By Elizabeth Howcroft
LONDON (Reuters) - Goldman Sachs expects a "significant uptick" in trading volumes of blockchain-based assets within the next one or two years, the bank's global head of digital assets told Reuters.
The Wall Street heavyweight has also seen increasing client interest in crypto derivatives trading, Mathew McDermott said, as markets expect the U.S. securities regulator to soon approve an application for a spot bitcoin ETF (exchange-traded fund).
Bitcoin has risen by more than 50% this quarter with institutional clients including hedge funds and asset managers weighing the opportunities.
But McDermott said he remains focused on developing digital assets beyond cryptocurrency, including issuing blockchain-based tokens which represent traditional assets such as bonds. He said there was a “huge appetite” for digital assets, which has "grown significantly" in the last 12 months.
Banks have long expressed interest in using blockchain technology to trade assets other than cryptocurrencies, but to do so on a large scale would require a major overhaul of the technology infrastructure underpinning financial markets.
McDermott said using blockchain could bring operational and settlement efficiencies and the "de-risking" of financial markets.
If securities were traded via blockchain, collateral and liquidity could be sent between parties more quickly and precisely, he added.
Having spent seven years attempting to re-build its software platform around blockchain, Australia's stock exchange "paused" the project last year and announced in May that the upgrade would no longer involve the technology.
And while there have been various pilot projects to issue blockchain-based versions of, for example, bonds, there is no routine issuance or liquid secondary market.
"Probably within the next one to two years you’ll see a big significant uptick in the quantum trading on-chain, probably three to five years to really see these marketplaces at scale," McDermott said.
Still, he thinks replicating the majority of financial markets exclusively on blockchain is a long way off.
A survey of Goldman Sachs' clients, published in September, found that 16% of respondents expect more than 10% of the financial market to be "tokenised" in the next three to five years.
As part of its FX desk, Goldman runs a team trading cryptocurrency derivatives- but not the underlying asset- for institutional clients, McDermott said.
"It's all relative, because it's still a very, very, very small market but definitely as the market's getting more excited about the potential of a bitcoin ETF, there's definitely been more interest," McDermott said.
McDermott said he did not expect the approval of the ETF to trigger a "sudden immediate spike in liquidity and price" but it could attract new institutional investors to the asset class.
"This ability to actually transact a product that people are familiar with and can provide scale, I think is very positive."
(Reporting by Elizabeth Howcroft; Editing by Kirsten Donovan)