A Tokenized Sovereign Debt Conversion Mechanism for Dynamic Public Debt Reduction

TL;DR

This paper introduces TSDCM, a smart contract-based mechanism that automates sovereign debt reduction through token conversion triggered by economic thresholds, demonstrating significant debt-to-GDP improvements.

Contribution

It presents a novel tokenized debt conversion mechanism with rigorous stochastic analysis and proven expected debt reduction, enhancing sovereign debt management strategies.

Findings

20-25% decrease in expected debt-to-GDP ratios over ten years

Finite-time activation and guaranteed debt decline proven mathematically

Calibration with IMF data and Monte Carlo simulations validate effectiveness

Abstract

In this paper, we present the Tokenized Sovereign Debt Conversion Mechanism (TSDCM), a smart-contracted instrument that, upon meeting both debt-to-GDP and GDP-growth thresholds, automates the retirement of sovereign debt. TSDCM initiates the conversion of a portion of outstanding bonds into performance-linked tokens by integrating a two-state regime-switching jump-diffusion framework into decentralized protocols. We prove finite-time activation and expected debt reduction through new propositions, establish the existence and uniqueness of the underlying stochastic processes, and introduce a main theorem that ensures a strict decline in expected debt levels. With significant tail-risk mitigation, calibration using IMF data and MATLAB Monte Carlo simulations shows a 20-25% decrease in expected debt-to-GDP ratios over a ten-year period. A transparent and incentive-aligned route to sustainable sovereign debt management is provided by TSDCM.