At a time when banks are displaying a deep interest in the blockchain technology underlying cryptocurrencies like bitcoin, the Goldman Sachs Group, Inc. (GS) has made a big leap forward. Its application regarding the patent of ‘cryptographic currency technology’ has brought it under the spotlight as well as placed it ahead of many other in the race to harness the power of blockchain.
The New York-based financial services giant’s patent was filed in October 2014, but only published recently by the US Patent and Trademark Office (USPTO). According to the application titled, “Cryptographic Currency For Securities Settlement,” Goldman Sachs is seeking patent protection for a settlement system for securities market based on cryptographic currency protocol, which introduces its own cryptographic currency - the SETLcoin.
The regular settlement procedure in securities markets is handled by clearing houses, such as National Securities Clearing Corporation (NSCC) wherein a settlement time of minimum one business day (in case of listed options and government securities) to three business days (for marketable securities) after the execution of trade is required. In addition to the huge time consumption that goes into such settlements, the procedure also involves certain proportion of risk for the parties during the settlement interval that ‘follows trading and precedes settlement.’
Goldman Sachs' patent application means that the settlement procedures are carried out via a cryptographic currency, as it facilitates rapid, secure and confirmed transactions via a network, thereby eliminating the need for a third party. This results in extremely timely and efficient settlements.
It further describes how the technology would replace the existing system of clearance and payments. Just like individuals (investors or traders) have traditional securities and cash accounts, the technology would provide a virtual multi-asset wallet that would generate, manipulate and store a new cryptocurrency referred to as SETLcoins.
The cryptographic currency SETLcoin would facilitate the exchange of assets via a peer-to-peer network while the underlying technology would further facilitate transactions between virtual wallets, as well as between virtual and non-virtual wallets on the same peer-to-peer network.
This would change the way settlement of securities are traditionally carried out. The patent application describes, “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. Traders using the described technology exchange securities by presenting an open transaction on the associated funds in their respective wallets.”
The ownership of SETLcoin will be transferred immediately after authentication and verification based on network ledgers within the peer-to-peer network, thereby making “nearly instantaneous execution and settlement” possible.
The technology generates SETLcoin transactions based on the contents in the wallet. Say, Trader A enters his order into his wallet, and Trader B enters her order into her wallet; then based on the orders, the described technology generates the appropriate transaction messages, which are broadcast to the network for authentication and verification. The figure below is a flow diagram implementing various aspects of the described technology:
Once the transaction is sent to the network, the settlement is immediate and thus requires traders to be prepared to make the trade. For the process to happen smoothly, the technology has implemented a two-phase commitment protocol to ensure that both traders are ready to send their respective transaction messages.
Goldman Sachs has been proactive with its comments and ventures towards cryptocurrencies and the blockchain technology. Back in 2014, the company had released a report which acknowledged the ledger-based technology as one that “could hold promise.” In early 2015, another report by Goldman Sachs mentioned that “bitcoin and cryptocurrencies promise to change the mechanics of transactions.”
In April 2015, Goldman Sachs, along with China-based IDG Capital Partners, led a $50 million investment into Circle Internet Financial Limited, a bitcoin start-up working on using bitcoin’s underlying technology to improve consumer payments. Goldman Sachs also was among the initial members to partner with R3, an innovation firm working on the distributive ledger initiative.
While the increasing interest and involvement of big banks towards the technology is evident, the news of Goldman Sachs patent filing opens up the possibility that they are more deeply (and even secretively) involved, than originally though.