On October 28, 2019, the SEC issued a no-action letter to Paxos Trust Company in connection with its proposal to settle equity securities trades on a blockchain platform for broker-dealers. The proposed “Paxos Settlement Service” is a private and permissioned distributed ledger system that records changes in the ownership of securities and cash resulting from the settlement of securities transactions between participants. Paxos described the benefits of providing such services on the blockchain as the facilitation of more efficient settlement, immediate access to the settlement proceeds, greater data accuracy and transparency, advanced security, and increased levels of availability and operational efficiency. To evaluate those benefits, Paxos requested no-action relief for 24 months to operate the Paxos Settlement Service in a production environment for the clearance and settlement of trades of listed U.S. equity securities trades without registering as a clearing agency. In its no-action letter, the SEC staff confirmed that it would not recommend enforcement action if Paxos operated the Paxos Settlement Service without registering as a clearing agency.
The SEC staff identified the following factors as supporting its decision to grant no-action relief: (1) the Feasibility Study No-Action Phase will be conducted in a “de minimis” manner with “well-defined” parameters and limits of volume of shares settled; (2) Paxos will establish and implement procedures reasonably designed to maintain ongoing compliance; (3) Paxos will provide the SEC with prior or same-day notifications of certain events specified in its proposal for the duration of the Feasibility Study No-Action Phase; and (4) Paxos will wind down the Feasability Study No-Action Phase during the twenty-third month.
Following the grant of no-action relief, Paxos announced that Credit Suisse and Société Générale would be the first two companies to use the Paxos Settlement Service.