Zero Settlement Risk Token Systems

Lee, Michael Junho; Martin, Antoine; Townsend, Robert M.

doi:10.59576/sr.1120

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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 with dynamic ownership representation, or a dynamic ledger, can be designed to achieve both, as long as it employs a protocol that enforces two restrictions: programs must be immediately implemented and must involve transactions based on verifiable claims. We show how such a system can support various arrangements, including insurance, derivatives, collateralized loans, and securitization.

Keywords: tokenization; programmability; settlement risk; financial architecture;

JEL Classification: G19; D86; D47; G29;

https://doi.org/10.59576/sr.1120