Blockchain-Based Settlement for Asset Trading

49 Pages Posted: 13 Aug 2018

See all articles by Jonathan Chiu

Jonathan Chiu

Bank of Canada

Thorsten V. Koeppl

Queen's University - Department of Economics

Date Written: May 1, 2018

Abstract

Can securities be settled on a blockchain and, if so, what are the gains relative to existing settlement systems? We consider a blockchain that ensures delivery-vs-payment by linking transfers of assets with payments and operates via a Proof-of-Work protocol. The main benefit of a blockchain is faster and more flexible settlement, whereas the challenge is to avoid settlement fails when participants fork the chain to get rid of trading losses. To deter forking, the blockchain needs to restrict settlement speed through block size and block time in order to generate sufficient transaction fees which finance costly mining. We show that large enough trading volume, sufficiently strong preferences for fast settlement and limited trade size and risk are necessary conditions for blockchain-based settlement to be feasible. Despite mining being a deadweight cost, our estimates based on the market for US corporate debt show that gains from moving to faster and more flexible settlement are in the range of 1-4 bps relative to existing legacy settlement systems.

Keywords: Securities Settlement, Blockchain, Block Size, Block Time, Transaction Fees, Club Good

JEL Classification: G2, H4, P43

Suggested Citation

Chiu, Jonathan and Koeppl, Thorsten V., Blockchain-Based Settlement for Asset Trading (May 1, 2018). Available at SSRN: https://ssrn.com/abstract=3203917 or http://dx.doi.org/10.2139/ssrn.3203917

Jonathan Chiu (Contact Author)

Bank of Canada ( email )

234 Wellington St.
Ottawa, Ontario K1A 0G9
Canada

Thorsten V. Koeppl

Queen's University - Department of Economics ( email )

99 University Avenue
Kingston K7L 3N6, Ontario
Canada

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