Goldman Sachs: We'll bet on crypto when it's more stable

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Although speculation has swirled for years about Goldman Sachs' cryptocurrency intentions — rumors of a crypto trading desk have been floated and shot down — the bank appears unlikely to fully support crypto until it has the backing of the U.S. government, a top executive suggested this week.

So far the firm has only done one thing related to crypto: It trades bitcoin futures in its foreign exchange business. Martin Chavez, global co-head of the securities division at Goldman Sachs and its former chief information and financial officer, made it clear at the DTCC conference that while the bank is still interested in the technology, it believes crypto needs to have stable backing.

“You can take a dollar bill to the Federal Reserve and demand a note,” Chavez said. “If we’re in the jurisdiction of the U.S. and I owe you some money and I give you one of these bills and you accept it, I’ve extinguished the debt and it’s backed by the force of the sovereign. I wouldn’t forget that as I start thinking about digital currencies and somehow going around sovereign. You have to go back and read your Hobbes and remember that.”

But Chavez does see potential for the U.S. dollar going crypto.

“To a considerable degree, the U.S. dollar has already dematerialized,” he said. “If you think deeply about it, you have a bank account. Where is your money? We all know it’s not sitting in piles of cash in some vault somewhere. It’s already been considerably abstracted. If you just play that out, it’s easy to imagine sovereign currencies becoming digital assets.”

This could lead to transformations of payment systems, he said.

“If you go to some other countries, you can be amazed at the ease with which you can move money around bank accounts and pay for things there compared to here,” Chavez said. “We still have things that take overnight or a couple of days. The service-level agreement is not where we want it. So there’s no question in my mind that there’s super-interesting technology there.”

Goldman Sachs is interested in the idea of stablecoins, cryptocurrencies that are always equal in value to a fiat currency.

But the speed of adoption, who is going to define the standards, who is going to own it, how it’s all going to look, I’m not sure,” Chavez said.

In the 1980s, when he was a computer scientist, Chavez studied the Byzantine Generals Problem.

“They want to agree on whether to attack or to retreat, but the communication on the battlefield is noisy and unreliable and some of the generals are noisy and unreliable,” Chavez said. “How can you reach agreement through all that noise? Bitcoin is an interesting solution to some constraints for that problem, so it’s fascinating as a matter of computer science. Will bitcoin or something like it be the solution to this set of constraints? Too early to tell.”

Chavez didn't say so, but the challenge of communicating by messenger with generals, some of whom can't be trusted, could be compared to the challenge of getting many financial services firms that don't trust each other to share data on a blockchain.

But Chavez denied reports that Goldman was setting up a cryptocurrency trading desk, saying that was never the plan.

“When we began this journey at Goldman Sachs, the way we framed it for ourselves and the way we framed it publicly was, we have to get knowledgeable. We don’t have in our firm all the experts, so we're going to need to find some to join us in this exploration,” Chavez said. “How that gets translated is, they’re opening up a crypto trading desk. Which is not quite what we said.”

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