By Gabriel Edelman, Managing Director
On January 27, 2022, the United States Securities and Exchange Commission (“Commission”) published an order (“Order”) approving a blockchain-based exchange, BOX Exchange LLC (“Exchange”), which allows for trades to settle faster than the standard two-day period. This would occur via a facility known as BSTX LCC (“BSTX”), using a proprietary blockchain system (“BSTX Market Data Blockchain”). This approval comes at a time when both the United States and markets around the world continue experimenting with blockchain’s applicability to faster settlements.
The approval was conditioned upon the Exchange joining all relevant national market system plans, updating its agreement with FINRA, ensuring its membership in the Intermarket Surveillance Group extends to the BSTX, and that the Exchange “adopted a rule establishing BSTX as a facility of the Exchange.”
Per a BSTX press release, this would “be the first fully automated, price/time priority execution exchange for trading securities that is both regulated by the Commission and leverages private blockchain technologies.” Per the Order, the classes of securities to be listed would be: “(i) new issuers who do not currently have any class of securities registered on a national securities exchange, and (ii) issuers who currently have securities registered on a national securities exchange and who are seeking registration of a new class of equity securities for listing on BSTX as Securities.”
BSTX proposed, under certain circumstances, to allow participants to settle trades same or next day (“T+0” or T+1”, respectively); this would only occur if both sides of a trade indicated a preference for the faster settlement. Per the Order, the Exchange stated that “the operation of the BSTX Market Data Blockchain will have no impact or effect on the manner in which a Security clears and settles.” The Commission stated that “the optional order parameter that would allow a BSTX Participant to place an Order with a T+0 Preference or Order with a T+1 Preference would permit BSTX Participants to take advantage of faster settlement timing provided by DTC and NSCC in a manner that is consistent with fair and orderly markets” and that “the Commission finds that the proposed order parameter that BSTX Participants could use to preference faster settlement is consistent with the Exchange Act.”
BSTX would also provide data feeds related to on-chain trading to make certain participant and market data available for review. The Commission stated that it found “the Exchange’s proposed market data products are consistent with the [Securities] Exchange Act [of 1934].”
This approval comes at a time when both the United States and markets around the world continue experimenting with blockchain’s applicability to faster settlements. For example, the Depository Trust & Clearing Corporation announced in 2021 that it would be moving into the development phase of its Project Ion initiative to leverage distributed ledger technology for T+0, T+1, and T+2 settlement. The Australian Securities Exchange is another example of an entity exploring a blockchain settlement system.
This is yet another step in blockchain’s influence upon the larger market and the speed at which it functions. Participants in the market need to stay abreast of such innovations. In addition, those wishing to push the envelope need to not only monitor the regulatory landscape but also ensure regulators are on board with such novel products. Early engagement with the Commission is always recommended to allow appropriate time for all parties to reach the desired outcome. Foreside will continue monitoring the introduction and impact of such technology, as well as the outcomes of regulatory reviews.