The SEC Division of Trading and Markets issued a no-action letter providing time-limited (two-year) relief to allow a New York limited purpose trust company to use blockchain technology to settle equities securities trades.
According to the no-action letter, Paxos Trust Company, LLC ("Paxos"), a New York State Department of Financial Services regulated entity, is a participant in the Depository Trust Company ("DTC"), a securities clearing agency. Paxos sought permission from the SEC to act "as a clearing agency in connection with its operation of a securities settlement system" without registering pursuant to Section 17A of the Securities Exchange Act. The Paxos settlement service would be offered on a private, permissioned distributed ledger. Persons wishing to transfer securities or cash would deposit their securities or cash into Paxos' account at DTC and would receive a corresponding digitized entitlement on the Paxos ledger. (Accordingly, if counterparties to a trade were both Paxos participants, the relevant securities would just move onto the Paxos ledger, but would not move at DTC.)
Under the no-action letter, the service will be (i) in operation for a limited 24-month period (a/k/a the "Feasibility Study No-Action Phase") and (ii) confined within "well-defined" parameters that include a cap on the number of participants (seven) and on the number of securities trades (no more than 300 a day between each counterparty pair of the seven participants), and there will be further caps on the volume in any security that may be settled in a day.
The no-action relief will expire after the Feasibility Study No-Action Phase is complete. According to the Division, Paxos will:
wind down settlements by the 23rd month of operations;
settle "all outstanding obligations" of the service; and
ensure that participants withdraw all cash and securities from the service.