The news that investment bank Goldman Sachs is set to partner with leading cryptocurrency exchange Coinbase is a milestone in the cryptocurrency’s journey from fringe financial standing to finding credibility with institutional investors. Acceptance from financial giants like Goldman Sachs was a pipe dream. Does this now make the ultimate goal of wholesale institutional investment in crypto feasible?
Coinbase has partnered with Goldman Sachs on the bank’s first Bitcoin-backed loan, according to multiple reports. “Coinbase’s work with Goldman is a first step in recognizing cryptocurrencies as collateral, which deepens the bridge between the crypto and crypto economies,” Brett Tiebull, President of the Coinbase Institutional, told Bloomberg in an email response.
The idea of a bridge between the crypto and crypto economies raises the question of how the two will coexist in the long run. Paris wholesale cryptocurrency investor platform SheeldMarket gives institutional investors direct access to digital assets. The company’s president and founder, Oliver Yates, says that while Goldman’s acceptance of cryptocurrencies as collateral for a loan is significant, it is not a crypto product that exists on the blockchain. However, what it may indicate is a first step towards a scenario in which institutional investors trade financial products in cryptocurrencies on a parallel decentralized global financial infrastructure.
“In ten years or so, most of the current financial infrastructure in banks and stock exchanges for brokers and lenders will no longer exist,” says Yates. “Instead, it will be a single common operating system, which we currently call decentralized finance.”
Cryptographic proponents believe that this system will be cheaper and more efficient to operate. “We’re looking to wholesale $1 billion worth of cryptocurrency while saving every little cent along the way,” says Yates. While retail trading and services in the crypto space have proliferated in the past few years, institutional investment may be the next frontier – provided the infrastructure is in place. “The ultimate goal goes far beyond buying bitcoin with dollars,” adds Yates.
The mainstream acceptance of cryptocurrencies brings regulatory problems
The acceptance of cryptocurrencies with institutional investors is gaining rapid progress. Several banks have opened crypto offices, according to GlobalData analyst George Monaghan. “It shows their willingness to entrust their own money to cryptocurrencies, as well as to other people,” he says. “It definitely boosts mainstream Bitcoin acceptance at least.” In fact, Goldman first started offering Bitcoin derivatives to investors in 2021 and made the first over-the-counter crypto trading with digital asset financial firm Galaxy Digital in March 2022.
However, the problem of how to organize such a system would be a major stumbling block, according to Monaghan. “It’s the regulators’ nightmare,” he says. Policy makers around the world are scrambling to fill the regulatory void in the crypto market, and regulatory risks may be the barrier to any meaningful participation by institutional investors in the cryptocurrency industry.
Regulatory clarity is critical to building a business, according to Carolyn Malcolm, head of international policy at crypto consultancy Chainalysis. “This is especially true for well-established traditional finance companies, because in a sense they have more to lose than exposing themselves to operational and regulatory risks by moving to crypto,” she adds.
It is important to note that the loan transaction between Goldman and Coinbase is regulated so that a third party holds collateral for bitcoin, according to reports. This means that in the event of a loan default, Goldman will have no direct dealings with Bitcoin collateral and therefore will not assume any regulatory risk. It remains to be seen whether regulators will see it that way in the long term.
Crypto pessimists will be watching closely to see how far Goldman and other institutional investors go after dipping their feet in crypto waters, just as regulators will scratch their heads at the regulatory complexity of creating a new framework of rules for what is essentially a new and hitherto completely separate global financial system.