Chicago Mercantile Exchange files patent to enable physical delivery of Bitcoin derivatives contracts

The United States Patent and Trademark Office (USPTO) published a Bitcoin-related patent application last week. The application was filed by the Chicago Mercantile Exchange (CME) and describes a physical settlement system for digital currency derivative contracts, including Bitcoin.

CME's patent application

CME is a financial and futures derivatives exchange located in Chicago, USA. Currently, it is the world's largest exchange for options and futures contracts.

The company filed a patent application titled "Virtual Currency Physical Delivery System" with the USPTO on November 4, 2015, and the agency made the application public on May 4.

The application was filed by Ryan Pierce, Sandra Ro and Mansoor Ahmed.

CME said:

This system is used for clearing derivatives contracts based on virtual currencies, particularly in physical delivery systems where the clearing party (i.e. the exchange) does not directly hold the virtual currency.

CME explained that the derivatives contracts mentioned above include common futures and options contracts. In addition, the company also said that the "virtual currencies involved in this system include Bitcoin", but did not mention other cryptocurrencies.

Last month, the USPTO also published another Bitcoin patent application filed by CME. This application, "Derivatives contract settlement based on virtual currency difficulty coefficient or virtual currency yield index," was first filed in October 2015 but was not officially published until April of this year.

Liquidation Challenges Brought by Bitcoin

In the application, CME mentioned the need to build new systems and methods for trading digital currencies such as Bitcoin, and pointed out that such assets "can be transferred anonymously."

The company explained that "some futures contracts are settled 'physically'", with the relevant trading parties delivering specific goods during the final settlement process.

CME added:

After the contract expires, the clearing party can make physical delivery of the virtual currency contract by requiring the seller to transfer the virtual currency directly to it, and then the clearing party can transfer this part of the virtual currency to the buyer.

However, CME mentioned that digital currency transactions are irreversible without the consent of the recipient, so "computer security vulnerabilities or fraudulent intentions of internal employees" will lead to permanent loss of such assets. In addition, "liquidators holding virtual currencies for derivative contract settlement may also become targets of thieves", and storing such currencies carries certain risks and requires special security processes. The company believes:

Virtual currencies such as Bitcoin present challenges for liquidators.

After listing so many risk factors, CME is convinced that "it is necessary to improve the clearing system and method for virtual currency derivative contracts while ensuring that the risk to the clearing party is minimized." The patent application states:

Such systems and methods must allow the clearing party to confirm that physical delivery of virtual currency has been completed without the clearing party taking possession of the virtual currency.