The Securities and Exchange Commission announced on November 4, 2025, that it is instituting proceedings to determine whether to grant or deny an application from Paxos Securities Settlement Company, LLC for registration as a clearing agency under Section 17A of the Securities Exchange Act of 1934. This step follows the company's July 14, 2025, filing of Form CA-1, with notice published in the Federal Register on August 6, 2025, and subsequent public comments. The proceedings aim to evaluate if the proposed services, which involve a private, permissioned distributed ledger for bilateral delivery versus payment settlement, meet statutory requirements for prompt and accurate securities clearance, investor protection, and fair competition. This development highlights ongoing regulatory scrutiny of innovative technologies in financial infrastructure, potentially shaping the integration of blockchain into the national clearance and settlement system.
Background and Application Details
Paxos Securities Settlement Company, LLC, or PSSC, submitted its application to operate as a central securities depository and securities settlement system. According to the application, PSSC plans to provide these services through a distributed ledger technology platform designed for delivery versus payment, or DVP, settlement on a bilateral basis. DVP ensures that securities are transferred only upon receipt of payment, reducing settlement risk.
The company intends to integrate with the Depository Trust Company, known as DTC, by becoming a participant. DTC is a registered clearing agency that serves as a central securities depository for a wide range of securities. PSSC's proposed rules outline participant eligibility, limited to entities such as registered broker-dealers, certain banks, trust companies, other clearing agencies, insurance companies, and registered investment companies. Approval for participation would come from PSSC's Compliance and Risk Management Committee, with requirements including meeting margin obligations under proposed Rules 5A, 5B, and 5C.
The SEC's notice of the application drew public comments, available on the Commission's website, though posting has been delayed due to operational issues. The Exchange Act mandates that the SEC act within 90 days of publication or institute proceedings, which it has now done to allow for deeper analysis.
Key Players Involved
PSSC is a subsidiary of Paxos Trust Company, a firm known for its work in digital assets and blockchain-based financial services. The application positions PSSC as an innovator seeking to leverage distributed ledger technology to enhance settlement efficiency.
The SEC, as the primary regulator, is responsible for overseeing clearing agencies to ensure they support a national system for securities clearance and settlement. DTC, operated by the Depository Trust & Clearing Corporation, plays a central role as the main U.S. securities depository, handling trillions in daily transactions. Public commenters, whose input the SEC is soliciting further, represent stakeholders including industry participants, investors, and possibly competitors concerned about market impacts.
Relevant Legal Framework and Precedents
Section 17A of the Exchange Act establishes the framework for clearing agency registration, requiring the SEC to determine if the applicant meets specific criteria. These include organizational capacity to facilitate prompt clearance and settlement, safeguard securities and funds, and comply with federal rules, as outlined in subsection (b)(3)(A).
Participation standards under subsection (b)(3)(B) mandate that rules allow access to qualified entities like broker-dealers, banks, and investment companies, supporting the development of a national clearance system. Fair representation requirements in subsection (b)(3)(C) ensure participants have a voice in governance. Fee structures must be equitable and not impose fixed prices, per subsections (b)(3)(D) and (E).
The rules must promote prompt settlement and safeguarding, as in subsection (b)(3)(F), while providing fair procedures for participant discipline under subsections (b)(3)(G) and (H). Finally, subsection (b)(3)(I) prohibits undue burdens on competition.
Precedents include the SEC's 2020 guidance on central securities depositories, emphasizing services like book-entry transfers and custody. The approval of other innovative clearing agencies, such as those incorporating new technologies, has required demonstrations of risk management and interoperability. For instance, the SEC's handling of applications from entities like LedgerX, now part of MIAX Pearl, involved similar scrutiny of technology-driven models under Section 17A.
Potential Implications and Perspectives
In the short term, these proceedings could delay PSSC's launch, as the SEC gathers additional comments until December 8, 2025. If approved, PSSC's platform might introduce efficiencies like faster settlement times through distributed ledger technology, potentially reducing costs and risks in bilateral trades.
Longer-term implications include broader adoption of blockchain in U.S. markets, aligning with SEC goals for a modernized national system. However, concerns arise about systemic risks if the technology fails or if integration with DTC creates vulnerabilities.
Different perspectives emerge from stakeholders. Proponents, including fintech advocates, argue that such innovations foster competition and efficiency, as noted in some public comments favoring technological advancement. Critics, possibly including traditional clearing agencies, may highlight risks to market stability or unequal access, emphasizing the need for robust safeguards. Regulators balance innovation with protection, without endorsing specific views, as the Exchange Act prioritizes public interest and investor safety.
The proceedings underscore tensions between innovation and regulation, with PSSC's model potentially setting precedents for other blockchain applications in finance.
In summary, the SEC's action reflects a cautious approach to integrating distributed ledger technology into core market infrastructure. Key takeaways include the need for PSSC to demonstrate compliance across multiple statutory criteria. Looking ahead, the process may involve further public input, potential amendments to the application, or hearings. Ongoing debates could focus on balancing technological progress with risks to the clearance system, influencing future regulatory frameworks for digital assets in securities markets.