Many technology companies are founded with the general thesis that something is broken and new technology can fix it. The thesis guiding everything at Paxos is that the infrastructure powering our global financial systems is inefficient and outdated – new technology can improve the system and make it more accessible. Paxos is using technology to fix how and when assets move – building solutions that reduce friction and increase accessibility for asset owners.
What’s different about Paxos – as compared to other product-led technology companies – is that we’re working in the long-established and highly regulated Securities industry. Many of the life-changing technology products the world relies on today created new markets – like social media for example. But stock markets have been around for hundreds of years and have strict rules governing their participants and operations.
Many people think regulation suffocates innovation in well-established markets, but that’s not the belief at Paxos. When you’re trying to build a new product in an existing, complex market, regulation can actually foster innovation. For us, it initiated creative problem solving and forced our teams to think of product design and solutions in a way that never existed before. Below, I’ll outline two specific situations in our securities business where existing regulatory frameworks informed our approach and led Paxos to build and iterate on an innovative product that has the potential to transform the industry.
The No-Action Letter from the SEC Staff
In October 2019, the staff of the Securities and Exchange Commission granted Paxos No-Action relief to settle US listed equities outside of the legacy settlement system. That may sound a little confusing if you’re unfamiliar with the jargon, but it means this: Paxos requested that the SEC allow Paxos to operate in a limited capacity to test new technology in the US stock market, a domain that is strictly overseen by the SEC. The SEC staff gave the green light by stating it would not bring legal action against Paxos during a two year pilot phase of this new tech.
This No-Action letter was a first of its kind. The SEC had never before given this kind of sandbox for a tech provider to operate their settlement system with blockchain technology for actively traded US stocks. Because we sought this specific relief and worked in lock-step with our clients Credit Suisse, Instinet and Societe Generale while informing the SEC along the way, we were able to bring the Paxos Settlement Service live in its pilot phase. By maintaining an open and transparent dialogue with the industry (clients and regulators), we received immediate feedback, iterated designs and introduced solutions faster.
This innovation would have never occurred without bringing the regulators on the journey with us to understand our long term vision and ambitions. In fact, the product would likely have failed if we did not engage with regulators from the outset – had we operated with the typical tech motto of “move fast and break things,” the results would have been disastrous and our highly regulated clients would have never had approval to participate. We’re pleased with the progress we’ve made and are in the process of applying for a full clearing agency registration with the SEC.
A Product Build for Interoperability and Long-Term Flexibility
An efficient settlement system for US equities has always been crucial to the success of capital markets. The system responsible for settlement today was introduced in the 1970s and revolutionized the market at that time. It facilitated greater liquidity, which allowed markets to grow. However, over the following 50 years, technological innovations fundamentally upgraded market processes – trades are now measured in microseconds – while the settlement technology remains the same and still takes days. It is time to upgrade the technology underpinning settlement (the recent gamestop events brought the urgency of this to light), but we also understand that a transition will take time for regulators and the regulated. This means the systems we’re building at Paxos must be interoperable with the current system and also flexible to adapt to future technologies and solutions.
Most tech products are built to solve one current challenge, but Paxos is making our product flexible so that it solves the current challenge of outdated and expensive settlement infrastructure while also remaining flexible to accommodate solutions for the future. For example, we may someday see greater market interest in alleviating the limitations of the traditional banking hours by transitioning to the use of a central bank digital currency. Or perhaps the market determines to move to a shorter settlement cycle. In both of these cases, it is crucial that Paxos Settlement Service is flexible enough to continue supporting settlement and deliver key benefits with minimal tech infrastructure adjustments.
So, It’s Really About Perspective
At Paxos, we’re constantly trying to push the boundaries of financial services and we’re using technology to create a more open and dynamic economy. We’re driving forward innovative solutions across regulated asset classes, and nowhere is that more true than in the Securities business. The reality of this industry is that it is highly regulated, so we have no choice but to build within strict confines. While most companies see this as a disadvantage, we believe regulation has actually benefited our products. It’s second nature that we innovate within this dynamic. We’re in the weeds and we have much work ahead of us. If you want to jump into the thick of it with us, check out our open roles and join us today.