Goldman Sachs Hunting For Bargain Crypto Firms after FTX Debacle

Mathew McDermott, Goldman's head of digital assets, recently commented that, FTX's implosion has amplified the need for trustworthy, regulated cryptocurrency players, and big banks see an opportunity to pick up distressed businesses. 

This opportunity has led to decision at Goldman Sachs to spend tens of millions of dollars to buy or invest in crypto companies, after the collapse of the FTX exchange hit crypto startup valuations and lowered investor interest.

"We do see some really interesting opportunities, priced much more sensibly," McDermott said in an interview. He Continued to state, "It's definitely set the market back in terms of sentiment, there's absolutely no doubt of that. FTX was a poster child in many parts of the ecosystem. But to reiterate, the underlying technology continues to perform."

According to data site CoinMarketCap, the global cryptocurrency market had peaked in 2021, reaching around $2.9 Trillion. Since then, the crypto market has shed about $2 trillion this year as central banks tightened credit and a string of high-profile corporate failures hit. Currently, it stands circa $865 billion as for Dec 5th, 2022. As a distressed market, still having an addressable market close to a trillion, other firms also see an opportunity to capture market share. 

Financial institutions like BNY Mellon and Nasdaq are now providing crypto related services. Binance, an early investor in FTX and a competitor, has suggested buying banks to integrated traditional and non-traditional financial offering for customers. Both Visa and Mastercard have either made investments or crafted partnerships to support and provide crypto related offerings.

There still remain some skeptics, who are not fully onboard with crypto:

"I don't think it's a fad or going away, but I can't put an intrinsic value on it," Morgan Stanley CEO James Gorman said at the Reuters NEXT conference on Dec. 1.

HSBC CEO Noel Quinn, meanwhile, told a banking conference in London last week he has no plans to expand into crypto trading or investing for retail customers.

Even the CEO of Goldman has mixed feelings, David Solomon told CNBC, he views cryptocurrencies as "highly speculative", but he also sees potential in the underlying technology as its infrastructure becomes more formalized.

Goldman is doing due diligence on a number of different crypto firms, McDermott has suggested, but did not provide details. His team has grow to more than 70 people, including a seven-strong crypto options and derivatives trading desk. The firm is also building its own private distributed ledger technology, McDermott said.

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How Mastercard is Bringing Cryptocurrency Trading to Banks

How Mastercard is Bringing Cryptocurrency Trading to Banks

According to Mastercard Press release, the firm will bring crypto trading capabilities to banks. Mastercards' 2022 New Payment Index highlighted that 29% of respondents globally hold cryptocurrency as an investment and 65% indicating crypto-related services should be part 'n parcel of services provided by their financial institutions. Understanding there is demand, Mastercard has introduced Crypto Source, a program to enable financial institutions to bring secure crypto trading capabilities and services to their customers.

Ajay Bhalla, President, Cyber & Intelligence at Mastercard has stated, “At Mastercard, trust is our business. What we are announcing today is a connected approach to services that will help bring users safely and securely into the crypto ecosystem. Our recent investments in this space, such as the acquisition of CipherTrace and Ekata, are providing us with a unique set of capabilities to help provide our customers and consumers with the most technically advanced solutions available in the market,”.

How will Mastercard Accomplish this?

Mastercard has partnered with licensed and regulated crypto custody providers, to create an ecosystem that provides  a comprehensive suite of buy, hold and sell services for select crypto assets, augmented with proven identity, cyber, security and advisory services. In addition to Crypto Source, Mastercard will extended Crypto Secure, to ensure security to the crypto ecosystem and support card issuers in their compliance with complex regulations. 

More specifically, Mastercard will use Paxos crypto trading platform to let financial institutions offer cryptocurrency trading to their customers. Paxos will handle custody and trading, while MasterCard will handle regulatory compliance and security. Paxos offers similar services to PayPal, which launched crypto services in late 2020. The platform is known for providing blockchain infrastructure that allows other companies to offer crypto-related products and services

What Does the Offering Include?

The offerings to financial institutes will include:

• Technology and partnership support to enable buy, hold and sell of select crypto assets
• Security management including Mastercard’s identity solutions, crypto analytics, transaction monitoring, anti-money laundering, ‘Know Your Business’ and lifecycle stages, cybersecurity, and biometrics
• Crypto spend and cash out capabilities offered through a range of products, including crypto cards, open banking and cross border services. Financial institutions would also be able to offer additional functionality using Mastercard’s technology such as digital receipts and loyalty solutions
• Crypto program management including program design, product development and technology implementation, as well as go-to-market optimization and marketing consultancy services, providing end-to-end support for banks, fintechs and issuers to offer crypto programs at scale

The So What?

As the cryptocurrencies normalize in both value and maturity, so does the adoption by mainstream. Financial institutions and service providers will be remiss to not enter a market, where there demand. In the end, its about maintaining market share by aligning and providing services that customers expect from their providers.

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Digital Dollar Gains Momentum as Boston Fed and MIT Report Ability to Manage 1.7 Million transactions per second

 

The Federal reserve bank of Boston, in collaboration with Massachusetts Institute of Technology (MIT), have published a research paper that could serve as the foundation to create a government-backed crypto currency. This collaboration, referred to as Project Hamilton, focuses on technological experimentation that could lead to the creation of central bank digital currency, or CBDC. The whitepaper does highlight that this research is separate from the Federal Reserve's Board's evaluation of the pros and cons of a CBDC.

"It is critical to understand how emerging technologies could support a CBDC and what challenges remain," said Boston Fed Executive Vice President and Interim Chief Operating Officer Jim Cunha. "This collaboration between MIT and our technologists has created a scalable CBDC research model that allows us to learn more about these technologies and the choices that should be considered when designing a CBDC."

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Why technological experimentations, when crypto currencies already exist?

There are two main problems with existing crypto currencies (security is a different topic):

1. Power consumed to find the next unique hash
2. Settlement time to reach consensus, before the block is added to the chain

Consider the following, currently, the Bitcoin network is capable of handling just 7 transactions per second and Ether just 25, according to research by Shihab Hazari, a software developer and former researcher at Ontario Tech University. Solana blockchain can process an industry-leading 65,000 transactions per second (TPS). Since, its launch in March 2020, Solana has racked ~$50 billion in transactions and ~$10 billion worth of crypto, according to DeFi Llama.

Visa's CFO Vasant Prabhu recently told Barron's that, “True cryptos aren’t fast enough for purchase transactions,” he said. “The cost of doing a transaction using fiat currency on the Visa network is minuscule compared to the cost for Bitcoin and Ether.”

So how does Fed & MIT mitigate this lag?

The whitepaper points to a multi-phased project, released as open-source license for anyone to inspect, modify, and enhance the code at OpenCBDC. Phase-1 of the project is focused on developing software to process digital transactions. The results are quite promising.

The resulting code from Phase-1 is capable of handling 1.7 million TPS. Researchers also highlighted that majority of the transactions settled in under two seconds.  

To put this achievement in perspective, albeit theoretical, credit card payments in 2018 totaled $44.7 billion in the U.S. alone and credit cards can settle 5,000 TPS. 5K vs 1.7M TPS may be seem like a no brainer to expedite adoption; considerations have to be made on infrastructure, scale and security controls that credit cards have in place.  

That's what the second phase of the project will focus on i.e explore more complex capabilities and issues, such as cybersecurity and how to balance user privacy with the need for transparency to deter criminal activity. 

How will this impact existing Fiat currency and financial institutions?

Just like with every new technology shift, there are risks and opportunities.

“While central banks’ CBDC initiatives are not intended to disrupt the banking system, they will likely have unintended disruptive consequences,” Morgan Stanley’s Ahya said. “The more widely digital currencies are accepted, the more opportunity for innovation and the greater the scope for disruption to the financial system.”

Digital currencies may have major consequences for commercial banks, especially if users prefer to hold their currency in digital wallets provided by a firms like PayPal or Venmo. “This substitution effect could reduce the aggregate amount of deposits in the banking system,” the Fed report said.

On the other hand, digital currencies could be easier and less expensive to access for people without bank accounts. Furthermore, if the digital currency is backed by the Fed's, then unlike a bank or the companies issuing stable coins, they can't simply go out of business. This also opens the doors to a global economy, utilizing common digital assets.

For U.S in particular, there is also the ever looming threat from China. With the launch of a digital yuan, there are concerns that China could undermine the dollar’s status as the world’s reserve currency. A Bank of America report notes that issuing digital dollars would let the U.S. currency “remain highly competitive … relative to other currencies.”

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Crypto is becoming mainstream, are you ready for it?

Crypto currency is starting to become mainstream. Is that a controversial statement or possibly conjecture, maybe yes, albeit, there is increasing evidence to suggest the hypothesis holds true. Here are a few evidentiary statements:

AMC Movie Theater, starts accepting crypto as payment

Some universities will start accepting crypto in form of tuition

Mastercard will start allowing crypto as incentivization

SEC has approved an ETF (Exchange Traded Fund) linked to crypto future trading

Mayor of Miami wants to get paid in Bitcoin 

What does this all mean? 

Going back to the opening statements, this implies that a technology is starting to mature and becoming mainstream. 

For sake of clarity, Bitcoin is only one type of asset class in the crypto currency space. Blockchain is the technology that enables different crypto asset classes (e.g: Ethereum, Dogecoin). Blockchain in itself is not all the same. Some are completely secure and closed, others are public and while are some hybrid.

The so what of it then?

In business & technology cycle, there are usually innovators, early adopters, early majority, late majority and then laggards. Between early adopter and early majority, there is usually a chasm, crossing it, or lack thereof, can makes and/or breaks the business. This especially holds true for any technology. Due to this primary reason, early startups go for growth vs profitability.

What these few examples suggest is that crypto is now on its way to crossing the chasm into early majority. Furthermore, it's evident that crypto is not specific to an industry type, rather most, if not all segments/industries are starting to leverage this technology.

On top of aforementioned, decentralized finance (DeFi) will also leverage the technology and all the asset classes to ease day-to-day finance. As such, it's high time to make crypto, DeFi part of vernacular.

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