The cash leg

On 26 June 1974, late in the afternoon, the German authorities withdrew the licence of a Cologne bank, Bankhaus Herstatt. That day, several foreign banks had already paid Deutsche Marks to Herstatt as part of foreign exchange transactions, and were waiting in return for dollars that were due to be paid to them a few hours later in New York, because of the time difference. Those dollars never came. The counterparties had delivered, and they were not paid. Settlement risk, the risk of handing over one’s side of an exchange without receiving the other, has borne that bank’s name ever since. The whole architecture of modern payment systems was built to eliminate it.

Tokenisation promises to put an end to this risk through atomic delivery versus payment, in which the security and the money change hands in the same indivisible operation. This promise rests on a condition that is often forgotten. The money, too, has to be present on the blockchain. A token representing a bond can circulate in a few seconds, but if its payment goes through a conventional bank transfer settled the next day, the gain almost entirely evaporates. Professionals call the money used in a transaction its cash leg, as opposed to the securities leg. The future of tokenised settlement depends on it.

Three monies for one euro

The euro we use every day takes three legally distinct forms, which coexist without our paying them any attention.