Goldman’s McDermott on how blockchain technology will produce “a profoundly different financial system”

Welcome to the Future of Finance, where Fortune asks prominent figures at major companies about their jobs, how their firm fits into the crypto ecosystem, and what this means for how we spend money.

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

In November, Goldman launched Datonomy, which it describes as “a new framework for classifying digital assets”, and which McDermott says 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 huge effects not just for clients, but for the firm itself, which oversees roughly $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 lead the digital asset business at Goldman Sachs. The way I describe it is, we look to use the underlying technology to transform the way these types of assets are issued, traded and then secured post-trade – what the components are and the web technology we use to look to redesign the way financial markets work. So repo, securities, finance, collateral, derivatives, intraday repo – it’s really just identifying commercial opportunities using the underlying technologies.

You were at Goldman for about 12 years before you got into digital assets. What drew you to the opportunity?

To me, it’s the positive impact that this technology can have on a lot of these markets, which have been dependent on technology that’s been around for years, in a really profound way, not just for Goldman, but for the market more generally. So when I was asked to take over the business and given the opportunity to create a digital asset strategy, it was incredibly exciting. Naturally, I saw a significant opportunity, and beyond that, following these markets separately from a personal perspective made me even more interested in the space. So, yeah, it was just a very interesting time.

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Your CEO likes to say, “Goldman is not a bank, we’re a technology company.” So in many ways, getting this kind of foothold is just the next logical step, right?

When you look at certain markets, I think having the opportunity to try to redefine the way they operate, which can actually create revenue opportunities and can actually make things more efficient, reduce risk — you know, it’s pretty compelling.

The situation in the US is bad from a regulatory point of view. It is MiCA regime in Europe, and Dubai and Singapore and Hong Kong follow. Will crypto really be viable if it has no home at all in the US?

It’s too far for me to say. If nothing else, crypto has proven to be extremely resilient, given what it has faced in terms of challenges throughout its lifetime, which is still relatively short. But I think about the use of the underlying technology, which is primarily where I spend my day – I can’t trade cryptocurrencies since we don’t have tokens on our balance sheet – and I’ve been super excited about the breadth of the financial market that’s really attracted to this area. Sell ​​side, buy side.

If you think about all kinds of large asset managers, pretty much all of them have a digital asset strategy. I think the US is obviously taking a slightly different approach at the moment, but I remain optimistic that they will turn around at some point.

It’s been about six months since launch Datonomy. How has it worked? Can you share some highlights?

For those less familiar, this is a digital asset taxonomy that we’ve developed in conjunction with MSCI and Coin Metrics, and it’s done everything we’ve expected it to – we’ve had a lot of interest. Now we’re actually working with a number of different clients in terms of thinking through 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 to 200, at any given time, to enable them to really dive in as they think through the investment. into what they want to invest in – what kind of smart contracts, what tokens they should look at, or should they look at a stable coin.

In terms of maximizing those efficiencies, how much is for clients, but also how much is for Goldman? How does using blockchain and similar technology help you do your jobs better?

I think that is a very good question. We’ve spent a lot of time recently talking, in closed sessions with regulators and central banks and the like, but I think commercially that sometimes it gets a bit lost on people. But there are two real core areas: First, tokenization and digitization of the lifecycle of different asset classes. It’s about creating efficiency from the start – from issuance to post-trade – and we see a huge value opportunity there when it manifests on a large scale.

The second area, which answers your question, is mobility. Many of the systems we use are probably as old as I am, and there are inefficiencies in them. In the movement of collateral from one custodian to another, you cannot be as precise as you would like, in terms of liquidity, which creates inefficiencies. There are certain risk profiles and trades you can completely transform through the use of DLT [distributed ledger technology] because of that precision, the final settlement.

The story of crypto, for many, is more of a lone wolf view – everything is decentralized – but I see more and more TradFi firms figuring out ways to implement this technology – and faster. Is that a fair generalization? Or is it still a bit early to say that the big ones will win again?

Ideologically, the institutions that looked at this technology use it for different purposes. When 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 permissionless.

They’re the ones — even journalists, in a way — who are probably very focused on just opening up and creating a more democratic kind of marketplace. But I think we’ve seen what’s happened when there’s no regulation – people behave in a way that’s just not appropriate for a multi-billion dollar marketplace. I am convinced that it is intuitive. If you’ve laid the groundwork and show how this technology can be hugely positive for everyone because it can reduce costs, you can become more efficient with key resources, and you can actually create a decentralized marketplace.

For what it’s worth, US banks are usually focused on the private blockchains at the moment. In client discussions it tends to be where they want to play because of the control, privacy, security, KYC [know your customer]all the things you’d expect.

I believe that as people become more familiar with the technology, they will see the value it adds. Web3 is about empowering the individual, and I really believe that one of the biggest beneficiaries of this technology will be wealth management clients and family offices, because they’re going to have greater access to investment opportunities. There will just be more liquidity in the market because you’re going to start seeing different marketplaces pop up.

As public blockchains improve—probably a better way to say it—as they do ripe– and people become more comfortable with them, opportunities will emerge. I think it’s probably a few years away, but I think that’s how it really needs to evolve, for regulators and institutions to be completely comfortable with it.

When you say a few years down the road, do you mean two or five or 10? And is it a milestone, a key point before the next key point?

I don’t think there’s going to be a definitive line in the sand that we hit and suddenly everyone will open up. But DeFi marketplaces continue to evolve. There is some impressive technology in some of these liquidity protocols – and much beyond. It can add an interesting dimension to the market. It could, commercially, show that this technology is transformative. Humans evolve and can create the kind of robustness that makes regulators comfortable. But is it two years away? No. Is it five years away? Possibly.

Are there too many blockchains out there? Would the industry be better off just focusing 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 view anyway. Ethereum and Bitcoin have proven to be remarkably resilient. There are some very interesting others that have unique features, but I think over time they will probably consolidate – but it’s hard to say which ones they will be. They will probably coalesce around a number of them where there will be clear interoperability between them all. I don’t think there will be tens and tens of them – it will probably be a small cohort.

What does this mean for the future of finance?

I would say that large parts of financial market transactions will be on the blockchain – I would say that just to keep my job. [Laughs] But I really believe that blockchain technology will have a profound impact – maybe not necessarily on every single type of marketplace, but in large part because of its hugely positive features, its efficiency, its revenue opportunities.

I look over just the last three years that I’ve been involved in this market: We’ve gone from a place where there was no regulation—people weren’t even interested in talking about it—to actually getting proper regulation, actually getting real clarity . If we see the same rate of change as the last three years, in three years, I think it will be a completely different financial system.

This story was originally featured on Fortune.com

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