April 26, 2022
BDF Paris
Séminaire Banque de France
Abstract
Trades in today’s financial system are inherently subject to settlement uncertainty. This paper explores tokenization as a potential technological solution. A token system, by enabling programmability of assets, can be designed to eradicate settlement uncertainty. We study the allocations achieved in a decentralized market with either the legacy settlement system or a token system. Tokenization can improve efficiency in markets subject to a limited commitment problem. However, it also materially alters the information environment, which in turn aggravates a hold-up problem. This limits potential gains from resolving settlement uncertainty, particularly for markets that depend on intermediaries.
Keywords
Tokenization; programmability; settlement uncertainty; asymmetric information;
JEL codes
- D82: Asymmetric and Private Information • Mechanism Design
- D86: Economics of Contract: Theory
- D47: Market Design
- G29: Other