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Goldman Sachs wants to put FX trades on the blockchain

WHY THIS MATTERS IN BRIEF

Using a blockchain will allow Goldman to settle FX trades in real time, without the need for expensive intermediaries and without compromising compliance, integrity or security.

 

Trading currencies is costly and slow for traders at major financial institutions – transactions need to go through a bunch of middle men, each of which take a slight fee. Now a new patent application from Goldman Sachs hints at how the blockchain technology behind Bitcoin could revolutionize that process.

 

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The patent application, published by the US Patent and Trademark Office (USPTO) was originally filed in March 2015. It outlines a distributed ledger – essentially an accounting ledger shared by a number of different parties, also known as a blockchain – that can process financial transactions in the Foreign Exchange (FOREX) market. It’s Goldman Sachs’ first blockchain related patent.

The $5.1 Trillion a day FOREX markets are risky – a party sends their funds to an intermediary, like the CLS Group, a foreign exchange settlement service, who hold onto the first party’s funds while they’re waiting on the counterparty on the trade to provide their funds. The problem? The first party’s capital gets tied up in that specific trade until it’s settled, which can take up to a day or two. That makes trading in FOREX markets a slow process, then add into that the fact that you can only trade 24*5 rather than 24*7 and it gets even slower. The hope is that blockchain could provide real time transactions to speed up the FOREX market.

Banks have been experimenting with blockchain technology to make transactions faster and cheaper for the past year or so, but most projects are still nascent. There are some fairly robust systems, like Bitcoin and Ripple, a blockchain startup; Bitcoin processes over 180,000 transactions a day, and banks like UBS and Santander have been partnering with Ripple. But those systems have their drawbacks, according to the Goldman patent filing, especially in the highly regulated industry of financial services.

 

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“These systems suffer from significant disadvantages in terms of privacy,” according to the patent, because anyone can see any transactions made on the Bitcoin blockchain.

If a bank blockchain was fully transparent, it would allow competitors to place opposing trades against a certain transaction and greatly reduce the competitive nature of foreign exchange trading. Bitcoin and Ripple also “lack designed-in identity checks that aid regulators with policing anti-money laundering,” the patent says.

Essentially, Goldman wants to merge the benefits of blockchains speed and efficiency with other technologies that offer privacy, security, and compliance with regulatory guidelines. For example, Goldman’s version of the blockchain would allow for private transactions only visible on a need to know basis; permit regulators to access the database; and adhere to Anti Money Laundering (AML) regulation and Know Your Customer (KYC) laws, which require that banks confirm the identity of their customers.

 

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As blockchain technology begin to permeate Wall Street, banks have begun collecting intellectual property over its potential uses. Bank of America has been filing for patents for quite some time and now has approximately 50 blockchain related patents in its pipeline, but of course, just because companies file for patents doesn’t necessarily mean they’re using them now or in the future – and the USPTO can still deny any of these applications.

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Comments (4)

[…] Goldman’s new consumer lending platform, Marcus, a debt consolidation and advice platform that’s run entirely by software, with no human intervention, and more recently Goldman has filed patents to put – and automate – FX trading on the blockchain. […]

[…] entire US military, all the way through to tuna and pigs, Universal Basic Income (UBI) programs and foreign exchange […]

[…] Goldman using Artificial Intelligence (AI) to replace its elite traders or trying to move FX trading to the Blockchain, JP Morgan Chase using it to automate its legal work, Bridgewater Associates using it to automate […]

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