Capital markets News

Goldman Sachs talks digital assets, expects to see mergers

goldman sachs

It’s been widely reported that Goldman Sachs re-opened its crypto trading desk, which it first launched in 2018 following the 2017 cryptocurrency boom. Mathew McDermott heads the digital assets team at Goldman Sachs and in a podcast shared details about the trading desk, the digital asset demand, and the blockchain projects he oversees beyond cryptocurrencies.

“2017 was very much a retail-driven market,” said McDermott referencing the cryptocurrency boom. “This time around as mentioned, we’ve just seen a huge volume of institutional demand across the broad spectrum of different industry types,” said McDermott. He elaborated that it includes hedge funds, asset managers, macro funds, banks, corporate treasurers, insurance, and pension funds.

Corporate treasurers

Goldman is seeing exploratory interest from corporate treasurers. The rationale is the cost of negative interest rates on cash deposits and concerns around asset devaluation. And there’s also the example that Tesla set by putting Bitcoin on its balance sheet.

McDermott did not mention a couple of counter-balancing points, such as the recent decline in Tesla’s share price. A treasurer would have to hedge any exposure and balance the cost of derivatives with negative interest rates as well as the risks. 

Institutional interest

As we’ve heard elsewhere, McDermott confirmed the interest is primarily in Bitcoin. Following a survey of 300 institutional clients, he was surprised to find that more than 40% already had exposure to cryptocurrencies, whether via direct holdings, derivatives, or securities products. 61% expect to increase holdings during the next year.

The Goldman trading desk will focus on CME futures and non-deliverable forwards. Regulatory uncertainty means banks won’t trade actual coins, but that’s where the demand is from hedge funds and asset managers.

“So, that’s been something that we’ve had to think cleverly (about) how we can facilitate that demand in a different way,” said McDermott. “In Asia, for example, there are certain jurisdictions where that is permissible, where you can trade the physical. And we’re seeing certain banks look at developing institutional exchanges and other avenues to execute the physical with institutional clients.” One example is DBS Bank in Singapore.

Consolidation coming

McDermott noted the progress made by ‘crypto incumbents’ over the last two years in terms of improved custody and risk management. Now that banks are developing their own offerings, “I certainly anticipate a certain amount of consolidation across that space,” said McDermott. We’d note the recent rumor that PayPal is looking to acquire Israeli custody solution Curv.

Apart from cryptocurrencies, Goldman is involved in a variety of blockchain projects. “This (blockchain) represents a real diverse set of opportunities for the financial industry and something that there’s a huge amount of momentum in the market,” said McDermott.

Three examples of projects where Goldman is a participant are Axoni’s DLT equity swap platform, the HQLAX collateral management solution, and the CLSNet FX blockchain solution for less mainstream currencies.

McDermott described it as a “hugely exciting time exploring the potential of that technology.”