The investment bank Goldman Sachs has started attracting a limited number of clients for trading in Bitcoin-based derivatives. According to The Block, this is a non-deliverable forward contract (NDF) for Bitcoin, which will be settled in fiat currency. This tool is similar to existing futures contracts for cryptocurrencies from the CBOE and CME trading platforms. A Bitcoin NDF, however, will not be traded on the stock exchange. Let’s understand what the significance of this tool is for the cryptocurrency market and how a financial conglomerate contributes to the adoption of digital assets at the institutional level.
Rumors that one of the largest investment banks was considering the possibility of launching cryptocurrency instruments outside of futures contracts and contracts for difference (CFD) appeared at the end of 2017. In December of last year, Bloomberg published information about the upcoming launch of a special unit of Goldman Sachs for trading and investing in cryptocurrencies. As a spokesman of the bank, Michael DuVally, noted: “In response to client interest in digital currencies, we are exploring how best to serve them.”
Presumably, the new division was supposed to start work at the end of June of this year and provide the bank’s clientele with access to operations with cryptocurrencies. In May, this information was also confirmed by The New York Times, which reported that cryptocurrency trader Justin Schmidt, who had previously worked with such trading companies as Seven Eight Capital and WorldQuant, was appointed to handle the day-to-day operations. Moreover, in an interview with the American news giant, one of the leaders of the bank Rana Yared stressed that analysts at Goldman Sachs had concluded that although Bitcoin was not a bubble, it did not have currency features. According to Yared, many investors want to keep Bitcoin as a valuable commodity like gold: “It resonates with us when a client says, ‘I want to hold Bitcoin or Bitcoin futures because I think it is an alternate store of value.’”
Yared also noted that among Goldman Sachs’ clients interested in the bank’s stance on Bitcoin are hedge funds and charitable organizations that receive donations in cryptocurrencies.
To fully launch the cryptocurrency division, Goldman Sachs must obtain permission from the New York State financial regulators. Due to the lack of regulatory certainty on this issue, the financial conglomerate was forced to abandon the formation of a new structure. According to Business Insider citing sources close to Goldman Sachs, the investment bank was counting on specific regulatory changes that did not happen, and therefore the bank’s management decided to postpone the launch of the unit for an indefinite period. “The bank’s management has come to the conclusion that the bank has yet to take a lot of steps before it gets permission to trade cryptocurrencies, and many issues are beyond the capabilities and power of a financial institution,” one source said.
But despite the regulatory obstacles, the financial conglomerate continues to consider possible options for working with the world’s first cryptocurrency. At the moment, Goldman Sachs is engaged in attracting a limited number of customers interested in Bitcoin derivatives. The Block journalists were the first to report this, citing a source in Goldman Sachs. According to journalists, in the near future, the bank will start offering non-deliverable Bitcoin forwards, which are a “flexible version of the futures,” to its customers. The product developed by the bank will provide the bank’s customers with the opportunity to receive income from a Bitcoin exchange rate equal to the value on the CME and CBOE exchanges. At the same time, the product itself will not be traded on the exchanges. Goldman Sachs also plans to create a custody service for cold storage of cryptocurrencies.
Institutional Adoption of Cryptocurrencies
The entry into the market of professional investors will be the next step in the development of the crypto industry. This opinion is shared by a crypto trader and BKCM cryptocurrency hedge fund manager Brian Kelly, who is confident that the acceptance of Bitcoin by such big Wall Street players as Goldman Sachs and ICE will lead to the rapid growth of the digital assets industry.
In May of this year, the financial corporation Intercontinental Exchange (ICE), which owns the New York Stock Exchange (NYSE), announced its plans to launch a cryptocurrency trading platform Bakkt. The trading platform is focused on large investors, and the first product offered will be Bitcoin futures contracts with a physical asset supply. Each futures contract provides for the delivery of one Bitcoin, located in the storage of digital assets of the exchange. The division of the exchange, ICE Clear US will deal with clearing, and giants such as Microsoft, BCG, and Starbucks are already noted among the platform partners. The official launch of the exchange is scheduled for December 12 of this year.
“Investors will get physical delivery of Bitcoin. That doesn’t sound that interesting except for the fact that it means ICE Exchange has a custody solution. That has been the big hurdle. How do you hold onto these assets? These are generally bearer instruments, just like gold bearer bonds. That’s a big deal. They have come up with a custody solution for institutional holders,” as Brian Kelly stressed.
The development of a cryptocurrency storage solution symbolizes the beginning of a new era for cryptocurrencies, which is becoming a new asset class. As Kelly noted, the growth of this segment will attract multi-billion-dollar pension funds and large institutional investors to crypto banks: “Finally, it opens the door for pensions and endowments. Up to this point, it has been challenging for them to get comfortable compliance wise in holding cryptocurrency. If ICE has a custodian solution that is SEC-compliant, that’s going to open the floodgates.”
While the crypto market waits for the launch of Bakkt, market players can use Bitcoin futures contracts offered by the two largest Chicago-based exchanges, CME and CBOE. In addition, each of the platforms indicated their intentions to develop products based on cryptocurrencies. At the end of August, CBOE announced plans to launch futures on Ether. Since May, the CME has been offering its customers new Ether-linked benchmark and index, which are Ether Reference Rate and Ether Real-Time Index, respectively.