Goldman Sachs to Offer Bitcoin to Wall Street, but Not Really
Goldman Sachs makes it possible for its high-net worth clients to dabble into crypto trading, without owning any actual digital assets. This way, they can both bet on Bitcoin’s performance while not committing to an asset that might be besieged by regulatory bodies.
Bitcoin’s Performance Makes a Mockery of Ex Goldman Sachs CEO
At the beginning of the year, the ex-CEO of Goldman Sachs, Lloyd Blankfein, was very concerned that Bitcoin would come under siege by regulatory authorities. When he issued this warning, Bitcoin was at about $37k. Interestingly, he also noted that Bitcoin serves as a poor store of value because of wild price swings.
Goldman Sachs’ ex-CEO Lloyd Blankfein told CNBC:
“the store of value element a little bit tough.”
In the meantime, Bitcoin’s value rose by 54% since that statement. All the while, a more traditional store of value—gold—remained effectively flat.
However, some argue the government would like to de-platform those forms of value not directly tied to their money supply issuance as a form of monetary control. After all, gold itself had been previously banned via the Executive Order 6102, which lasted for 40 years. Reflecting this intent, central bankers, both former and current, try to tie cryptocurrency to illicit dealings and money laundering, contrary to all evidence.
By the same token, it is becoming increasingly difficult to resist Bitcoin’s performance. The banking sector has come under such pressure that hundreds of smaller US banks are to integrate Bitcoin into their regular services by the end of the year. Likewise, many hedge funds and Wall Street heavy-weights have too invested in Bitcoin, for better or worse.
Goldman Sachs CEO Changes Crypto Tune
The current Goldman Sachs CEO, David Solomon, first came into public spotlight when he instituted racial quotas as a prerequisite for his investment bank to offer service to businesses.
However, Solomon seems to be more equitable when it comes to crypto integration. In April, the Goldman Sachs CEO announced that his bank is taking a new approach to crypto assets, taking a departure from his predecessor.
Solomon told CNBC that the firm is focusing on ways they can support their clients:
Following through on that announcement, as of May 6, 2021, Goldman Sachs issued an internal memo, obtained by CNBC, to commence cryptocurrency trading from their centralized desk. The desk is a part of the bank’s Global Currencies and Emerging Markets (GCEM), headed by Rajesh Venkataramani.
Goldman Sachs Crypto Trading as a Simulation of the Real Thing
While this latest crypto incursion into the world’s largest banks seems like a victory portending crypto inevitability, it bears keeping in mind that Sachs’ approach departs from regular crypto trading in key ways. Specifically, Bitcoin (BTC) will be traded in the form of NDFs and CME BTC futures, both cash-settled derivatives, instead of a physical basis:
“Please note, the firm is not in a position to trade bitcoin, or any cryptocurrency (including Ethereum) on a physical basis.”
NDFs are non-deliverable forward contracts, traded privately over-the-counter (OTC), as a forex exchange contract. As such, they bind trading parties on a settlement between the NDF rate and the leading spot rate. The latter is the price quoted for settlement.
NDFs are also commonly known as FCDs – forward contracts for difference. NDFs are settled in cash and used as a tool to mitigate exchange rate volatility. In practice, NDF for Bitcoin would work as follows:
- A client instructs the OTC to commit a trade with a BTC/USD pair.
- OTC delivers an NDF to which the client then agrees, setting the settlement date and fixing date (the date when the differential between the leading spot rate and agreed rate is finalized).
- With the fixing date set, the BTC rate is then checked against the agreed-upon rate in the NDF contract.
- If the rate has gone up, the settlement is paid out in cash.
Put simple, this is quite similar to gambling. A client bets on Bitcoin’s price move, and if correct, Goldman Sachs deposits cash as settlement. When it comes to CME BTC futures, CME simply refers to the Chicago Mercantile Exchange for trading options and futures, serving as a rate reference.
In other words, Goldman Sachs’ crypto trading should not be viewed as such since there are no private keys involved – which would denote true ownership of crypto assets. Instead, the bank’s clients simply use the bank as a mediator to bet on Bitcoin’s upward trajectory without themselves getting involved with the possession of crypto assets.
Many people are still reluctant to dive into the crypto space. Do you think this circumspect way of crypto trading would be appealing to them? Let us know in the comments below.