FED NY: Zero Settlement Risk Token Systems

• The Federal Reserve Bank of New York (FED NY) paper discusses the potential for modern settlement systems using distributed ledger technology (DLT) to achieve zero settlement risk. The paper introduces a token-based system with dynamic ownership representation.
• Key elements of the proposed token system include:

i) Dynamic Ledger Representation: The token system employs a dynamic ledger that can conditionally represent asset ownership over time, improving on the static ledgers used in traditional systems;

ii) Immediate Execution Requirement: For a token system to achieve zero settlement risk, transactions must be programmed to execute immediately, though actual settlement can occur at a designated future state. This ensures that commitments are enforced without delay;

iii) Information-Leakage Proof: The system aims to prevent information leakage that could influence future trades, a challenge for DLT systems using public ledgers like Bitcoin and Ethereum. The token system achieves this by employing a protocol that restricts transaction programs to those that do not rely on contingent conditions;

iv) Applications: The paper demonstrates that the proposed system can support a wide array of financial arrangements, including insurance, derivatives, and collateralized loans. It also facilitates complex multilateral transactions like securitization, without the need for third-party intermediaries, enhancing the efficiency and security of these processes;

v) Conditions for Adoption: For widespread adoption in traditional financial markets, the system must ensure that sensitive information remains private and only shared with necessary parties, such as bookkeepers or validators, in a restricted manner.?

Original source: Zero Settlement Risk Token Systems ( newyorkfed.org )