Goldman Sachs anticipates surge in blockchain asset trading

Goldman Sachs, a Wall Street powerhouse, foresees a "significant uptick" in trading volumes of blockchain-based assets within the next one or two years, according to Mathew McDermott, the bank's global head of digital assets.

McDermott highlighted the increasing client interest in crypto derivatives trading, attributing it to market expectations of the U.S. securities regulator approving a spot bitcoin ETF application soon. Bitcoin's remarkable 50 per cent surge this quarter has captured institutional attention, with hedge funds and asset managers exploring opportunities.

However, McDermott emphasised the bank's commitment to expanding digital assets beyond cryptocurrency. He discussed the issuance of blockchain-based tokens representing traditional assets like bonds, noting a "huge appetite" for digital assets that has grown significantly in the past 12 months.

While banks have eyed blockchain for trading non-cryptocurrency assets, a large-scale implementation would necessitate a substantial overhaul of financial market technology infrastructure. McDermott pointed out potential benefits, including operational and settlement efficiencies and the "de-risking" of financial markets, through the use of blockchain.

Blockchain technology could expedite collateral and liquidity transfers between parties, enhancing precision. McDermott acknowledged the challenges, referencing Australia's stock exchange, which paused a seven-year project to rebuild its software platform around blockchain.

Despite various pilot projects for blockchain-based versions of assets like bonds, routine issuance or a liquid secondary market is yet to materialise. McDermott predicted a significant increase in on-chain quantum trading within the next one to two years, with marketplaces reaching scale in three to five years.

However, he cautioned that replicating the majority of financial markets exclusively on blockchain remains a distant prospect. A survey of Goldman Sachs' clients in September revealed that 16 per cent expect more than 10 per cent of the financial market to be "tokenised" in the next three to five years.

Goldman, operating a team within its FX desk for cryptocurrency derivatives trading, observes growing interest as the market anticipates the potential approval of a bitcoin ETF. McDermott doesn't anticipate an immediate spike in liquidity and price but believes it could attract new institutional investors to the asset class, offering positive prospects for transacting familiar products at scale.

(With Reuters inputs.)