Zero Settlement Risk Token Systems

Abstract

How might a modern settlement system with distributed ledger technology achieve zero settlement risk? We consider the design of a settlement system based that satisfies two integral features: information-leakage proof and zero settlement risk. The legacy settlement systems partition market participants’ private information but are vulnerable to settlement risk. We show that a token system can be designed to achieve both as long it employs a protocol that enforces appropriate restrictions on the set of programs traders can enter. First, programs must be immediately executed, i.e. a collapse between trade and settlement; second, they must also involve transactions based on verifiable claims, at the time of trade. We provide concrete applications of zero settlement risk system to derivatives, collateralized loans, and securitization.

Keywords: token system, instant settlement, financial architecture

JEL Classification: G00, G29, E42