Settlement tokens and their role in a tokenized ecosystem
Distributed ledger technology (DLT) is viewed by many to have significant disruptive potential for the clearing and settlement of securities transactions.
This is currently a process which takes up to two to three working days and represents a sizeable market – in 2018, USD 68 trillion worth of equity alone was traded globally, which would correspond to an estimated USD 20 billion in clearing and settlement fees .
With DLT, this process could become almost instantaneous and counterparty risk would be eliminated, thereby transferring value more efficiently and reducing the associated fees.
In today’s world, after a transaction is placed there is a complex system which matches buyers and sellers, verifies their identity and reconciles positions before authorising and executing the transfer of securities and fiat into buyer and seller accounts. This is mainly conducted by a clearing and settlements house, with a depository to hold and facilitate the exchange of securities. This process also contains the risk that one or more of the parties may fail to deliver on the agreement at the end.
Future Finance – a tokenized ecosystem
In a tokenized ecosystem where both securities and fiat can be represented on tokens, DLT-based records and the ability to conduct real-time transfers would mean this process could happen almost instantaneously, resulting in immediate delivery versus payment (T=0) – giving parties the choice to optimise between time for liquidity management and settlement risk.
This is the vision that Sygnum is working towards with its tokenization offering involving asset and settlement tokens (see figure 1), which it will implement first within the Sygnum ecosystem and later on with other market participants.
A settlement token can be seen as a bridge between other digital assets and fiat currencies, linking the digital asset economy with the traditional financial world and increasing transaction ease and efficiency. The use case for it is not limited to what we at Sygnum have planned for in the near future and outlined in this article – there is potential for it to be used in payments by businesses or peer-to-peer, and those who trade protocol tokens can leverage it as a price-stable tool when pausing between trading activity. Sygnum believes that the settlement token is essential to the digital asset ecosystem and will foster the development of other new digital asset business models in the future.
About the Sygnum Digital CHF
Sygnum’s Digital CHF (DCHF) is a fully collateralised settlement token pegged to the Swiss Franc. This collateral is blocked in clients’ segregated fiat deposit accounts and for every settlement token minted in customer accounts, the equivalent amount of CHF is held in the Swiss National Bank (SNB). As a bank, Sygnum and its products and services are regularly audited.
The Swiss Banking Act of 2005 stipulates that all Swiss branches of banks and securities firms must have their deposits protected by esisuisse, and DCHF is included in this coverage of up to CHF 100,000 per depositor (of total deposits).
DCHF is now available to Sygnum clients through our e-banking portal.