Out-Law News 2 min. read

Goldman Sachs' patent application reveals details of potential use of crypto-currency in securities settlement


Goldman Sachs is attempting to patent technology that supports the use of "cryptographic currency" and distributed ledger systems to speed up the settlement of trades in financial securities.

The patent application was filed in October 2014 but has only recently been published by the US Patent and Trademark Office (PTO).

According to its application, Goldman Sachs is seeking patent protection for a mode of settlement that would replicate the functions of a clearing house but which avoids potential days waiting for funds to be transferred and ownership of securities to be exchanged.

Goldman Sachs' invention consists of using virtual wallets as a hub for holding and releasing investor funds through the medium of cryptographic currency, called SETLcoin, that are "independently and extemporaneously generated, verified, and executed" within a peer-to-peer environment.

"As implemented by the … technology, a trader no longer trades securities by meeting at an exchange with an indication of cash for security and then settles the transaction seconds, hours, or days later, meanwhile bearing all of the associated credit risk in the interim," the patent application said.

"Traders using the … technology exchange securities by presenting an open transaction on the associated funds in their respective wallets. SETLcoin ownership is immediately transferred to a new owner after authentication and verification, which are based on network ledgers within a peer-to-peer network, guaranteeing nearly instantaneous execution and settlement," it said.

The securities settlement mode envisaged in the patent application would, the application claims, provide trust to those involved in securities trading that funding for such trades will not fall through.

"Opening a transaction via the virtual wallet to transfer the cryptographic currency is a strong guarantee of the availability of funds in the virtual wallet because, e.g., funds are not transacted unless the commit phase is successful," it said.

Daniel Marovitz, European president and global head of products at payments network company Earthport, recently told Out-Law.com that distributed ledger technology, or blockchain, has the potential to disrupt the traditional model of financial trading.

Best known for being the technology that underpins trading involving the digital currency bitcoin, blockchain is best described as a public ledger solution with storage capacity that is secured by cryptography and a system of algorithmic problem-solving.

In the context of payments, blockchain enables peer-to-peer transactions to take place outside of existing bank clearing and settlement protocols, Marovitz said. This is because the distributed ledger system upon which it relies provides trust to the transacting parties by publically recording transactions made at "tens of thousands of points of truth" online, making it difficult for details of payments made to be "corrupted", he said.

According to a recent report by the Committee on Payments and Market Infrastructures at the Bank for International Settlements (BIS) it is "conceivable" that blockchain technology could "impact on the pledging of collateral or on the registration of shares, bonds, derivatives trades and other assets".

"The use of distributed ledgers may also induce changes in trading, clearing and settlement as they could foster disintermediation of traditional service providers in various markets and infrastructures," BIS said. "These changes may result in a potential impact on [financial market infrastructures] beyond retail payment systems, such as large-value payment systems, central securities depositories, securities settlement systems or trade repositories."

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