Technology

Crypto markets are undergoing a ‘flight to quality,’ says Goldman Sachs digital assets chief

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Last year’s havoc in the cryptocurrencies space has allowed for a “flight to quality” among crypto investors, Mathew McDermott, Goldman Sachs’ global head of digital assets, said on CNBC’s “Crypto World” on Friday.

“We do have a crypto trading desk at the firm,” he said, noting that the bank only trades cash-settled derivatives, options and futures.

Cryptocurrencies suffered during 2022 as investors steered clear of risk assets. Bitcoin tanked more than 60% last year. The collapse of crypto exchange FTX, along with a washout among other crypto-related companies, also raised concerns on whether federal agencies need to step in and regulate the industry.

Since then, large investors who continue to participate in the space have become more discerning.

“What we’ve seen more of our larger clients eager to onboard and trade with what they probably perceive to be much better regulated and capitalized entities,” McDermott added, noting that this has been a byproduct of last year.

Three key areas

Speaking with CNBC’s “Crypto World,” McDermott pointed to the bank’s three key areas of focus in crypto: tokenization, remaking the plumbing of financial markets and the “profound” effect that digital money will have across markets.

“The excitement from our side is … seeing how this technology can impact many different parts of the financial system and have a real commercial impact,” he added. ”We’re at such an early stage in terms of its adoption, but as you look across the marketplace and you see the breadth of financial institutions building out their digital asset teams, their digital asset strategies, be that the sell side or the buy side, it’s just super exciting and I think there’s a real recognition there.” 

Collaborating with two other banks, Goldman Sachs launched a tokenization platform that processed a $100 million dollar eurobond from the European Investment Bank

“One of the things from my perspective that’s kind of been quite important is really demonstrating that we can apply the technology across all the geographies,” McDermott said. ”We’ve done something in Europe and as we continue to build out, we’re very eager to do that more broadly across the globe.” 

CNBC was first to report in November that Goldman Sachs also collaborated with crypto data firm Coin Metrics and financial firm MSCI to create a new classification system called Datonomy, which McDermott said essentially provides a framework for investment into the new asset class. 

“This we felt was a really important kind of feature for the market,” McDermott said, describing Datonomy. 

“We wanted to provide something to the clients that gave them the tools to kind of better analyze, and particularly those who are looking to kind of think about investing, just give them that skill set, or certainly the details to enable them to do it in a more intelligent way,” he said.

A silver lining from 2022’s havoc

FTX’s collapse in late 2022 and the domino effect that wiped out other crypto companies, contributed to traditional financial institutions, like Goldman, being presented with “more sensible” valuations for potential investment in the technology that underpins crypto, according to McDermott.

“There’s been this precipitous fall in the valuation of many companies related to the crypto marketplace,” McDermott said. “But really the area that we’ve been focused on, blockchain infrastructure, we’ve continued to see some really interesting opportunities in businesses that are well managed.”

McDermott noted that Goldman Sachs has made investments in the digital asset space, predominantly focusing on blockchain infrastructure and that the bank is “seeing some interesting opportunities there of valuations that just look much more sensible.”

Goldman Sachs has 11 crypto businesses in its portfolio, including Coin Metrics, infrastructure firm Blockdaemon and the bank’s most recent investment TRM Labs.