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Chase Alumni News Article on GoldMoney

Eliminating 'Herstatt Risk'

Chase Alumni News
30 November 2001
by James Turk
Copyright © 2001

Many Chase alumni will no doubt remember the collapse of Herstatt Bank in June 1974. At that time I was managing the commercial loan portfolio of Chase's Bangkok, Thailand branch.

I was shocked by the global repercussions from Herstatt's failure and wondered why the banking system was so vulnerable. Not knowing the answer, I decided to study what had happened.

I soon realized that Herstatt's collapse rippled globally throughout the international banking system for good reason. It severely undermined the fundamental building block of commerce - the integrity of the payment system. A chain is only as strong as its weakest link, and bank payment systems are integrally linked to one another through necessary clearing and settlement processes that enable bank liabilities to circulate as currency. Nevertheless, it seemed unthinkable that the failure of a medium- sized West German bank could wreak such devastation worldwide. So I decided to see whether I could develop a solution to eliminate the problem that came to be known as 'Herstatt risk'. It took 4½ years of reading and studying in my spare time, but in February 1979 I had an idea.

This idea required a basic change in the nature of what was being used for money, and there were two elements to it. First, some tangible, physical asset would need to be used as money. The unit by which this physical asset was measured - in other words, a certain, recognized quantity like grams of gold - would provide the basic unit of account. Second, to be effective as money this asset would need to circulate efficiently as currency, which I envisioned could be done electronically by instantaneously transferring the ownership of that asset even while the asset itself remained in safekeeping.

In other words, I envisioned a type of 'electronic currency'. Herstatt risk was eliminated when making payments with this currency because it transferred ownership of an asset - the grams of gold in the vault - rather than transferring one bank's liability to another bank, which is the cause of Herstatt risk.

Though my idea was useful because it made possible payments without Herstatt risk, I did not think back in 1979 that I would ever make use of it. At a time when PC's were still a hobby and transatlantic telephone calls were outrageously expensive, it didn't seem the technology to make it feasible would happen in my lifetime.

But by the late 1980's it was becoming apparent that within a matter of years technological developments would indeed make my idea possible. I therefore began studying how to develop and protect this intellectual property. I filed the first patent application in February 1993, but even then the Internet and ecommerce were more a vision than a reality. Nevertheless, that patent was awarded in 1997 with a second patent to follow in 1999. By then I had established a company and chosen a name, GoldMoney.

The patents were granted because we advanced what in patent law is called the prior art. In other words, we created a new and better currency - better because we eliminated Herstatt risk.

Over the years banks have been able to lessen Herstatt risk, but they will never be able to eliminate it. The reason of course is that the dollar and every other national currency is a liability of some financial institution, which is the reason that Herstatt risk exists.

GoldMoney is fundamentally different. GoldGrams, the unit of account of GoldMoney, are an asset-currency, not a liability-currency. This difference is as great as night and day, or perhaps more to the point, between gold coins and paper money. GoldGrams are the electronic equivalent of gold coins, and GoldGrams circulate more efficiently than national currency. People anywhere in the world can use GoldMoney to make instantaneous, non-repudiable payments 24 hours per day, 7 days a week, and we charge less than 50¢ per payment.

Ever pay $50 for a bank wire transfer and then have it get lost for two weeks? That can't happen with GoldMoney, which is more efficient than anything the banks have to offer.

While banks can use today's technology to make clearing and settlement more efficient, this process itself is outdated, which is not surprising. Bank settlement and clearing systems have their origin in the 18th century, and are exceptionally cumbersome with cross-border payments. Efforts today to make clearing and settlement more efficient ignore the basic fact that the clearing process itself is not workable in ecommerce, which requires instantaneous, 24/7 payments that are non-repudiable, namely, the result GoldMoney achieves.

I invite all Chase alumni to visit our site, www.goldmoney.com. With alumni living throughout the world, might GoldGrams someday become the common currency for paying dues to our global organization? I welcome all questions and comments.

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James Turk joined Chase in 1969 and worked in the International Department until resigning in 1980. He is Managing Director of GoldMoney.com, a company he founded to operate a digital gold currency payment system based on two US patents awarded to him.

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