Good Money Replacing Bad?

Reuters published an article yesterday entitled “Goldman Sachs on hunt for bargain crypto firms after FTX fiasco”. It’s easy to dismiss this as just an opportunistic move from an aggressive investment bank and leave it at that. But think about it closely, and its significance grows.

First, let’s make an assumption that Goldman is not staffed by morons. They might be caricatured as many things, but fools they are not. That they see something in crypto which has value should be a rebuttal to those claiming the opposite. Goldman are not obliged to invest in crypto. Like any proper business, one must assume they are driven by competition for capital, and this action tells us that they envisage strong future returns from any investment that they make.

Second, take note of the language.

FTX’s implosion has heightened the need for more trustworthy, regulated cryptocurrency players, and big banks see an opportunity to pick up business, Mathew McDermott, Goldman's head of digital assets, told Reuters.

Established, regulated entities have an unprecedented opportunity to benefit from the wreckage of the collapse of Three Arrows Capital and the trail of destruction left behind. Goldman has clearly taken a view that if this thing is here to stay, they are perfectly placed to benefit from the strength of the brand and now is the time to up the ante.

Third, it is reassuring to see external investors getting involved in crypto. One of crypto’s problems is the lack of capital market discipline imposed by external forces. It’s been a huge echo chamber. The vast majority of funding and investment has been done by entities with no competing capital requirements. The story of Three Arrows Capital (3AC) is instructive in this regard, and it’s worth listening to The Acid Capitalist podcast, where Hugh Hendry interviews Kyle Davies. It turns out that 3AC was one of very few games in town for various hedge fund and venture capitalists to lend to. At this point, 3AC starts investing directionally in start-ups and discounted coins, which is not only a major case of “style-drift” but also an example of how the industry was pumping up its own growth. With seemingly unlimited funds, it’s no wonder that just about every capital-raise, regardless of the price, was being scooped up, in the process sucking in venerable institutions such as Blackrock and Sequoia, let alone their underlying pension fund clients. There is literally zero price discipline in this sort of environment, something “real-world” businesses, like Goldman, will bring to the space.

Fourth, Goldman’s apparent commitment to the asset class not only brings industry certification, but also adds the weight of their ability to shape regulatory outcomes. This will be helpful as we go through this important phase of creating a framework around digital assets that will sharply reduce the risk of future collapses like those we have witnessed this year. Hopefully more entities from outside the space will also bring constructive contributions to the debate.

It is easy to sneer at the appearance of a business such as Goldman Sachs sifting through the fallout of the FTX collapse. Many in crypto espouse an eco-system free of old-world entities. But crypto can’t have it both ways. Broad adoption comes with institutional acceptance and engagement, otherwise it remains a marginal and lawless playground for chancers. If Goldman and its like bring regulatory and capital discipline, it should be applauded.