CME’s New Patent Application
CME is an American financial and commodity derivative exchange based in Chicago. Today, it is the world’s largest options and futures contracts exchange, based on the number of contracts outstanding.
The company filed a patent application titled “System for Physically Delivering Virtual Currencies” with the USPTO on November 4, 2015. It was then published on the agency’s website on May 4.
The inventors listed on this patent application are Ryan Pierce, Sandra Ro, and Mansoor Ahmed. According to CME:
The present invention relates to systems for clearing derivative contracts based on virtual currencies and, in particular to systems that allow for the physical delivery of virtual currencies without the clearing counter-party directly possessing the virtual currencies.
The aforementioned derivative contracts include common futures and options contracts, CME details. In addition, the company specifies that “the virtual currency comprises bitcoin” without naming other cryptocurrencies.
Last month, the USPTO published another Bitcoin-related patent application by the company. The patent for “Derivative Contracts that Settle Based on a Virtual Currency Difficulty Factor or an Index of Virtual Currency Generation Yield” was filed in October 2015 but published in April this year.
Bitcoin Poses a Clearing Challenge
In its patent filing, CME claims the needs for new systems and methods for transactions involving digital currencies including bitcoin, citing that these assets “can be transferred pseudonymously”.
“Some types of futures contracts are ‘physically’ settled” where the actual commodity is delivered by the relevant counter-party at final settlement, the company explains, adding that:
A clearing counter-party could facilitate physical delivery of virtual currency contracts by instructing the sellers of expiring contracts to transfer the virtual currencies directly to the clearing counter-party, and the clearing counter-party would then transfer the virtual currencies to the buyers.
However, digital currency transactions “cannot be reversed without the consent of the recipient,” CME wrote, noting that “computer security breaches or employee dishonesty” could result in permanent loss of these assets. Furthermore, holding them “for settlement of derivatives contracts at a clearing counter-party presents a tempting target for thieves” and storing them also carries unique risks requiring specialized security procedures. The company believes:
Virtual currencies, such as bitcoin, create challenges for clearing counter-parties.
After outlining many risk factors, CME asserts that “there is a need in the art for improved systems and methods for clearing derivative contracts based on virtual currencies while minimizing risks to clearing counter-parties.” The patent describes “systems and methods that allow a clearing counter party to confirm that virtual currency has been physically delivered without taking possession of the virtual currency,” the company details.