Blockchain-Based Equities Settlement: The Time is Now

22/10/2020

As in all manners of life and business, the global Covid-19 pandemic has had a serious effect on banking technology transformation. Distributed ledgers, already slowly riding the downward slope of the hype cycle after a meteoric rise earlier in the decade, haven’t been immune. Many banks still see promise, but firms have directed their fintech budgets toward urgent new priorities in 2020 after experimenting, partnering on, and investing in different blockchain applications for several years—but often with only limited real-life success.

At Societe Generale, that makes our recent move onto the blockchain-based Paxos Settlement Service for US listed equities settlement all the more compelling. To us, it comes down to a fundamental question: how do ledgers become an effective part of the ‘new normal’ rather than a technology indulgence dust-binned to the recent past?

Strangely enough, some of the answers to that question aren’t new. For many banks the post-Covid environment may have reframed priorities, but a lot of the issues surrounding ledgers before the pandemic continue to govern today. They’re just even more important with budgets shifting around and operating models adopting on the fly. 

So why blockchain clearing and settlement, and why now? For our purposes, there were three priorities: working with the right kind of blockchain provider; realizing efficiency gains right away in a practical, difference-making application; and, built-in interoperability. It’s worth highlighting each of these in turn.

Digital Assets Heritage

To start with, the biggest challenge for most industry participants has not been the vision for how clearing and settlement can change, rather it lies in how we get from where we are now to where we need to be.  Paxos has been able to articulate a migration plan and has gotten consensus from the US Securities and Exchange Commission via a no-action letter, to move forward and pilot the first stages of this plan. 

Many blockchain providers in financial services began (and remain) as little more than holding companies buying intellectual property from elsewhere, rather than building proper plans and solutions. There is nothing wrong with hoarding IP, of course. But at Societe Generale we sought out a partner that had real implementations under its belt, and these tend to come from the tokenization and digital assets realm – as Paxos does with their itBit crypto currency exchange. Indeed, blockchain-native providers have the ability to map technology backwards onto the traditional execution, clearing, settlement and funding requirements that we have in listed equities. They also tend to be more experienced with building smart contracts and incorporating artificial intelligence.

In combination, these attributes can provide innovation more readily and effectively than coming at the issue from the other direction. Starting with a decades-old settlement issue and then trying to apply unfamiliar technology to it just isn’t sufficient.

Post-Pandemic Compression

Second, building consensus around revamped US equities settlement has long been an industry White Whale. Blockchain-based or not, many banks and industry groups have seen various different efforts at “T+O” or instant settlement go through, only to find that there are too many interconnected pieces to solve for, too much legacy infrastructure to retire, and frankly a tolerance level for additional operational risk and IT costs among many participants that suggests “if it ain’t quite broke, why fix it?”

In 2020, however, that mindset has begun to change. The pandemic and its aftermath have introduced renewed volatility, new participants, and greater volumes on equities venues, which naturally draws more attention to the way market microstructure functions. Perhaps more importantly, it has compressed the time to market technology-enabled competition across industries, which was already quickening before March of this year. As we become the third large equities broker to join the Paxos settlement platform—along with Credit Suisse and Instinet—it’s obvious that momentum is gathering behind a collective move to faster and more efficient workflow in this area.

Governance Attributes

Finally, and relatedly, it’s crucial that any blockchain solution for finance be regulatory-grade and interoperable. From day one, these have been the twin governance issues facing greater ledger adoption: can they be designed with trade confidentiality, data availability and platform integrity in mind; and can they be built to flexibly interact with both legacy infrastructure and other blockchain competitors?

Following more than three years working closely with Paxos, we have spent the better part of a year testing out this amalgam of critical concerns, from permissioning to integration with DTC infrastructure and interface with our own internal systems, and all the contingencies involved in making sure the fastest-moving securities in the world can stand up with ledgers doing the work on the back end. The readiness, as they say, is all.

Both our team and our clients are satisfied, and in the upside-down environment of 2020, we are proud to be blockchain contrarians, steady in the belief that a post-Covid world will drive digitalization of securities forward faster. And that includes the most liquid and volume-intensive market of all.


Disclaimer

Unless otherwise stated, any views or opinions expressed herein are solely those of Jeff Rosen and may differ from the views and opinions of others at, or other departments or divisions of, Societe Generale (“SG”) and its affiliates. No part of Jeff Rosen’s compensation was, is or will be related, directly or indirectly to the specific views expressed herein. This material is provided for information purposes only and is not intended as a recommendation or an offer or solicitation for the purchase or sale of any security or financial instrument. The information contained herein has been obtained from, and is based upon, sources believed to be reliable, but SG and its affiliates make no representation as to its accuracy and completeness. The views and opinions contained herein are those of the author of this material as of the date of this material and are subject to change without notice. Neither Jeff Rosen nor SG has any obligation to update, modify or otherwise notify the recipient in the event any information contained herein, including any opinion or view, changes or becomes inaccurate. To the maximum extent possible at law, SG does not accept any liability whatsoever arising from the use of the material or information contained herein.

This publication should not be construed as investment research as it has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Therefore, even if it contains a research recommendation, it should be treated as a marketing communication. This publication is not subject to any prohibition on dealing ahead of the dissemination of investment research. Notwithstanding the preceding sentence SG is required to have policies in place to manage the conflicts which may arise in the production of its research, including preventing dealing ahead of investment research.