SEC approves blockchain-based stock settlement, ushering in a new era

The U.S. Securities and Exchange Commission (SEC) on 10/28 approved three major securities brokerage firms, including Credit Suisse and Société Générale, to settle trades using blockchain-based distributed ledger software.

In the 1970s, U.S. stockbrokers generated a large amount of written records, leading exchanges to close one day a week to process and catch up. As a solution, the financial industry introduced a centralized electronic clearing system that could confirm trades within five days, a process that has since been reduced to two days.

According to a report, a new technology is now poised to virtually eliminate the lag in stock trading. This technology is blockchain's distributed ledger technology, and the SEC recently approved measures that will allow brokers to use a blockchain system designed by New York startup Paxos.

This means brokers can begin recording fewer stock trades on the blockchain instead of in the memory of depositories or clearinghouses, freeing up these industries responsible for settling and clearing all trades and reducing the original clearing costs.

Paxos CEO Charles Cascarilla stated that the market has not changed since the financial crisis. He said:

That's why we created Paxos and invested in financial infrastructure.

Furthermore, three prominent brokers praised the potential efficiency of Paxos. In the background, a senior executive acknowledged that blockchain-based stock clearing is largely an experiment, but if successful, it could bring significant advantages to the market. One executive told Fortune magazine:

Transitioning from the current T-2 system to same-day clearing can release a significant amount of cash currently tied up in the clearing process. We all have to hold a lot of capital in case something goes wrong, like Lehman Brothers.

The executive also added that initially, brokerages will use blockchain processes to clear a small number of high-volume U.S. stocks, such as IBM or Apple.

Cascarilla mentioned that Paxos technology is built on a private version of the blockchain called Ethereum, capable of processing 5,000 to 10,000 transactions per second. While Paxos will represent brokers recording trades at the start of the process, brokers hope to internalize the process in the future.

The system is specifically designed to integrate with existing depositories and retain records of all securities traded in the U.S. In the long run, the Paxos system will not only reduce the capital banks need to allocate for clearing trades but also cut down on record-keeping costs.

Although U.S. regulatory agencies have recently shown mostly negative attitudes toward blockchain projects, particularly with several reports of SEC rejections, positive news like this report on blockchain technology continues to emerge. China, in particular, sees it as a key development, making the U.S. stance a crucial point of attention going forward.

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