Goldman’s patent aims to integrate fractional banking with cryptocurrency DLT – Ledger Insights

In June, Goldman Sachs filed a patent application aimed at supporting fractional banking in the cryptocurrency world and on distributed ledgers (DLTs) in general.

In the patent preamble, Goldman states that in the cryptocurrency world, there is a one-to-one relationship between a token and its ownership. “This technical limitation of existing approaches makes it impractical to leverage many powerful financial technologies that involve leverage with such cryptocurrencies.”

Crypto’s fully secured lending

The patent talks about pools, but not the kind of liquidity pools known in the crypto world that act relatively conservatively.

For crypto lending protocols like Compound and Aave, when multiple users deposit their dollar stablecoins, the amount loaned by the protocol cannot exceed the total amount deposited for that token. This is the key difference from what Goldman is proposing.

Fractional banking crypto style

Goldman’s patent is about pools containing tokens where it is possible that claims on the tokens are greater than the amount in the pool. If you’re considering a bank rush, Goldman offers a smart, contract-based solution to such a rush.

For example, the smart contract would allow claims (or withdrawals of deposits) until the reserves remaining in the pool reach a fractional limit. At this point, you have more receivables than funds available in the pool. How the remaining depositors are repaid is governed by rules. They could all receive a fixed percentage of their debt, and there could be a separate deposit insurance pool that pays out up to a certain limit.

The patent does not only consider fractional banking. In the case of insurance, the premiums paid into a pool may not be sufficient to cover all claims. Some will be paid out via reinsurance, but if the claims exceed the pool’s value, the smart contract logic will make the decisions. That could mean that each person is paid 50% of the entitlement or something else. Other scenarios discussed include margin lending and multi-tranche securitisations.

In fact, Goldman Sachs was granted a patent on the subject back in March of this year. The last submission is a sequel.

In November last year, Goldman was granted another patent for tokenization. It describes a scenario in which various securities and fiat currencies are tokenized to enable atomic settlement. Notably, these are all referred to as different types of SETLcoins that have nothing to do with the SETL company.

A recent patent application by Goldman Sachs relates to “Know Your Customer” (KYC) and storing a unique identifier on a blockchain that corresponds to a verified off-chain identity.

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