On November 19, the United States Patent & Trademark Office (USPTO) published Goldman, Sachs & Co.’s patent application 20150332395 or “Cryptographic Currency For Securities Settlement.” Described are “ […] methods for settling securities in financial markets using distributed, peer-to-peer, and cryptographic techniques ” using a cryptocurrency named SETLcoin. The application lists Paul Walker and Phil J. Venables as the inventors of the technology.

Paul Walker is the co-head of technology at Goldman and a member of the Board of Directors of the Depository Trust and Clearing Corporation (DTCC). According to Nathaniel Popper’s book “Digital Gold” and his adaptation for American Banker, “When Goldman Sachs Began Flirting with Bitcoin,” Walker led a panel to educate the banks clients about virtual currencies. Popper writes that Walker, “indicated that the bank was taking a hard look at how the blockchain might be used to change basic things about how banks do business.”

Phil Venables, managing director and chief information security officer at Goldman Sachs has been described by American Banker as an “outspoken industry leader.”

The patent application addresses chain of custody of an asset, counterparty risk and settlement through a cryptocurrency called SETLcoin. The patent describes a colored coin scheme referred to as a PIC or “Positional Item inside Cryptographic currency”:

[…] 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.”

SETLcoin, an amalgamation of “settlement” and “coin,” boasts near instantaneous execution and settlement:

[…] cryptographic currency transactions are independently and extemporaneously generated, verified, and executed within the network, without the risks associated with traditional clearing houses that can delay settlements for several days .”

Further, the application defines a cryptocurrency or “cryptographic currency” as a

[…] digital medium of exchange that enables distributed, rapid, cryptographically secure, confirmed transactions for goods and/or services.”

The patent goes on to describe an “atomic commitment protocol” and “fungibility engine.” The patent also explains how a settlement cryptocurrency would also make credit checks obsolete.

The Complexity of Asset Ownership

According to the patent application, SETLcoin ownership can be used to prevent fraud, including float fraud such as kiting. One of the earliest cases (if not the earliest) of ownership fraud at Goldman Sachs dates back to 1884 as detailed in an article for the New York Times, “Note Brokers ’ Responsibility ” from March 19, 1886 and further highlighted in the book “Money and Power: How Goldman Sachs Came to Rule the World .”

A forged note for $1,100 endorsed by a Carl Wolf was sold by Goldman to a Frederick E. Douglas. Wolf then “ran away.” Douglas was unsuccessful in suing Goldman to recover his losses. “Money and Power” notes that this was one of the first legal examinations of the role and responsibilities of a financial intermediary.

A more recent examination of the complexities of asset ownership (and unwinding of shares) was detailed this summer by Bloomberg in ”Banks Forgot Who Was Supposed to Own Dell Shares.”

The Depository Trust Company (DTC), the central securities depository subsidiary of DTCC, according to their website:

provides settlement services for virtually all broker-to-broker equity and listed corporate and municipal debt securities transactions in the U.S.”

Patrick Byrne, the CEO of e-commerce firm Overstock, has written about DTCC in “The DTCC’s CNS naked short selling residue ” and most recently the clearing debacle in “Goldman Sachs Internal Memo (Yesterday): ‘Easy to Borrow List to be Discontinued.’

Byrne sued Goldman Sachs and others for allegedly naked short selling his company’s shares. That is “clearing operations at the banks intentionally failed to locate and deliver borrowed shares for clients shorting stocks.” It is somewhat ironic here because it appears that Goldman’s cryptocurrency application could prevent the very same behavior it allegedly participated in according to the lawsuit.

Byrne embraced cryptocurrency as a result and started the Overstock subsidiary tØ which is also using digital currencies and blockchain to settle trades and asset ownership.

According to tØ’s website they provide:

Trustless

Cryptocurrencies such as Bitcoin are lauded for their trustless nature — that is to say, there is no reliance on a trusted third party. Goldman’s patent filing however allows for the possible introduction of an “authoritative source” such as the Securities and Exchange Commission:

...there are no prior ownership rights when an SETLcoin is first issued; therefore, […] {In addition to} […] one or more trusted nodes […] a government entity, {such as} the Security Exchange Commission, or other entity {can} […] verify and authentic the issuer’s transaction.”

Blockchain Cometh

Goldman Sachs and IDG Capital Partners co-led a $50 million strategic investment round in Bitcoin company Circle in late April of this year. This was the first publicly announced cryptocurrency investment by Goldman. However, as reported by CB Insights, Goldman’s investment activity into fintech startups has been intensifying.

According to the Federal Financial Institutions Examination Council (FFIEC), Goldman is the fifth largest bank holding company with $859.93 billion in assets as of June 2015. The cryptocurrency technology patent was filed prior to Goldman’s membership in R3 CEV. R3 is working on a common blockchain standard for its members (which includes many of the banks listed in FFIEC).

Goldman’s thoughts on Bitcoin were broadcasted at it Talks@GS in “The Evolution of Bitcoin” and podcast “Exchanges at Goldman Sachs” in Episode 16, The Future of Finance.

Photo Bjoertvedt / Creative Commons