Future of Finance: Goldman’s McDermott on How Blockchain Technology Will Produce ‘A Profoundly Different Financial System’

Mathew McDermott is a managing director at Goldman Sachs, where, after nine years at Morgan Stanley, he spent more than 17 years and now heads the firm’s digital assets division.

In November, Goldman launched Datonomy, which it described as “a new framework for digital asset classification” and which, according to McDermott, has generated “a lot of interest.” In a recent interview with Fortune from London, he explained how blockchain and the technology behind it will have massive effects not only for clients but also for the company itself, which oversees approximately $2.5 trillion in assets.

(This interview has been edited for length and clarity.)

When people ask, “What do you do?” and you say, “I’m at Goldman,” well, what do you do at Goldman?

Well, globally, I run the digital asset business at Goldman Sachs. The way I describe it is that we’re looking to use the underlying technology to transform how these types of assets are issued, traded, and then taken care of post-trade: what are the components and online technology that we use to look to redesign the ways in which financial markets operate. So reports, securities, finance, collateralization, derivatives, intraday reports—it’s really just identifying trading opportunities using the underlying technologies.

He was at Goldman for about 12 years before he started managing the digital asset side. What attracted you to the opportunity?

To me, it’s the positive impact that this technology could have in a lot of these markets, who have been relying on technology that’s been around for many years, in a really profound way, not just for Goldman, but for the market as a whole. So when they asked me to take over the business and they gave me the ability to create a strategy for digital assets, it was incredibly exciting. Naturally, I saw a significant opportunity, and beyond that, I became even more interested in the space after following these separate markets more broadly from a personal perspective. So, yeah, it was a very interesting time.

Their CEO loves to say “Goldman is not a bank, we are a technology company.” So in a lot of ways, gaining this kind of foothold is just the next logical step, right?

Looking at certain markets, I think having the ability to try to redefine the way they operate, that can actually create revenue opportunities and can make things more efficient, reduce risk, you know, that’s pretty compelling.

The situation in the United States is bad from a regulatory point of view. there he is MICA Regime in Europe, and Dubai, Singapore and Hong Kong are joining. Will cryptocurrencies really be viable if they don’t have a home in the US?

Far be it from me to say. If nothing else, crypto has proven to be extremely resilient, given what she has faced in terms of challenges throughout her life, which is still relatively short. But I think about the use of the underlying technology, which is mostly where I spend my day (I can’t trade cryptocurrency because we don’t have tokens on our balance sheet) and I’m very excited by the breadth of the financial market that is really drawn to this space. . The sell side, the buy side.

If you think of all kinds of major asset managers, almost all of them have a digital asset strategy. I think the US is obviously taking a slightly different approach right now, but I remain optimistic that they will change at some point.

It’s been about six months since the launch datanomy. How has that worked? Can you share some highlights?

For those less familiar, that’s a taxonomy of digital assets that we’ve developed together with MSCI and Coin Metrics, and it’s done everything we’d hoped for — we’ve had a lot of interest. Now, we’re actually working with a variety of different clients in terms of thinking about potential indexes, licenses for people to actually use the data.

One of the key drivers for us in creating this was to give people the granularity to understand different tokens and, you know, look for the top 150 or 200, at any given time, to allow them, as they think about investing, to really drill down. what they want to invest in: what kind of smart contracts, what tokens should they be looking at, or should they be looking at a stablecoin.

When it comes to maximizing these efficiencies, how much is it for clients but also how much is it for Goldman? How does using blockchain and similar technology help make your job even better?

I think it’s a very good question. We’ve spent a lot of time talking recently, in closed sessions with regulators and central bankers and the like, but I think commercially sometimes people get a little lost. But there are two real core areas: first, tokenization and digitization of the lifecycle of different asset classes. It’s about creating efficiencies early on, from issuance to post-trade, and we see a huge value opportunity there when it manifests at scale.

The second area, which answers your question, is collateral mobility. Many of the systems we use are probably as old as I am, and there are inefficiencies in them. When moving collateral from one custodian to another, one cannot be as precise as one would like, in terms of liquidity, which leads to inefficiencies. There are certain risk profiles and trades that you can totally transform by using DLT because of that precision, that settlement finality.

The history of cryptocurrency, for many, is more of a lone wolf vision, everything is decentralized, but I see more and more TradFi companies figuring out ways to implement this technology, and faster. Is it a fair generalization? Or is it still a bit early to say that the big guys are going to win again?

Ideologically, the institutions that looked at this technology are using it for different purposes. As you think about the options you have, in terms of using the underlying technology, you have private permission, which is apparently a glorified database, you have public permission, and then you have permission.

There are those, even journalists, naturally, probably very focused on just opening up and creating a more democratized type of market. But I think we’ve seen what happens when there are no regulations: people behave in a way that is not appropriate for a multi-billion dollar market. I firmly believe that it is intuitive. If you laid the foundation and showed how this technology can be very positive for everyone because it can reduce costs, it can be more efficient with key resources, and it can actually create a decentralized marketplace.

For what it’s worth, US banks are generally focused on private blockchains right now. In conversations with customers, it tends to be where they want to play because of control, privacy, security, KYC, all the things you’d expect.

I think as people become more familiar with the technology, they will see the value that it adds. Web3 is all about empowering the individual, and I genuinely believe that one of the biggest beneficiaries of this technology will be wealth management clients and family offices, because they will gain greater access to investment opportunities. There will simply be more liquidity in the market because you will start to see different markets emerge.

As public blockchains improve, there’s probably a better way to say it, since ripe—and people feel more comfortable with them, opportunities will present themselves. I think it’s probably a few years from now, but I think that’s the way it really has to evolve, for regulators and institutions to be completely comfortable with it.

When you say a few years later, do you mean two, five or ten? And is there a milestone, a key point before the next key point?

I don’t think there’s a definitive line in the sand that we hit and suddenly everyone will open up. But DeFi markets continue to evolve. There is some impressive technology in some of these liquidity protocols, and much more. That could add an interesting dimension to the market. You can, commercially, show that this technology is transformative. People evolve and can create the kind of robustness that makes regulators comfortable. But is that two years away? No. Five years to go? Possibly.

Are there too many blockchains out there? Would it be better for the industry to focus more on Ethereum and Bitcoin, and one or two others, instead of everyone starting their own project and issuing tokens?

I don’t have a strong vision by any means. Ethereum and Bitcoin have proven to be remarkably resilient. There are some other very interesting ones that have unique features, but I think, over time, they will probably take root, but it’s hard to say what they will be. They will probably merge around a number of them where there will be clear interoperability between all of them. I don’t think there are dozens and dozens of them, it will probably be a small cohort.

What does this mean for the future of finance?

I would say that a large part of the financial market transactions will be done on the blockchain; I’d say I’ll just keep my job. [Laughs] But I genuinely believe that blockchain technology will have a profound impact, maybe not necessarily in all types of markets, but in large swaths because of its hugely positive features, efficiencies and revenue opportunities.

I look at the last three years that I’ve been involved in this market: we’ve gone from a place where there were no regulations (people weren’t even interested in talking about it) to getting the proper regulations, getting real clarity. If we see the same speed of change as we have in the last three years, in three years, I think it will be a profoundly different financial system.