Zero Settlement Risk Token Systems

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