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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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    References listed on IDEAS

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    1. Jonathan Chiu & Thorsten V Koeppl, 2019. "Blockchain-Based Settlement for Asset Trading," The Review of Financial Studies, Society for Financial Studies, vol. 32(5), pages 1716-1753.
    2. Jean-Charles Rochet & Jean Tirole, 1996. "Controlling risk in payment systems," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 832-869.
    3. Kahn, Charles M & McAndrews, James & Roberds, William, 2003. "Settlement Risk under Gross and Net Settlement," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 591-608, August.
    4. Lin William Cong & Zhiguo He, 2019. "Blockchain Disruption and Smart Contracts," The Review of Financial Studies, Society for Financial Studies, vol. 32(5), pages 1754-1797.
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    More about this item

    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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