Blockchain Is Much More Than Crypto

The fall of FTX happened less than a month ago and SBF (Sam Bankman-Fried) has since moved to the Bahamas and actually still made public appearances since then, namely with Andrew Ross Sorkin.

The collapse of FTX, the so called poster child of crypto, caused mass hysteria in crypto markets. The darling of Silicon Valley worth tens of billions of dollars collapsed in less than a day. Billions of investor and client dollars went straight out the window, and all SBF had to say was, well I guess I should’ve taken risk management more seriously.

But if there is any entity that takes risk management seriously is large multinational banks and they do it for two reasons. The first is that they are regulated to do so, unlike “crypto banks”, and the second is that their businesses are built on trust and security. If a multinational bank were to lose its status of trustworthiness among its depositors it would suffer greatly.

This year, we’ve seen that exact scenario play out in a multinational bank. Credit Suisse has said that they expect a $1.6 billion dollar loss in the fourth quarter as client rush to take money out of the bank. Credit Suisse has made headlines for some of the bad investments that it lost money on, and more recently we’ve seen a spike in the number of credit default swaps on the company. Credit default swaps basically protect you against the risk that the bank can’t give you your deposits back. Credit Suisse is a long way away from that, but it is never a good look when you are the only bank that has that issue.

The business model of FTX and other crypto exchanges/platforms is eerily similar to that of banks. They create a place for clients to deposit and hold money that will generate some sort of return. You get that at a bank with interest-paying accounts and you get that at “crypto banks” with 7% Bitcoin yields.

Crypto platforms prided themselves on the slogan of “unbank yourself” when in fact they were acting like a bank. They were just an extremely unregulated and risky bank.

But does this diminish the value of cryptocurrencies or blockchain technology? I don’t think so. The use cases are endless for those technologies, does that mean they are great investments, no it does not, but not every great idea is a great investment right away.

The CEO of Goldman Sachs, David Solomon said in a Wall Street Journal opinion piece that “blockchain is much more than crypto”, and “regulated financial institutions are well positioned to harness the revolutionary technology.”

In that article, there is one paragraph that I would like to highlight.

“Using blockchain, we’ve been building trading platforms where clients can trade with each other in minutes. By cutting down each trade’s processing time from hours or even days, we’re freeing up capital that would otherwise be locked in limbo. Last week, using our new tokenization platform, we arranged a €100 million two-year digital bond for the European Investment Bank with two other banks, all based on a private blockchain. Typically, a bond sale like this takes about five days to settle. Ours settled in 60 seconds. By reducing settlement times, we are lowering costs for issuers, investors and regulators. Using blockchain, we can extend these benefits more broadly in fixed-income markets and across other asset classes.”

Anyone working in finance, myself included, knows that mutual funds settle the day after the trade occurs, stocks/ETFs settle two days after the trade occurs, and bonds can take longer on occasion. This is because exchanges give the buyer time to come up with cash to finalize the transaction, but it must be done within a set time frame. That cash is in, as David called it, “limbo”.

Freeing up that limboed cash allows for much more efficient markets. I think it is rather remarkable that a bond transaction took 60 seconds to settle using a private blockchain.

So back to the untrusted “crypto banks”. Their valuations are down significantly and that makes them a target for acquisition by trusted financial institutions. Institutions that want to enhance their digital presence and allow for faster and cheaper transactions.

Mathew McDermott, Goldman Sachs’ head of digital assets, said that the bank is doing due diligence on a number of different crypto firms. Stating that “we do see some really interesting opportunities, priced much more sensibly.”

Mathew said that the ripple effects from FTX's collapse have boosted Goldman's trading volumes, as investors look to trade with regulated and well-capitalized companies. “What's increased is the number of financial institutions wanting to trade with us,” Mathew said. "I suspect a number of them traded with FTX, but I can't say that with cast iron certainty."

With the bank looking to invest tens of millions of dollars in crypto companies, it leads the way to more trusted crypto institutions in the future. And even $50 million is nothing for a bank the size of Goldman Sachs, which earned close to $22 billion last year, paving the way for future investments if the initial push is a success.

So what do you think, will Goldman Sachs and other trusted banks restore trust in how their client’s crypto is being used? And would you give your cryptocurrency to Goldman Sachs versus some unregulated startup?