Zero Settlement Risk Token Systems

29 Pages Posted: 7 Apr 2021 Last revised: 21 Sep 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

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 can be designed to achieve both, as long as it employs a protocol that enforces two restrictions: programs must be immediately executed, i.e. a collapse between trade and settlement, and must involve transactions based on verifiable claims. We show concrete implementation of various arrangements, including insurance, derivatives, collateralized loans, and securitization.

Keywords: token system, instant settlement, financial architecture

JEL Classification: G00, G29, E42

Suggested Citation

Lee, Michael and Martin, Antoine and Townsend, Robert M., Zero Settlement Risk Token Systems (March 1, 2021). Available at SSRN: https://ssrn.com/abstract=3820997 or http://dx.doi.org/10.2139/ssrn.3820997

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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