Comment Text:
To add to my prior comment:
One way for LedgerX to address the problem of holding bitcoin as collateral would be via insurance. If the bitcoin held by LedgerX were 100% insured then a disaster scenario is mitigated. The insurance would need to cover loss, theft and ownership status, in case a participant’s rightful ownership of bitcoins is called into question post-trade.
A plan involving insurance is a good idea but not a perfect one: there would still be the risk of the insurer denying a claim (even the most reputable of insurers, Berkshire Hathaway, is notorious for denying claims). Timing of payments would also be a problem: any insurance payout would need to be triggered immediately, or market participants would suffer from price movements in between a loss event and an insurance settlement. Insurance is a partial solution.
To create a complete solution, LedgerX should have a cushion fund as other DCOs do. The whole point of having DCOs is remove counterparty risk from a market. To do that, a DCO needs to have a sufficient cushion to continue seamless operation regardless of whatever problems present themselves – and those problems could take any number of forms.
LedgerX’s current DCO plan trades one problem for another. They have eliminated default risk by requiring 100% collateral, but they have taken on new risks related to the collateral in their custody.
A DCO needs to have a sizable margin of safety. That is why normal DCOs have a cushion fund and the ability to impose monetary assessments on FCMs.
