What Goldman’s crypto trading plans mean for other banks
- If regulatory clarity is what’s holding back finance firms from participating in crypto asset markets, having firms like Goldman trying to clarify that should speed up regulators’ process of formalizing their views
- Regulatory clarity could lead to a significant acceleration in the size and growth of the overall crypto asset and token markets in the U.S. and abroad
No one wants to be the first to do something new, but everyone wants to be the second — a saying particularly true in an industry as heavily regulated as banking. But Goldman Sachs plans to open a bitcoin trading operation after months of speculation around it, blazing in some ways a regulatory trail for its peers.
Last week, the Wall Street giant hired its first crypto trader to help the bank figure out its crypto strategy, and this week, Goldman has confirmed the imminent launch of its long-rumored trading desk — the first operation of its kind at a Wall Street firm. It’s still figuring out how it can get regulatory approval to buy and sell bitcoins and deal with the risks associated with holding them — for now, it’s using its own money to trade with clients in various contracts linked to the price of bitcoin — so ultimately Goldman, and other big firms, will be able to offer crypto trading to clients.
The mainstream financial system has been incorporating cryptocurrencies into financial products accessible to everyday people for the past six months, beginning with the massive creation of hedge funds investing in cryptocurrencies, like CME Group offering bitcoin futures trading. Goldman’s launching bitcoin trading is just another bridge between institutional investors and the mainstream financial system. That momentum, though it’s building slowly, will continue.
“It’s part of a natural evolution of a new asset class,” said Ajit Tripathi, a partner at Consensys. “If we go far back enough in history, Wall Street’s role has been to formalize, standardize and scale the processes and technology for creating markets in just about every major asset class.”
If regulatory clarity is what’s (mostly) holding back finance firms from participating in crypto asset markets, having institutional investors and sell-side banks like Goldman inquiring on that should speed up regulators’ process of formalizing their views on different crypto assets and the rules and regulations that govern the conduct of market participants. (And based on CME’s bitcoin futures offering, there’s arguably already a lot of regulatory clarity already, Tripathi said.)
That will lead to a significant acceleration in the size and growth of the overall crypto asset and token markets in the U.S. and abroad.
“Goldman’s a leader and very well-respected. If it’s willing to dip its toes into these waters, I can definitely envision other big institutions doing that,” said Angela Walch, associate professor at St. Mary’s University School of Law and research fellow at the Centre for Blockchain Technologies at University College London.
Barclays in the U.K. recently said it’s also monitoring developments in the cryptocurrency space and gauging clients’ interest in the bank launching a crypto trading desk but that it has no concrete plans to do so.
Still, the leaders of most major financial institutions have repeatedly maintained their companies won’t touch cryptocurrencies, which is pretty good instinct since the technology is still so poorly understood and immature.
“It’s premature to be integrating [this tech] into financial products and for significant institutional investors moving to it, but it seems like we’re doing that nonetheless,” Walch said. “I’m curious about what Goldman’s and other banks’ plans would be for dealing with forks or splits of these assets. … I don’t think we’ve all gotten our heads around that.”
Once interest in crypto assets reaches a critical mass, however, many companies in the industry will feel the pressure to offer a similar service to their own clients or risk them wondering why they don’t and perhaps even losing business.
Tripathi said that following will grow sooner than later.
“Goldman have created entire markets in the past and their entry in crypto asset markets definitely marks a shift in the maturation of crypto asset markets,” he said.
But the formal institutional acceptance of the crypto asset class is just the beginning, he added. What’s perhaps most significant are the implications for capital markets infrastructure. Private, consortia-based distributed ledgers, like the Depository Trust & Clearing Corporation, can’t eliminate all the unnecessary intermediation in capital markets the way public blockchains — like the ones that back bitcoin and ethereum — can.
“The intellectual leap from Goldman trading bitcoin futures to the technology behind the tokens being used for representing asset ownership is not steep at all,” Tripathi said. “That’s where the real value is. The rest is just buying and selling.”