Goldman Sachs is planning to launch a new cryptocurrency market on Wall Street by offering Bitcoin futures contracts, a move that could strengthen institutional adoption of digital assets.
In a step that is likely to lend legitimacy to virtual currencies the bank is about to begin using its own money to trade with clients in a variety of contracts linked to the price of Bitcoin, The New York Times reports.
Goldman Sachs has been rumored to have been planning to set up a cryptocurrency trading desk since last December, but executives and spokespeople claimed that those reports were false. As recently as April 23 — when the bank hired cryptocurrency trader Justin Schmidt — the bank claimed that it had “not reached a conclusion on the scope of our digital asset offering.”
Rana Yared, one of the Goldman executives overseeing the creation of the trading operation, said the bank was cleareyed about what it was getting itself into.
“I would not describe myself as a true believer who wakes up thinking Bitcoin will take over the world,” Ms. Yared said. “For almost every person involved, there has been personal skepticism brought to the table.”
Until now, regulated financial institutions have steered clear of Bitcoin, with some going so far as to shut down the accounts of customers who traded Bitcoin. Jamie Dimon, the chief executive of JPMorgan Chase, famously called it a fraud, and many other bank chief executives have said Bitcoin is nothing more than a speculative bubble.
Ms. Yared said Goldman had concluded that Bitcoin is not a fraud and does not have the characteristics of a currency. But a number of clients wanted to hold it as a valuable commodity, similar to gold, given Bitcoin’s limited supply.
“It resonates with us when a client says, ‘I want to hold Bitcoin or Bitcoin futures because I think it is an alternate store of value,” she said.
According to Ms. Yared, the bank had received inquiries from hedge funds, as well as endowments and foundations that received virtual currency donations from newly minted Bitcoin millionaires and didn’t know how to handle them. The ultimate decision to begin trading Bitcoin contracts went through Goldman’s board of directors.
Since the beginning of the year, the price of Bitcoin has plunged — and recovered significantly — as traders have faced uncertainty about how regulators will deal with virtual currencies.
“It is not a new risk that we don’t understand,” Ms. Yared said. “It is just a heightened risk that we need to be extra aware of here.”
Goldman has already been doing more than most banks in the area, clearing trades for customers who want to buy and sell Bitcoin futures on the Chicago Mercantile Exchange and the Chicago Board Options Exchange.
In the next few weeks — the exact start date has not been set — Goldman will begin using its own money to trade Bitcoin futures contracts on behalf of clients. It will also create its own, more flexible version of a future, known as a non-deliverable forward, which it will offer to clients.
A recent report from Denmark’s Saxo Bank suggested that the cryptocurrency rally could be just getting started.
“The steep losses have driven industry consolidation. The rush to market was badly timed and a number of crypto asset hedge funds, exchanges, and ICOs have shut down already,” according to Jacob Pouncey, who authored a section on cryptocurrency that appeared last month in Saxo’s quarterly report.
Goldman Sachs’ first “digital asset” trader, Justin Schmidt, joined the bank two weeks ago to handle the day-to-day operations. In his last job, Mr. Schmidt, 38, was an electronic trader at the hedge fund Seven Eight Capital. In 2017, he left that job to trade virtual currencies on his own.
He will initially be placed on Goldman’s foreign currency desk because Bitcoin trading has the most similarity to movements in emerging market currencies, Ms. Yared said.
Notably, Mr. Schmidt is looking at trading actual Bitcoin if the bank can secure regulatory approval from the Federal Reserve and New York authorities.
The firm also has to find a way to confidently hold Bitcoin for customers without its being stolen by hackers, as has happened to many Bitcoin exchanges. Mr. Schmidt and Ms. Yared said the current options for holding Bitcoin for clients did not yet meet Wall Street standards.