"Smart" Settlement
Résumé
Blockchain technology allows for flexible settlement of trades. We build a model of intermediated trading with search frictions and counterparty risk. On the one hand, longer trade-to-settlement time increases counterparty risk exposure. On the other hand, liquidity improves since intermediaries have more time to adjust inventories. Optimal time-to-settlement decreases in counterparty risk and search intensity. However, with flexible time-to-settlement intermediaries specialize in either high- or low-default risk contracts. Consequently, price competition is relaxed. Intermediaries earn rents, increasing in their (common) default rate due to larger scope for specialization. A unique time-to-settlement for all trades in a given security improves welfare.