The Goldman Sachs of Crypto

Plus: Regulating DeFi, Ant’s Rectification, MrBeast

Welcome to another issue of Net Interest, my newsletter on financial sector themes. Every Friday I go deep on a topic of interest in the sector and highlight a few other trending themes underneath. If you enjoy Net Interest, please invite friends and coworkers to sign up. Thanks!

The Goldman Sachs of Crypto

Earlier this week, Goldman Sachs strategists put out a report highlighting which US stocks have the highest exposure to blockchain and cryptocurrency. They come up with nineteen names. Tesla’s in there, of course – its CEO is one of crypto’s biggest champions; Facebook makes the grade as well, as the driving force behind the Diem stablecoin project. But the list also includes quite a few financial companies, from Coinbase and Square and PayPal all the way through to Bank of New York and JPMorgan. In fact, just under half the list consists of financial companies.

Based on Satoshi’s initial vision for bitcoin, this may seem odd. The white paper that launched bitcoin talks about allowing “online payments to be sent directly from one party to another without going through a financial institution.” With Coinbase now worth $60 billion, that ship has clearly sailed. But what about the role of the other financial institutions on the list?

It’s a question bank executives are fielding from their shareholders as they navigate AGM season:

  • “What role is Wells Fargo taking to help lead crypto technologies to capitalize on the benefits they offer once the speculative frenzy settles?”

  • “What is Bank of America's strategy on accepting cryptocurrencies and adopting blockchain and smart contracts?”

  • And at Goldman Sachs, where investor Mindy Wasserman asked half the questions: “What will GS be doing in blockchain, Bitcoin and other cryptocurrencies? For your corporate clients, as you expand your asset and wealth management business, what type of asset is Bitcoin and what vehicle or form do you use?”

The main way for financial companies to participate in crypto currently is as an on-ramp for consumers. Coinbase’s success came from removing all the complexity around addresses and private keys, allowing consumers to access bitcoin and other crypto assets in a way that resembles online banking. By the end of March, just before its stock market debut, Coinbase had 56 million verified users. Square added bitcoin trading to its service last year and 3 million customers took it up on the offer, with another 1 million buying and selling crypto for the first time in January. PayPal launched trading functionality last November, and has since gone on to offer “checkout with crypto” at merchants. In an interview this week, PayPal’s CEO said: “Demand on the crypto side has been multiple-fold to what we initially expected.”

Behind all the consumer interest, though, there is increasing institutional interest. Indeed, the latest rally in crypto markets is characterised by a much higher level of interest from institutions than prior rallies. Institutions accounted for nearly two-thirds of Coinbase trading volume at the end of 2020, up from a fifth at the beginning of 2018. Institutional assets sitting on the Coinbase platform rose from $45 billion to $122 billion over the first quarter of this year. 

There are plenty of anecdotes to back up this trend. MassMutual invested $100 million of its general investment fund in bitcoin; Brevan Howard has said it will start buying crypto in its main $5.6 billion hedge fund; Tesla bought (and sold) bitcoin on its corporate balance sheet; Fidelity is preparing to launch an exchange-traded fund invested in bitcoin. Goldman Sachs surveyed 300 of its clients in March and 61% expected their digital asset holdings to increase over the next year.

For investment banks, this should present an opportunity. After all, as we discussed in our piece on the industry a few weeks ago, if “[a] client has a risk they don’t want or wants a risk they don’t have… we make it happen for them.” Shouldn’t that apply to crypto?

Unfortunately, banks such as Goldman have a problem – regulation. The President and COO of Goldman Sachs, John Waldron concurs that client demand is rising, but he cautions, “As a regulated bank, we are limited in what we can and can’t do. So we could custody, but we can’t principal bitcoin as an example. So those distinctions, maybe not as well understood, but that’s something that we’ll have to navigate through.”

The futures market provides one way for firms like Goldman to channel access for their clients. The Chicago Mercantile Exchange has been offering bitcoin futures since the end of 2017. Management said on their earnings call this week that revenue from the contract was higher in the first quarter than in the whole of last year. Next week they launch a micro bitcoin contract whose notional size is 1/50 the size of the standard contract, so the margin requirement reduces from around $105,000 to $2,000 per contract, which should improve its liquidity.

Another service that is being explored by the traditional banks is custody, although by itself it’s a very low margin business that requires scale (Coinbase makes 0.02% on custody). Bank of New York made a big splash when it announced it’s in the process of setting up a custody business; it anticipates launching towards the end of 2021.

But core to any institutional offering is the ability to offer physical trading, with all the services that stem from that, for example lending. If Goldman Sachs isn’t able to offer it, then others will step into the vacuum, and one such firm – run by a group of ex-Goldman partners – is ramping up.  

Galaxy Brain

For most of history, investment markets were led by retail investors rather than institutions. It wasn’t until the Investment Company Act of 1940 that individual investors felt their interests were sufficiently protected to trust institutions and benefit from the professionalisation and economies of scale they offered. Since then, most new asset classes have been led by institutional demand – mortgage backed securities, high yield and the like. Crypto represents a reversion to the historical trend. 

That didn’t stop Mike Novogratz launching an institution-facing crypto firm in 2018. An ex- Goldman Sachs partner and macro hedge fund manager, he felt more comfortable dealing with institutions than with retail. “I look back on it and was like, you know, what a knucklehead. I spent all this time building a brand – personal branding, firm brand – and I didn't have a retail outlet.” [source]

What he has though is an old-fashioned merchant bank – the type where proprietary trading and principal investing and client execution and corporate advisory are all undertaken under the same roof – focused exclusively on crypto. Merchant banks once referred to shops run by grain merchants who used their own capital to finance foreign trade. Novogratz is pointing that model towards crypto.

“It's been focused on institutions not retail. And so that was a painful position to be in until about April last year when Covid happened, right. I said, oh the institutions are coming, and then they were slow and then Covid happened, and they went from walking at one mile an hour to trotting to sprinting and now it’s like a 99 mile per hour, you know, just mad dash.” [source]

Galaxy Digital was launched in its present form in 2018, when Novogratz reversed his personal portfolio of crypto assets and crypto company investments into a Canadian shell company. In January that year, he acquired a Vancouver based advisory start up, First Coin Capital and together with his $302 million assets, Galaxy Digital LP was formed. The shell company raised $229 million from outside investors to acquire a minority stake in the business. That piece is listed on the Toronto Stock Exchange, as Galaxy Digital Holdings Ltd, giving the business a free float of around 30%. 

Galaxy Digital has five business lines. 

  • It offers trading in over 60 cryptocurrencies to around 150 clients. Novogratz’s portfolio of digital assets provided the inventory to seed a trading business. Today, the firm executes client orders on-exchange and over the counter, on an agency basis or a principal basis and across multiple product areas including derivatives. Late last year, the firm made two acquisitions to add more trading know-how and also to add lending capability. In the first quarter of this year, trading volumes were up 40% versus the fourth quarter (still a long way behind Coinbase); the loan book has grown in size to around $380 million (+240%).

  • It uses its own balance sheet to make principal investments across private and public markets in the crypto sector. It has around 80 investments across 60 portfolio companies.

  • It has an asset management operation where it manages $1.275 billion in assets over a number of funds including a crypto index fund, a bitcoin fund and a venture fund. Morgan Stanley recently started distributing Galaxy’s bitcoin funds in its wealth management business. Galaxy is also sub-advisor to an exchange-traded fund authorised in Canada and has applied to the US regulator to issue one there. In December last year the firm launched a bitcoin index with Bloomberg. 

  • It runs an investment banking advisory business. The firm’s headline M&A transaction to date has been the sale of Blockfolio to FTX Trading Ltd (for $150 million). 

  • It is active in mining cryptocurrencies and offers financing to third-party miners. 

The economics of the business are still largely driven by the company’s digital asset holdings and principal investments. As at the end of 2020, these assets were valued at $1.1 billion, which included $433 million of bitcoin. However, the company is increasingly allocating capital to its client trading business. At the end of 2020, 45% of its balance sheet was allocated to trading, up from 25% at the end of 2019.1

Disentangling how much the company makes from client trading and how much it makes from proprietary trading, though, is hard. Last year the company reported $304 million of revenue, which includes $271 million of net realised gains on digital assets. Including unrealised gains of $240 million (plus another $91 million on principal investments) mark-to-market revenues were even higher.2 These returns are greater than those Galaxy would have earned simply from HODLing, indicating that value is being created in the trading business, whatever its source.

Imbued with the confidence of growing institutional demand, Galaxy Digital is expanding. The firm hired over 70 people in the past six months, doubling its headcount. In particular, Novogratz has been raiding Goldman Sachs for talent. Damien Vanderwilt, formerly head of fixed income execution,  joined as co-President and Mike Daffey, up until recently Chairman of Global Markets, joined as Chairman. The firm also hired a new CFO, Alex Ioffe, who has experience in CFO roles at Virtu and Interactive Brokers. 

Most other early entrants in crypto markets have more of a tech background than a finance background; Galaxy Digital is different. “I do think having the Wall Street and the speculating experience is a really good tool for operating in the crypto space, and we’re trying to use this firm to help clients, to give advice, to participate in all sides of the space.” [source]

Run by former Goldman partners and reflective of the Goldman model of old, it’s no wonder Novogratz regards his firm, “the Goldman Sachs of crypto”. But there are some risks. There’s the price of bitcoin, obviously. Then there’s the competition from firms like Goldman. “One [risk] is that we’re here building away and in two years time, David Solomon [CEO of Goldman Sachs] tells his army of warriors, hey we need to be in this business faster than we thought and Goldman and JP [Morgan] and everybody else is trading and lending and they just have so many resources, that they can move quick. And so we need to build fast enough to be a player before the competition comes. They’re gonna come. There is absolutely no way that in five years time at least, you’re not calling up your broker and saying, you know, dollar/yen and cable and bitcoin and libra and gold, and they’re all going to get traded on the same desk.” [source]

Finally, there’s the potential conflict of interest inherent in a mixed principal agency model. Novogratz recently admitted, “If 42 [thousand dollars bitcoin price] should hold, we see tons of institutions coming to buy this thing… institutions are coming to move into the bitcoin space, I’m positive. It’s not something I’m guessing, I’m actually seeing: I see the order book, so that gives me an edge.”

The company is targeting a US listing in the second half of this year. As long as the first risk is mitigated, that will give Novogratz and his team an opportunity to address the other two risks. From a strategic perspective the more Galaxy can exploit its head start in institutional markets, the more likely incumbent firms may want to buy it. Galaxy could indeed become the Goldman Sachs of crypto.

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Regulating DeFi

In a blog post, JP Koning looks at how decentralised finance will adapt to greater regulatory scrutiny. A growing number of financial sector functions are being recreated via Ethereum based smart contracts without the licenses and permits imposed on traditional, centralised providers. The question of regulation becomes increasingly relevant as decentralised finance (DeFi) finds application outside the walls of crypto and in the real world. Recently, MakerDao – a decentralised bank – financed real world mortgages by issuing US dollar deposits – all without a license. 

For mainstream adoption, regulation is important. Consumers want it! One of the ingredients of Coinbase’s success was its willingness to embrace regulation, albeit not wholeheartedly. (“We have become increasingly obligated to comply with the laws, rules, regulations, policies, and legal interpretations both of the jurisdictions in which we operate and those into which we offer services on a cross-border basis.”)

In a recent Twitter exchange, Paul Graham asks, “What do you suppose is the ratio of trouble caused for the innocent to trouble caused for the guilty by KYC regulations? A hundred thousand to one? A million to one?” Patrick McKenzie responded: “I think it is broadly underappreciated in the technology industry that neither consumers nor producers could transact on the Internet—it would be reduced to a fraud-ridden wasteland—but for persistence of reputation by financial industry, which is substantially enabled by KYC.”

Whether it’s KYC, consumer protections, prudential regulations, usury laws – they’re all there to protect the average (and aggregate, in the case of prudential regulation) consumer. As DeFi applications grow in adoption, their success may be subject to how open they are to regulation.

Ant’s Rectification

We’ve discussed Ant Group here a lot, beginning with our primer, Ant Financial: The World’s Largest Financial Services Firm, back in July (before the IPO prospectus was filed). It’s now clear that being the world’s largest financial services firm can have its drawbacks. Ant recently filed a plan with regulators that will strip it of much of its scope. According to Caixing, there are five main element to the plan:

  • Restructuring the group into a financial holding company, subject to PBOC regulation

  • Removing financial services from the core payments platform

  • Consolidating lending operations into a new business, 50% owned by Ant – regulated, obviously (by the banking regulator)

  • Setting up a new company to oversee personal credit reporting, subject to new regulatory guidelines

  • Implementing prudential regulatory oversight

The developments are a warning to financial super app aspirants across the world. Ant’s strength came from its oversight of customer data and access to customer fund flows; the requirements restrict what it can do with those resources. Plainly China is a special case, but the message may be that other consumer fintechs around the world need to temper the scale of their ambitions.


This week, Current, a US based challenger bank, raised funds at a $2.2 billion valuation. The bank was founded in 2015, initially with a debit card offer for teens, but subsequently broadened its scope to address the larger digital banking market (the average age of its customers is now 27). With 3 million users, its valuation is equivalent to $733 per user.  That’s a lot lower than Chime’s $2,500, but it’s on a par with many other digital banks. If Revolut attracts a $10 billion valuation, for example, that would put it on $666 per user. And Nubank is valued at around $735 per user.

Of course, the profitability per customer between these banks likely varies considerably. Chime has a slightly older user base, with more available funds; Revolut offers more services; and Nubank operates in a structurally more profitable market. But MrBeast is an investor in Current and has said that he will personally send $1 to the first 100,000 people who sign up using his code – so maybe that’s worth something?


Financial leverage at Galaxy is quite low. Equity capital of $798 million sits alongside liabilities of $372 million.


The company has a large non-controlling interest as it consolidates the bitcoin funds in its asset management business. Revenues include the non-controlling interest. Earnings net of the controlling interest were $386 million in 2020.