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Blockchain-based Settlement for Asset Trading

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  • Chiu, Jonathan
  • Koeppl, Thorsten

Abstract

Can securities be settled on a blockchain and, if so, what are the gains relative to existing settlement systems? We consider a blockchain that ensures delivery-vs-payment by linking transfers of assets with payments and operates via a Proof-of-Work protocol. The main problem is to overcome settlement fails where participants fork the chain to get rid of trading losses. To deter forking, the blockchain needs to restrict block size and block time in order to generate sucient transaction fees which nance costly mining. We show that large enough trading volume, suciently strong preferences for fast settlement and limited trade size and risk are necessary conditions for blockchain-based settlement to be feasible. Despite mining being a deadweight cost, our estimates based on the market for US corporate debt show that gains from moving to faster and more exible settlement are in the range of 1-4 bps relative to existing legacy settlement systems.

Suggested Citation

  • Chiu, Jonathan & Koeppl, Thorsten, 2018. "Blockchain-based Settlement for Asset Trading," Queen's Economics Department Working Papers 274723, Queen's University - Department of Economics.
    • Handle: RePEc:ags:quedwp:274723
    DOI: 10.22004/ag.econ.274723
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    Keywords

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    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • H4 - Public Economics - - Publicly Provided Goods
    • P43 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Finance; Public Finance

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