Fund Management

Goldman Sachs Eyes Crypto-Currency Trading Unit - IM Clients Could Be Offered Holdings

Josh O'Neill Assistant Editor October 3, 2017

Goldman Sachs Eyes Crypto-Currency Trading Unit - IM Clients Could Be Offered Holdings

Goldman Sachs could be the first blue chip Wall Street firm that is readying itself to deal directly in the growing but controversial market.

Clients of Goldman Sachs Investment Management could soon be offered crypto-currency holdings, should its parent group press ahead with plans to create a new trading operation dedicated to the controversial digital coins.

Goldman Sachs is weighing a new unit that would trade bitcoin and other crypto-currencies, according to media reports, in a move that would make it the first blue-chip Wall Street firm readying itself to deal directly in the growing but controversial market.

However, the plans are in early stages and may not proceed, according to media reports citing sources close to the process. Should plans be given the green light, though, the bank’s move could help drive up the price of bitcoin and other crypto-currencies and boost their standing among investors, giving merit to a market that is widely considered a haven for illicit activity. 

“In response to client interest in digital currencies, we are exploring how best to serve them in the space,” Tiffany Galvin, a US-based spokesperson for Goldman Sachs, told this publication. If launched, the new unit’s services could be extended to clients of Goldman Sachs’ other divisions, notably its investment management arm. The unit, comprised of Goldman Sachs Asset Management and Private Wealth Management, currently manages more than $1 trillion in assets and employs more than 700 investment professionals. 

News of the bank’s plans comes at a time when crypto-currencies continue to sit at the center of a heated debate. 

In recent weeks, the Chinese government has moved to ban domestic bitcoin exchanges and initial coin offerings (ICOs), a largely unregulated method of fundraising used by crypto start-ups to quickly generate capital to grow their businesses. JP Morgan chief executive Jamie Dimon, whose bank is the largest dealer in global currencies, last month touted bitcoin as a “fraud” that would likely “blow up”, and said he would fire any employee who traded it. 

Yet bitcoin and crypto-currencies have garnered the support of other countries and industry figureheads.

Japan, for example, has embraced bitcoin and recognizes it as a valid payment method, creating regulations to legitimize its trading. Switzerland is generally bullish on bitcoin, and certain towns and cities in the Alpine State allow their citizens to pay portions of their tax bills using the crypto-currency. Some countries have mused about creating their own crypto-currencies, as have banks in order to streamline and cut costs surrounding inter-bank payments. Many of the world’s big banks, governments and financial regulators have collaborated on projects studying blockchain, the technology underpinning crypto-currency transactions. 

Bitcoin was spawned in 2009 by an unidentified person or group operating under the pseudonym Satoshi Nakamoto. In the wake of the 2008 financial tsunami, so-called “cypherpunks” sought to create a decentralized payment system independent of distrusted central banks and free of regulatory burden.

While banks have generally steered clear of bitcoin, the crypto-currency has gained the support of some money managers, technology enthusiasts and speculators wooed by its price swings.

Its price has rocketed this year, from $969 per coin to as much as $5,000 at its peak. Ethereum, another crypto-currency, has traded as high as $400 after ending 2016 at $8. There are nearly $150 billion worth of crypto-currencies in circulation, with bitcoin accounting for over $73 billion of this. 

A saturated market
If its plans go ahead, Goldman Sachs would be entering what is undoubtedly a saturated market. 

The market for crypto-currencies is red-hot, and there are now said to be some 68 hedge funds offering investors exposure to the alternative asset class, albeit while likely levying high fees.

Autonomous NEXT, a fintech analytics firm, recently published a list of hedge funds targeting the space.

“Like wild mushrooms, crypto hedge funds have been taking root in the volatile and unregulated soil of the crypto economy,” the company said in a post on its website. 

However, many of the crypto-currency funds that have sprung up define themselves as hedge funds, but lack the infrastructure or level of experience to qualify as such, according to the Financial Times, as they have failed to attract sophisticated institutional investors or prove they are moving to hedge their long positions. 

Nonetheless, it is becoming increasingly difficult for banks to ignore crypto-currencies, given that around $750 million worth of bitcoin trades on exchanges daily. 

Numerous firms have filed applications to launch exchange-traded funds designed to track crypto-currencies or have derivatives linked to them, but they have so far faced pushback from regulators

Still, crypto-currencies are disrupting some traditional investment banking services.

While start-ups may have once relied on Wall Street’s services to take them public, many are bypassing investment banks through ICOs. A meld of crowdfunding and an initial public offering (IPO), ICOs involve the sale of digital tokens by blockchain start-ups looking to expand their business. But unlike a traditional IPO in which investors get shares, investors in ICOs are instead rewarded with mini crypto-currencies, the value of which is directly tied to the business' performance. This means the digital coins grow in value only if the start-up's operation or network proves viable, attracting more investors and driving up liquidity.

Criminal losses related to ICOs are at around $225 million this year, according to Chainalysis, a New York-based anti-money laundering software developer that analyses transactions. In phishing scams, investors are tricked into sending money to internet addresses that are a guise for funding sites for ICOs.

More than 30,000 people have fallen victim to ethereum-related cyber-crime since January, losing an average of $7,500 each, Chainalysis estimates

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