  A blockchain replaces central counterparties with time-consuming consensus
protocols to record the transfer of ownership. This settlement latency slows
cross-exchange trading, exposing arbitrageurs to price risk. Off-chain
settlement, instead, exposes arbitrageurs to costly default risk. We show with
Bitcoin network and order book data that cross-exchange price differences
coincide with periods of high settlement latency, asset flows chase arbitrage
opportunities, and price differences across exchanges with low default risk are
smaller. Blockchain-based trading thus faces a dilemma: Reliable consensus
protocols require time-consuming settlement latency, leading to arbitrage
limits. Circumventing such arbitrage costs is possible only by reinstalling
trusted intermediation, which mitigates default risk.
