Canada: Goldman Sachs Files Patent For Cryptocurrency "SETLcoin"

Last Updated: January 19 2016
Article by Judith McKay, Ana Badour, Claire Gowdy, Justin Shoemaker and Vincent K.S. Yip

Most Read Contributor in Canada, September 2018

The transformational potential behind the popular cryptocurrency bitcoin continues to draw the interest of traditional financial institutions looking to ready their core businesses for a wave of new financial technology. The aspect of bitcoin that appears to be of the greatest interest to financial services organizations is not the currency itself, but the underlying blockchain technology. This technology is what enables the integrity of trading systems without a central authority.

On October 30, 2014, Goldman Sachs filed a patent application titled "Cryptographic Currency for Securities Settlement", which claimed priority to an earlier provisional patent application filed in May 15, 2014. The patent application was recently published by the US Patent and Trademark Office on November 19, 2015 as US Patent Application Publication No. 20150332395 (the "395 Application"). The 395 Application refers to a securities settlement system that leverages a distributed ledger and cryptographic protocols to provide for the secure, near instantaneous settlement of securities trades.

The current settlement system requires an interval of time between the execution of a trade and the actual delivery of a security or interest in securities to the purchaser. Clearing houses like the Canadian Depository for Securities ("CDS") mitigate the risk that exists between the time of payment and the actual transfer of ownership.

The 395 Application provides for a new cryptographic currency called a SETLcoin to facilitate the exchange of assets, such as securities, cash, or other cryptocurrencies. Like other cryptocurrencies, the exchanges are enabled by reference to a distributed ledger derived from a peer-to-peer network of nodes that secure the ledger by publicly replicating it and thus making it nearly impossible for a fraudster to tamper with.  According to the 395 Application, each participant would possess a digital wallet capable of proposing a transaction that would modify the public ledger to reflect the change in ownership of an asset acquired from, or exchanged with another wallet.  These proposals (in SETLcoin language, "Exchange Transaction Messages") would be checked against the multiplicity of nodes on the network to confirm the sender actually has the asset it is purporting to exchange.  The Exchange Transaction Message embeds two important pieces of identifying information—an address based on the recipient's public key, which is shared across the network and used to identify the recipient, and a signature based on the sender's private key, a secret key mathematically linked to the public key that acts as a secure password through which a person may prove ownership of an asset on the public ledger.  If the Exchange Transaction Message contains authentic and verified ownership information, the ledger is modified, presumably by a computation intensive, one-way algorithm as is the case for other cryptographic currencies.  This transaction protocol is essentially the same as other established cryptocurrencies.

SETLcoin, however, differs from traditional cryptocurrencies in at least one very important manner: a SETLcoin can describe a particular exchangeable security or other asset. The 395 Application calls for the use of a "Positional Item inside Cryptographic currency" ("PIC") that provides a common identifier code shared across the peer-to-peer network to represent a particular type of asset.  A PIC can be supplemented by a "position", which represents a quantity of the asset described by the PIC.

In order to make use of the PIC, SETLcoin offers a further twist on traditional distributed ledger cryptocurrencies: the use of authoritative entities that may designate, issue, authenticate, and destroy PICs. In the example described in the 395 Application , the inventors describe how an authoritative entity in the network, such as IBM (or, equally, an underwriter, regulator, or government treasury), could designate different classes of securities through PICs such as PIC IBM-B, (IBM bonds) or PIC IBM-S (IBM shares).  These notations could be based on ticker symbols, abbreviations, security names, etc.  Each issuer would use its private key to digitally sign each SETLcoin it issued in order to positively identify it when it is entered into the network ledger.  This use of a hash based on the issuer's own private key would provide a verification mechanism that could be supplemented by a counter-verifying validation by a trusted third party entity (for example the Ontario Securities Commission).  Once registered on the distributed ledger, traditional methods of verifying the chain of past ownership could be used to trace the SETLcoin back to the issuer.

In order to provide for certainty in securities trades, the 395 Application also contemplates the use of a commitment protocol in the form of a distributed algorithm that checks to ensure two traders are prepared to perform their respective parts of the exchange. Certainty can be generated through the use of a multiplicity of nodes to confirm commitment by both parties, or through the use of a third party or exchange server that maintains a transactional queue.

The concepts and technologies described in the 395 Application represent the kind of thinking that could potentially disrupt entire industries by disintermediating anyone in the business of selling "trust". The near instantaneous nature of trading and the verifiable certainty provided by a single, open and transparent ledger could seriously reshape the role of clearing houses like CDS and the necessity of systems like the large value transfer system.  Both the Nasdaq stock market and the London Stock Exchange are already exploring the use of blockchain technology in their operations.  These innovations are not constrained to the world of finance, and Goldman Sachs is not alone in its attempts to apply cryptocurrency technology to other walks of life.  It is likely that there will be a strong first-mover advantage for innovative businesses who are capable of developing a blockchain network. The strength and usefulness of a distributed ledger depends on its capability to attract a multiplicity of users or nodes to verify and build on the ledger.  The greater the number of nodes on the network, the greater the computational power, and the greater the security of the ledger.

If Goldman Sachs is able to obtain a patent (or a family of patents) protecting these transformative concepts and technologies, it may be able to assert control over the use of these concepts in new trading platforms through such patent rights. Goldman may be able to use these patent rights to maintain market exclusivity over its own trading platform and/or monetize these rights by extracting royalties from other platforms using these technologies. However, it is worth noting that other players, including Bank of America, are actively pursuing their own patent applications in this space.  It's another reminder that patent rights over transformative, ground-breaking foundation technologies can be very valuable, whether or not the companies actually commercialize the technologies themselves. As financial service organizations ramp up their technology development in this evolving area, patents will proliferate. As a consequence, it will become increasingly difficult for later entrants to carve a space for themselves without a robust intellectual property strategy.

McCarthy Tétrault has significant expertise in formulating intellectual property strategies for our clients. You can learn more about our approach by contacting any of the authors of this paper.

To view original article, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions