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Zero Settlement Risk Token Systems

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Abstract

How might modern settlement systems with distributed ledger technology achieve zero settlement risk? We consider the design of settlement systems that satisfies two integral features: information-leakage proof and zero settlement risk. Legacy settlement systems partition private information but are vulnerable to settlement fails. A token system with dynamic ownership representation, or a dynamic ledger, can be designed to achieve both, as long as it employs a protocol that enforces two restrictions: programs must be immediately implemented and must involve transactions based on verifiable claims. We show how such a system can support various arrangements, including insurance, derivatives, collateralized loans, and securitization.

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  • Michael Junho Lee & Antoine Martin & Robert M. Townsend, 2024. "Zero Settlement Risk Token Systems," Staff Reports 1120, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:98894
    DOI: 10.59576/sr.1120
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    Keywords

    tokenization; programmability; settlement risk; financial architecture;
    All these keywords.

    JEL classification:

    • G19 - Financial Economics - - General Financial Markets - - - Other
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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