Optimal Design of Tokenized Markets

28 Pages Posted: 7 Apr 2021 Last revised: 18 Feb 2022

See all articles by Michael Lee

Michael Lee

Federal Reserve Banks - Federal Reserve Bank of New York

Antoine Martin

Federal Reserve Bank of New York - Research and Statistics

Robert M. Townsend

Massachusetts Institute of Technology (MIT)

Date Written: March 1, 2021

Abstract

Trades in today’s financial system are inherently subject to settlement uncertainty. This paper explores tokenization as a potential technological solution. A token system, by enabling programmability of assets, can be designed to eradicate settlement uncertainty. We study the allocations achieved in a decentralized market with either the legacy settlement system or a token system. Tokenization can improve efficiency in markets subject to a limited commitment problem. However, it also materially alters the information environment, which in turn aggravates a hold-up problem. This limits potential gains from resolving settlement uncertainty, particularly for markets that depend on intermediaries.

Keywords: token system, security tokenization, settlement uncertainty, market design

JEL Classification: D47, G00, G29

Suggested Citation

Lee, Michael and Martin, Antoine and Townsend, Robert M., Optimal Design of Tokenized Markets (March 1, 2021). Available at SSRN: https://ssrn.com/abstract=3820973 or http://dx.doi.org/10.2139/ssrn.3820973

Michael Lee (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Antoine Martin

Federal Reserve Bank of New York - Research and Statistics ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6943 (Phone)

Robert M. Townsend

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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