Bank of America (BofA), the second-largest bank in the US, has joined the Paxos Settlement Service, a platform that leverages the blockchain to settle stock trades in minutes. A report unveiled this news on May 17, noting that this change will help the bank avoid the lengthy, antiquated settlement system, which took days to complete a transaction.
Reportedly, BofA has joined the likes of Swiss financial firm Credit Suisse and Nomura Holdings, a Japanese bank, which already leverage the network. This is the latest development that depicts Wall Street’s increasing interest and adoption of blockchain technology. Allegedly, BofA has been running internal transactions on the network for a few months. The next step will be offering its clients the service. However, the bank needs to become a certified clearing agency before it can offer this service to its clients, according to Kevin McCarthy, the head of financing and clearing at BofA.
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Explaining why the bank decided to embark on this path, McCarthy said Paxos offers attractive versatility and cost-saving abilities. Referring to a settlement that happens at the same time or on the same day as the trade, McCarthy said joining the Paxos Settlement Service will help the bank push the settlement cycle down to T+0. He added that this would help BofA free up the collateral that it would have to post overnight, hence leading to massive savings.
Disrupting legacy systems
Paxos’ CEO, Chad Cascarilla, said as more firms shift to its settlement system, the Depository Trust & Clearing Corp. (DTCC) will be at significant risk, seeing as its 50-year dominance in equity markets could end. At the moment, trades that settle on the same day must be recorded by DTCC by 11:30 AM. As such, this system misses almost 75% of all stocks traded on a given day.
To this end the current settlement system uses up to two days, leaving sellers frustrated because the money paid to them is stuck in the system until this period lapses. To solve this problem, the Paxos Settlement Service leverages the Ethereum blockchain to connect investors directly. While DTCC is working to minimize its settlement times and offer same-day settlements for some trades, the Paxos system poses a significant threat.
This news comes after Paxos facilitated the same day settlements for two trades from Credit Suisse and Instinet. Reportedly, the trades were initiated at 11:00 AM ET and 3:00 PM ET and the Paxos Settlement Service settled both at 4:30 PM ET. This illustrated that the network is capable of handling same-day settlements for trades conducted throughout the day.