Wednesday, July 17, 2024

The future of finance: Goldman's McDermott on blockchain


Welcome to the future of finance, where Luck Asks key people at major companies about their jobs, how their firm fits into the crypto ecosystem, and what this means for how we use money.

Matthew McDermott is a managing director at Goldman Sachs, where he spent more than 17 years, after nine years at Morgan Stanley, and now leads the firm. Digital Assets Division,

In November, Goldman launched detanomy, which it describes as “a new framework for the classification of digital assets,” and which McDermott says has generated “a lot of interest.” in a recent interview with Luck From London, he explained how blockchain and the technology behind it will have massive implications not only for clients, but also for the firm, which oversees approximately $2.5 trillion in property.

(This interview has been edited for length and clarity.)

When people ask, “What do you do?” And you say, “I’m at Goldman,” well, what do you do at Goldman?

Well, globally, I’m the head of the digital asset business at Goldman Sachs. The way I describe it, we look at using the underlying technology to change the way these types of assets are issued, traded, and then taken care of post-trade. What are the components, and the online technology we use to look at reimagining the way the financial markets operate. So repo, securities, finance, collateralization, derivatives, intraday repo – it’s really like identifying commercial opportunities using the underlying techniques.

You were at Goldman about 12 years ago before running the digital asset side. What attracted you to the opportunity?

To me, it’s the positive impact that this technology can have on many of these markets that have been relying on the technology for many years, not just for Goldman, but for the market more broadly. So when I was asked to take over the business and was given the ability to drive strategy for digital assets, it was incredibly exciting. Naturally, I saw a significant opportunity, and beyond that I became even more interested in the space after following these markets separately from a personal perspective. So yeah, it was a very interesting time.

Your CEO loves to say “Goldman is not a bank, we are a technology firm.” So in many ways, getting a hold of this is the next logical step, right?

As you look at some of the markets, I think there’s potential to try and redefine the way they operate, which can really create revenue opportunities and actually make things more efficient, the risks can reduce – you know, it’s very compelling.

The situation in the US is worse from a regulatory point of view. there is mica rule In Europe, and Dubai and Singapore and Hong Kong are coming along. Is crypto really going to be viable if it doesn’t have a home in the US?

Far be it for me to say. If nothing else, crypto has proven itself to be highly resilient considering what it has faced in terms of challenges throughout its life, which are still relatively few. But I think about the use of the underlying technology, which is mainly where I spend my day – I can’t trade cryptocurrencies because we don’t have tokens on our balance sheet – and I’m very excited by the breadth of it. . Financial market which is really attracted towards this place. Sell ​​side, buy side.

If you think about all the major asset managers out there, almost everyone has a digital asset strategy. I think the US is obviously taking a slightly different approach at the moment, but I’m kind of hopeful that they’ll pivot at some point.

It’s been almost six months since launch detanomy, How has it worked? Can you share some highlights?

For those less familiar, it’s a digital asset classification with whom we have developed MSCI And coin metrics, and it’s done everything we expected—we were very interested in it. Now, we’re working with different clients in terms of actually thinking through potential indices, licenses for people to actually use the data.

One of the key drivers for us in building this was to give people the granularity to understand the different tokens and, you know, look for the top 150 to 200 at any given time, so that they can really think through investing. It’s what they want to invest in—what kind of smart contracts, what tokens should they look at, or should they look at stablecoins.

When it comes to maximizing these efficiencies, how much is it for the clients and how much is it for Goldman? How is using blockchain and similar technology making your work even better?

I think that’s a really good question. We’ve spent a lot of time lately talking in closed sessions about regulators and central bankers and such, but I think commercially sometimes it’s a little bit lost on people. But there are two real main areas: first, tokenization and the digitization of the lifecycle of different asset classes. It’s about creating efficiencies from the start – from issuance to post-trade – and we see a huge value opportunity there when that manifests itself at scale.

The second area, which answers your question, is collateral mobility. Many of the systems we use are probably as old as I am, and have inefficiencies. In the movement of collateral from one custodian to another, you cannot be as precise in terms of liquidity as one would like, which creates inefficiencies. There are certain risk profiles and trades that you can completely change using DLT Because of that precision, that compromise finality.

The story of crypto is, for many, more of a lone-wolf approach – everything is decentralized – but I see more and more tradefi firms figuring out ways to implement this technology – and more quickly. Is this a fair generalization? Or is it a little too early to say that the big guys are going to win again?

Conceptually, the institutions that saw this technology are using it for various purposes. What are your options in terms of using what you think underlying technologyYou have private permission, which is apparently a glorified database, you have public permission, and then you have permissionless.

There are people—even journalists, naturally—perhaps too focused on opening up and creating a more democratic type of market. But I think we’ve seen what happens when there are no rules—people conduct themselves in a way that’s not appropriate for a multi-trillion dollar market. I firmly believe that this is intuitive. If you’ve laid the groundwork and demonstrated how this technology can be hugely positive for everyone because it can lower costs, you can be more efficient with key resources, and you can create a truly decentralized marketplace. Can

For what it’s worth, US banks are generally focused on private blockchains at the moment. In customer discussions, that’s where they want to play because of control, privacy, security, KYC, all those things.

I think as people become more familiar with the technology, they will see the value it adds. Web3 is about empowering the individual, and I truly believe that one of the biggest beneficiaries of this technology will be wealth management clients and family offices, as they are going to have greater access to investment opportunities. There will be more liquidity in the market as you will start to see individual markets emerge.

As public blockchains improve—probably a nicer way to put it, as they Mature—and people become more comfortable with them, opportunities will present themselves. I think it’s, probably, a few years away, but I think it’s going to have to really evolve in order for regulators and institutions to be completely comfortable with it.

When you say a few years down the road, do you mean two or five or 10? And is there a milestone, a turning point before the next main point?

I don’t think there’s going to be a definite line in the sand that we hit and all of a sudden everyone will open up. But the DeFi marketplace continues to grow. Some of these Liquidity protocols have some impressive technology in them—and beyond. This can add an interesting dimension to the market. It can demonstrate commercially that this technology is transformative. People evolve and can generate the kind of coercion that puts regulators at ease. But is that two years away? No, is it five years away? Perhaps.

Are there too many blockchains out there? Would everyone be better off starting their own projects and issuing tokens instead of just focusing more on Ethereum and Bitcoin and one or two others?

I don’t have a strong opinion either way. Ethereum and bitcoin have proven themselves to be remarkably resilient. There are some very interesting others that have unique features, but I think that over time, they’ll probably consolidate—but it’s hard to say which ones they will be. They will probably coalesce around several of them where there will be clear interactivity between all of them. I don’t think there’s going to be ten and ten of them – it’ll probably be a small group.

What does this mean for the future of finance?

I would say that the vast majority of financial market transactions will be on the blockchain – I would say just get on with it. [Laughs] But I truly believe that blockchain technology will have a profound impact – not necessarily on every type of market, but in large part because of its enormously positive attributes, efficiencies, revenue opportunities.

I look back on the last three years that I’ve been involved in this market: We’ve gone from a place where there were no rules—people weren’t even interested in talking about it—to actually getting fair rule, really getting real clarity. If we see the pace of change like the last three years, in three years, I think it will be a completely different financial system.