“silver-colored glitters” by abigail low on Unsplash

Not quite yet the world’s money

If bitcoin takes over, the actions of one bank won’t matter much

Mark Rogowsky
Sep 5, 2018 · 5 min read

Someday, the global economy might run on bitcoin, with hundreds of billions worth of commerce flowing through the cryptocurrency each day. When that happens, the theory goes, people will no longer be “bound by the shackles of banks or taxes but … emancipated … with new or revitalized dreams and hopes of a brighter, more independent future.” (Source: Knut Svanholm) Today, however, is not that day.

Early this morning Business Insider broke the news that banking giant Goldman Sachs has indefinitely shelved planned to create a crypto trading desk. The report sites unresolved regulatory issues as the reason for the delay, but what happened next illustrates the gap between “Bitcoin 2018: the speculative bet” and “Bitcoin Future — the one currency to rule them all.”

80 minutes of hell: Goldman’s decision not to trade crypto led bitcoin off a mini-cliff (Source: Coinmarketcap)

Over the 80 minutes after the article was published, bitcoin prices tumbled against the US dollar, falling more than 4% before ultimately bottoming out below $7,000 per BTC. That’s $7 billion erased from the value of all bitcoin in circulation before most folks had a chance to enjoy their morning coffee.


Murad Mahmudov tweeted this image out in July, note the green dots just above the “we are here”

Which brings us back to that future. If the bet on bitcoin is even partly correct, in a few years everyone will be trading and using it. Imagine, though, that for some reason in 2027, Deutsche Bank announced it no longer would trade bitcoin against “legacy currencies” like the euro, dollar, and yuan. The relative value of bitcoin that hypothetical day would likely change scarcely at all. If anything, it’s possible a future reason to stop trading bitcoin against euro or dollars could be that BTC has won and therefore the utility of fiat currencies declined, with investor interest in them falling commensurately. (You could speculate BTC value would go up in this “no more euro trading” event, though the idea of it rising 4% in minutes is pretty unlikely.)

Today’s news, however, was bearish — at least for the moment. If the BI story is indeed correct, regulatory uncertainty led to this decision — not some belief at Goldman that the time for crypto trading isn’t ripe. And that leads us to the other side of the coin (sorry!), which is for Goldman this pragmatism is allegedly based on prioritization.

The project the bank is focusing on? One Bloomberg reported on just a month ago: Goldman wants to provide a custody offering for cryptocurrencies. And the reason why this matters gets to the heart of how assets are normally bought and sold by big investors like pensions funds, hedge funds, et al. Without a custodian to ensure the safety of those assets, it’s often impossible for institutional investors to participate. The partly anonymous, hard-to-trace nature of crypto makes it hard to safeguard and has led to a number of high-profile hacks.

Goldman is hardly alone in seeking to provide custodianship for crypto assets. Startups like Circle and Coinbase, along with experienced custody providers like BNY Mellon, are all trying to get in the game. They’re planning to blend insurance (for peace of mind) with cold storage (to put tokens out of the reach of hackers), all while navigating the regulatory thicket that provides the security institutions require.

With a brand like Goldman Sachs’, any custodial offering will automatically look strong. That should pave the way for larger hedge funds (think those with billions under management), a pension manager like CalPERS, and sovereign wealth funds like Norway’s to participate in a much larger way in the crypto markets. Today’s non-custodial solutions might literally prohibit some from participating but also limit the total amount of money even smaller entities can put to work in bitcoin, Ethereum, or XRP.

If we look back at Murad’s chart above, he describes several steps between where we are now and bitcoin’s next major milestone — what he calls “reliable store of value.” Those sub-milestones include “greater perceived safety”; “greater liquidity”; “greater custodial solutions, institutionalization, financialization, regulatory clarity.” What Murad’s chart doesn’t say is how tightly interwoven these all are — as we will see.

To understand that, it’s helpful to look at the critical role of the Securities and Exchange Commission in all this. It’s likely if Goldman decided to shelve trading plans, they heard from Washington that these markets aren’t yet ready for the SEC’s stamp of approval. Ironically, custodial solutions might both make a future crypto-related thumbs up from the SEC more likely but also make it somewhat less necessary. The link in the previous sentence dates back a few weeks to the SEC’s most recent rejection of a bitcoin exchange-traded fund (ETF) which would not only benefit institutions trying to invest in bitcoin but also pave the way to individual’s buying in via IRA or 401(k).

While a custodial solution won’t instantly solve the IRA problem, it would allow for the institutional buying and selling that could create a second pathway for retirement funds to get into bitcoin. And, of course, those institutions will be free to buy and sell as they deem appropriate for their own accounts.

Today, Goldman’s decision “tooketh” from bitcoin holders. But the bank’s desire to participate in what is very likely the next important crypto regulatory development out there could easily soon “giveth” investors something to cheer about. As always, though, don’t confuse this with investment advice. The wise philosopher Yogi Berra reminds us: “It’s tough to make predictions, especially about the future.”

The Block Crypto

Crypto Simplified

Mark Rogowsky

Written by

Founding Editor in Chief, The Block. Multiple-time entrepreneur. Ex-Uber, Apple, Oracle, MongoDB. Long-time Silicon Valley observer.

The Block Crypto

Crypto Simplified

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