A Formal Architecture for DLT Settlement Hubs: Resolving the Security Paradox of Convex Monitoring Costs

Abstract

Central banks face rising cross-border supervision costs as banking groups operate across fragmented regulatory regimes, making traditional oversight mechanisms ineffective and increasing crisis risk. While a distributed ledger technology (DLT) settlement hub offers unified visibility, it introduces a novel Security Paradox: complex regulatory detection methods increase monitoring costs and collateral requirements, thereby risking the exit of compliant banks and systemic instability. This working paper presents a formal architecture for a multi-currency, permissioned regional DLT settlement hub-designed to address the complexities and inefficiencies of cross-border supervision and settlement-that maintains monetary sovereignty across jurisdictions. By adopting a "slashing reserve" model, in which coordinating central banks jointly set monitoring, penalties, transparency, and collateral, regional hub security is decoupled from collateral through efficient detection and a Byzantine-fault-tolerant quorum structure. This design enables capital-efficient, Basel-consistent settlement, ensuring stability and sovereignty, even during crises, and provides a blueprint for modern cross-border financial infrastructure.