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Trading  | July 17, 2017

Goldman Sachs has clinched an important victory in its race to transition from a stodgy investment bank into a fintech powerhouse: it was awarded a patent for its proposed “SETLcoin” cryptocurrency settlement system, according to CoinDesk, the first to report on the patent.

“The US Patent and Trademark Office (USPTO) published Goldman’s patent on July 11, entitled “Cryptographic currency for securities settlement”. The bank made headlines when the existence of the patent application was revealed in late 2015.”

The concept envisions a system for settling securities trades using cryptocurrency instead of cash or other cash equivalents. When filed in December of 2015, the application notably outlined methods for exchanging SETLcoins for digitized stocks for firms like Google and Microsoft, as well as cryptocurrencies, naming bitcoin and litecoin in particular, as CoinDesk explains.

In its patent application, Goldman highlights the shortcomings of the clearing and settlement system, explaining how counterparties are forced to bear unnecessary risk during the period between when a trade is made and when it is settled, which can be up to three days for stock trades.

“The settlement of securities involves a process whereby securities or interests in securities (e.g., debt, equity, or derivative contracts) are delivered, usually against payment of money. A number of risks arise for the parties during the settlement interval that follows trading and precedes settlement. For example, after a trade for a security and before settlement, the rights of the purchaser are contractual and therefore personal; however, because such rights are merely personal, these rights are at risk in the event of the insolvency of the either counterparty to the trade. After settlement, the purchaser owns the securities, and the purchaser` rights are proprietary. Clearing involves modifying contractual obligations to facilitate settlement. Clearing houses, such as the National Securities Clearing Corporation (NSCC), provide clearing, settlement, risk management, central counterparty services, and a guarantee of completion for certain transactions (e.g., broker-to-broker trades, depositary receipts, and exchange-traded funds), and they serve as the central counterparty for trades in the U.S. securities markets. In the United States, the settlement date for marketable stocks can be an extended length of time–three business days after the trade is executed and for listed options and government securities it is usually one day after the execution.”

Then Goldman describes how cryptocurrencies like bitcoin work.

“A cryptographic currency is a digital medium of exchange that enables distributed, rapid, cryptographically secure, confirmed transactions for goods and/or services. One of the first cryptographic currencies to come to broad attention was Bitcoin, which is based on a peer-to-peer network, in 2009. Since then, numerous cryptographic currencies have become available, such as Litecoin, Novacoin, Namecoin, Feathercoin, Terracoin, Dogecoin, and Peercoin. Fundamentally, cryptographic currencies are specifications regarding the use of currency that seek to incorporate principles of cryptography (e.g., public-key cryptography) to implement a distributed and decentralized information economy. A digital currency, e.g., a bitcoin used in Bitcoin, is computationally brought into existence by an issuer (e.g., a bitcoin is “mined”). Digital currency can be stored in a virtual cryptographic wallet, (hereinafter “wallet”), i.e., a software and/or hardware technology to store cryptographic keys and cryptographic currency. Digital currency can be purchased (e.g., for U.S. dollars at an ATM or at an exchange), sold (e.g., for goods and/or services), traded, or exchanged for a different currency or cryptographic currency, for example. A sender makes a payment (or otherwise transfers ownership) of digital currency by broadcasting (e.g., in packets or other data structures) a transaction message to nodes on a peer-to-peer network. The transaction message includes the quantity of virtual currency changing ownership (e.g., 4 bitcoins) and the receiver’s (i.e., the new owner’s) public key-based address. Transaction messages are sent through the Internet, without the need to trust a third party, so settlements are extremely timely and efficient.”

…before providing a detailed description of how its SETLCoin system works, along with a summary of its most important innovation: the reduction in settlement times.

“The described technology concerns one or more methods, systems, apparatuses, and mediums storing processor-executable process steps to substantively instantly settle securities, based on cryptographic currency technology, without the risks associated with traditional settlement technologies.”

To be sure, Goldman knows what it is doing: a recent chart showing the blockchain ecosystem confirms that it is ripe for a major bank stepping in and profiting from the numerous “externalities”:

According to Goldman, SETLCoin is a cryptocurrency that can be exchanged for financial securities over a peer-to-peer network, allowing trades to settle instantly because transfer of the SETLCoin is instant. Here’s how it will work:

“…SETLcoin wallet holds multiple positionable items (e.g., a security item, such as a share), herein referred to as a Positional Item inside Cryptographic currency (PIC), and a position (i.e., a quantity of the PIC represented by an SETLcoin wallet). A PIC is an agreed upon reference used by the peer-to-peer network to refer to, e.g., a particular security. For example, “IBM” (the stock market symbol of the company by the same name) can also be a PIC used by the peer-to-peer network to refer to IBM stock. A PIC, in some embodiments, is determined (and invalidated) by an issuer. An issuer (e.g., a company, underwriter, municipality, government, etc.) can have multiple PICS to represent different types of securities. For example, IBM stocks can be represented by PIC “IBM-S” and IBM bonds by PIC “IBM-B”. In some embodiments, PICS are issued (and destroyed) by highly authoritative entities. For example, dollars available on the SETLcoin network represented by, e.g., PIC “USD” may be authoritatively issued by, for example, the U.S. Treasury. However, the described technology can issue PICS based on various other techniques (e.g., network node agreement, exchange regulation, lease or purchase, auction, etc.) and can be named based on, e.g., a company’s name, its market symbol, its branding, its security name, availability, or a preferred format (e.g., length, abbreviation, etc.).

An SETLcoin wallet or transaction can house a single security, as described above, or multiple denominations of the same security (e.g., 1 IBM-S SETLcoin valued at 100 IBM shares). SETLcoin wallets or transactions may also house multiple securities (e.g., 1 IBM-S SETLcoin and 2 GOOG-S SETLcoins). SETLcoins are exchangeable for, e.g., other SETLcoins and/or other cryptographic currencies (e.g., peercoins). For example, a single IBM-S SETLcoin may be exchangeable for one or more “GOOG” SETLcoins (i.e., Google shares), for 13,000 USD SETLcoins, 100 litecoins, and/or for 5 bitcoins.”

It is unclear if and how Goldman’s foray into blockchain will impact prices of existing tokens. You can read the whole patent here

A revolutionary initiative is helping average Americans find quick and lasting stock market success.

275% in one week on XLF - an index fund for the financial sector. Even 583%, in 7 days on XHB… an ETF of homebuilding companies in the S&P 500. 

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