Stock Connect system, which acts as a gateway for international investors to trade Chinese mainland stocks. Both ASX and HKEX are using the DAML smart contracting language. Paxos used a permissioned version of Ethereum.