Zero Settlement Risk Token Systems

23 Pages Posted: 7 Apr 2021 Last revised: 18 Apr 2021

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 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

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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