Much has been made about the ‘on again, off again’ Goldman Sachs crypto initiatives. First, it was a trading desk for crypto and Goldman Sachs clients (their institutional clients i.e. family offices and hedge funds). Then the narrative turned away from a dedicated trading desk to custody services that would hold Bitcoin for clients.
And on both fronts, Goldman Sachs wouldn’t confirm or deny what they were building, discussing or the timing of any of it. The way it sounds today, there was a reason why they haven’t confirmed any reports. Goldman was aware of the multiple institutional offerings that were on the way and evaluating who they’d choose to use as the backbone of their digital asset offerings.
It looks like it will be Bakkt, and that the evaluation was easy and the decision swiftly made. Speaking to several sources at the investment bank the scale of Bakkt’s infrastructure was the deciding factor.
**a quick note about the decision making and what this all could look like, say, two years from now. All of the pipes, levers, and ‘factories’ that are being constructed to process billions of crypto trades per day will eventually all work together. Bakkt, Fidelity, Nasdaq, ErisX – all of them will eventually clear trades from a place like Goldman Sachs on a daily basis. These firms are just providing access and ‘regulatory insurance’ via custody and some warehousing services. Goldman choosing to work with Bakkt is a nice headline today but may be irrelevant by late 2019.**
Goldman Sachs trusts what Bakkt has built and already processes hundreds of millions, if not billions, of dollars of trades via ICE exchanges across all different commodity products each day. So the understanding of how the exchanges work, how they will function, and the architecture’s strength is not in question.
Rather than seeing Bakkt as a ‘new’ product and exchange, Goldman sees it as an extension of the NYSE, EuroNext, or any other exchange brand under the ICE umbrella. There is zero concern that Bakkt would run afoul of regulators or suffer any of the daily drama associated with current crypto exchanges like Bitmex, Bitfinex, or others.
In fact, Goldman reps actively advise clients to stay away from those exchanges for regulatory and AML (anti-money laundering) reasons. Goldman Sachs would rather clients tap into their ‘off-book’ OTC crypto network spread across large parts of the US, Asia, and Eastern Europe.
Bakkt’s architecture will allow Goldman Sachs to replace that narrative with a stable exchange narrative and remove the elevated risk they associate with digital assets.
Again, this isn’t some sort of watershed moment for Goldman Sachs or Bakkt. This is simply Goldman using the pipes that Bakkt has laid on top of an exchange network that is decades old and Goldman Sachs uses every second of every day the markets are open.
Still, Goldman trusts Bakkt in a way that is different from what Fidelity is offering at the moment. If there is anything significant here it is that factor – trust.
Trust in Bakkt’s leadership team. Trust in Jeff Sprecher and Kelly Loeffler. Trust in the process by which Bakkt went about planning and building it’s custody and warehouse facilities. And trust that Bakkt will execute in a way that satisfies the standards that exist at Goldman and that it’s clients expect.