For a technology that promises speed and cost reduction for financial transactions, blockchain has taken its own time to find its way into the regulated corridors of Wall Street.
Even as other industries embrace blockchain’s uses, Wall Street is still hesitant. Which is why the announcement last month of an SEC no-action letter issued to New York-based startup Paxos is a game-changer.
The letter enables Paxos, which counts former FDIC chief Sheila Blair among its Board members, to conduct a two-year pilot project for settlement and clearing of securities on a distributed ledger. More importantly, it cracks the door open for blockchain experimentation in the plumbing infrastructure for money markets.
So what does Paxos hope to achieve for that infrastructure? The primary use of blockchain lies in shortening settlement times for securities. The current time to settle securities is T+2 days (trade date, followed by two days). In a world of instant gratification, that time almost seems anachronistic. Paxos intends to reduce that settlement time to the same day that trades are agreed upon.
Nick Cowan, CEO of Gibraltar Stock Exchange (GSX), said the current settlement process has onerous capital requirements which lock up capital with Central Counterparty Providers (CCP), who act as guarantors for a transaction for extended periods of time, making instant settlements difficult. “[The capital requirements] use up the balance sheet of the broker,” he explained. The use of CCPs also amplifies risk, propagating it through the entire system resulting in crises, as the chain of events that led to the 2008 financial crash demonstrated.
The sheer number of actors and their disparate technology systems, back-office processes, legal management, and liquidity management also add up costs to a trading firm’s balance sheet. Research by Broadridge, a financial services industry consulting firm, in 2015 estimated a post-trade spend of approximately between $17 billion to…