The SEC has approved BSTX (Boston Security Token Exchange) as a national security exchange. The initiative is a joint venture between BOX Digital Markets and tZERO, an Overstock subsidiary. Certain order and post-trade data will be recorded on an enterprise blockchain. However, the stocks are custodied by the DTC, and clearing is to be via the NSCC.
A number of platforms for security tokens are regulated in the United States, but they invariably opt for the lighter touch Alternative Trading Systems (ATSs) regulation. Examples include Securitize, Figure and BSTX partner tZero. Hence, BSTX is pretty big news. By automating much of the process a key aim is to cut the cost of raising finance.
BSTX says its the first fully-automated, price/time priority execution exchange for trading securities that uses blockchain technology. Given its partner is tZERO, we assume the technology is an enterprise version of Ethereum.
Shorter settlement cycles
Last year’s meme stock frenzy and the problems Robinhood encountered due to two-day stock settlement have helped accelerate the move to faster settlement times. BSTX will offer the option of T+0 and T+1 although two day settlement will still be the default and settlement will happen at the later of buyers and sellers timing preference.
This quarter the DTCC is planning a phased launch of its blockchain-based Project Ion to enable shorter settlement times. And Paxos has been trialing blockchain for shorter settlement times with several big banks, including Bank of America, Nomura’s Instinet, Credit Suisse and Societe Generale.
With all the data logged on the blockchain, BSTX plans to launch an API feed for its trading activity.
“We are eager to continue to work closely with the SEC to launch a fully regulated new exchange and to help provide capital markets with more modern tools for issuers and investors,” said BSTX CEO Lisa Fall.
“Our overarching goal is to empower developers and exchange observers to leverage the innovation and modern market structure currently being leveraged in crypto and blockchain technologies to come up with ideas to improve the listing and trading experience for all.”
Security tokens are ready for launch
Despite several organizations being active in the security tokens sector, take-up has been modest so far. Several reasons include a lack of regulated exchanges, issues around regulatory clarity, and a need for interoperability between different platforms. The availability of high-quality settlement tokens or stablecoins is seen as another requirement.
Regarding regulated exchanges, now it has BSTX, and in Europe there’s SIX’s SDX. Other platforms are under development in Singapore, Japan and elsewhere.
Many jurisdictions have laws that require separation of trading venues, post-trade and settlement. However, to exploit the full efficiencies of blockchain, there’s a need to blur these lines. In Europe, legislation for a pilot DLT regime is likely to pass in the next couple of months. While the EU sandbox will allow a single platform to perform both trade and post-trade functions for security tokens, that’s only for the sandbox. Europe doesn’t yet have plans to review legislation that enforces this role separation.
The third issue relates to interoperability. Most security tokens won’t be listed, but dozens of platforms issue the security tokens. The prospect of integrating all the different platforms is problematic. Interoperability is needed with solutions such as FinP2P being explored.
Meanwhile, last week tZERO was fined $800,000 by the SEC for breaching ATS rules.
