Can new Settlement Structure save our financial system?
Settlement in the repo market, despite its critical role in global liquidity, operates on aging infrastructure built around T+1 or T+2 conventions, meaning actual delivery of cash and securities occurs up to two days after trade agreement. This latency isn’t merely operational—it constitutes embedded credit exposure. Each lagging transaction introduces counterparty risk, liquidity traps, and collateral availability constraints, none of which are trivial in a global system reliant on just-in-time flows of collateralized interbank funding.
These inefficiencies are not isolated events but structural features. Settlement is bottlenecked by fragmented clearing arrangements—Euroclear, DTCC, and national central securities depositories—each operating independently with proprietary protocols. This patchwork architecture requires multiple reconciliations and message translations (often via SWIFT), compounding latency and error rates. Simultaneously, intermediaries like custodian banks and tri-party agents play indispensable roles in verifying delivery and ownership transfer, yet they represent frictional layers, not value-additive functions in a purely digital settlement world.
The result is a system incapable of real-time netting or collateral substitution without introducing systemic delay. During periods of heightened stress, when collateral becomes scarce and velocity matters most, the repo system’s sluggishness becomes its liability. This was plainly visible during March 2020, when repo spreads spiked and collateral bottlenecks paralyzed functioning in what is supposedly the most liquid segment of the global financial system. Settlement latency is not a secondary issue—it is central to fragility.
Blockchain offers a viable overhaul, not because it is fashionable, but because its core design eliminates intermediated trust and introduces deterministic finality. In a distributed ledger configuration, counterparties can transact via atomic delivery-vs-payment (DvP) mechanisms, where transfer of securities and cash are interlocked within a single digital execution. There is no delay. A smart contract acts as the neutral settlement agent, ensuring simultaneous fulfillment of both legs of the repo.
To implement this, the market must move away from legacy messaging and into shared data infrastructure. Tokenized collateral must be issued onto a permissioned blockchain where each asset is natively represented and transferable. Central bank digital currencies (or cash tokens backed 1:1 in segregated escrow) must exist in parallel on the same chain, enabling true DvP. Fnality’s project with central bank-participating institutions is an early model here. But the key technical enabler is consensus-led settlement—meaning state changes on the ledger are accepted universally by all parties the instant they are validated, without awaiting batch reconciliation or third-party confirmation.
This implies systemic changes in how banks operate. They no longer process repo trades asynchronously through multiple departments but plug into a real-time execution layer. Front, middle, and back-office functions collapse into a single settlement engine. Custodians must reconfigure to become node operators, not passive safekeepers. Tri-party agents lose their raison d’être if collateral and cash can be programmed to move conditionally in a single execution instance.
Moreover, regulators must pivot from rule-based supervision to data-integrity oversight. Instead of relying on ex-post audit trails, they can node-verify in real-time the full ledger history. This kind of embedded transparency would make traditional reporting structures obsolete and allow systemic risks to be modeled continuously, not periodically.
Thus, what blockchain integration really demands is not technological adoption per se, but the dismantling of operational silos, the redefinition of financial plumbing, and the real-time synchronization of liquidity provision with collateral movement. The Eurodollar system, which long ago migrated into a ledger-centric, trust-based architecture invisible to central banks, is ironically the best foundation for this transformation. It already operates with distributed credit creation, just not with synchronized clearing. By upgrading its collateral mechanics to blockchain-based atomicity, the system can close the loop it never managed to institutionalize: immediate, riskless settlement in a currency and collateral system defined by its opacity.
The overhaul is not optional. Settlement latency is not a nuisance. It is the silent killer of liquidity under duress. Blockchain, if properly applied—not as marketing gloss, but as core monetary infrastructure—can excise this risk and bring the Eurodollar system into the 21st century without betraying its underlying ethos of decentralized, credit-based money.
