Hello everybody, my name is Maurice Button and I'd like to welcome you to the next in our series of speaker interviews. It's a great pleasure today to have Mathew McDermott, who's Global Head of Digital Assets at Goldman Sachs with us. Mathew, welcome.

Thank you very much for having me.

Let's turn to the questions.

Obviously, one reads some about some very sort of negative comments in the press currently about the state of the digital asset market, but what's really going on? What are the macro factors that are affecting at the current time?

Yeah, I mean, it's a really good question and I'd probably say there's probably a couple of key factors. One, certainly when you start to think about liquidity and capital with potential Basel for kind of meandering down the path that's actually having an impact on banks today and people are starting to see the cost you know rise so, when you start to think about the potential of the technology and how, you know, a lot of the market really are focused on how you can re-architect the financial plumbing, there is this kind of realization that the technology, you know really will have an impact in a very positive way. So, the macro backdrop whilst obviously kind of, you know unpleasant for some in terms of rising rates, it is highlighting a real need where this technology can be hugely impactful and as a byproduct of that you know, I have started to see across both the buy side the sell side and even the FMI's really recognizing that and that's really kind of led to kind of a broad cross-section of the market really focusing on a number of different projects in that space. The other point that I would probably make is on investment I mean, we're all very well aware that there's been you know abundance of cheap money that's flowed into digital assets globally that naturally as the cost of liquidity increases has reduced significantly and so now really you're seeing a very kind of more a much more laser focus on projects where there's real commerciality, which I think is a key point, scalability and where you know kind of companies have got good management teams or where people can really see that this is truly transformative to the market. So, so I think if you think about the macro backdrop today, they're kind of two key areas that I see that have been impacted and you know while there's a bit of pain I do think for the medium to long term in a positive way.

Do you think, just a supplementary question to that, do you think that the surge in AI all things AI and AI startups and so on, at a time of limited Investment funds available for new projects. Do you think that perhaps has taken some of the funding away from additional assets?

I mean naturally yes, because digital assets two and a half three years ago was you know the kind of the shiny thing that everyone was super focused on a lot of money flowing there. AI obviously, it's got huge potential and actually interestingly is following a similar pathway to digital assets, obviously the regulators are looking at the impact and so it's kind of the playbooks quite similar. But I think it really what it does it kind of really then kind of emphasises that the dollars that do flow into digital assets for the you know, the projects and the reasons I mentioned earlier.

Yeah, so it's taking the froth away a little bit.

In terms of what you're doing at Goldman Sachs, which are the key areas that you see in terms of institutional adoption of digital assets?

It's pretty broad. I mean, I guess just really kind of looking at our own kind of strategy I mean, I think there are probably three core things four core things. One, you know, we are very focused on tokenisation this is something kind of our client base is you know key to get to push forward and I think certainly on the issue side there is absolutely no shortage of opportunities.

For us, it's kind of being judicious with the projects to make sure that you know going back to that commercial theme, scalability really building it out and really looking to replicate what we do today in the kind of traditional markets on a distributed ledger. So, tokenisation key focus as a byproduct of that, you know, that's what we've developed our own digital asset platform so we can be more nimble, but really the focus there is broadening that the kind of marketplace bringing more people onto the platform etc.

And the second key area which we've kind of touched on a little bit, you know it's really kind of the collateral mobility, really thinking about how you can more seamlessly move collateral around the marketplace be that for intraday, repo, securities finance and derivative collateralisation, to me that that is going to have a profound impact and the risk reductions the operational efficiencies the settlement efficiencies, you know all kind of very self-evident but what we need to do is kind of scale that up.

So again, real key focus, you know from our perspective, and I know many across the market. We also you know as a function of having a crypto trading desk for cash settled options, futures and derivatives, you know, we continue to service that for our clients see a lot of appetite, you know could still in that space, probably the trading activity is a little muted, but in terms of the appetite to on board, so that's kind of you know a focus for us and building out the product suite there, again driven by the clients and then data and content, you know big focus for us we do also have as we talked a little bit about capital kind of deployment, we have invested, you know in a number of companies that kind of aid those kind of real core strategic objectives, so obviously a lot of time that we spend with those companies as well.

There's some very real opportunities there.

Absolutely.

Obviously the HM Treasury asset management task forces that publish its blueprints for investment fund tokenisation and the LSEG is launching its blockchain based trading platform. So, where do you see that the main benefits of tokenisation and its applications in in traditional financial markets?

Yeah, I think these have probably been, you know, very well socialised at this stage but I think there's probably kind of three or four kind of core benefits. I mean one is you know kind of enhanced functionality, which I think comes as a second order and basically speed and using the example of some of the transactions we've been involved in that ability to settle, you know if that's what you want t plus zero to a given time, you know aids the precision in terms of use of liquidity and capital.

Operational efficiencies, you know you reduce fails and just kind of improve that whole post trade kind of reconciliation process so there's a huge amount of value, you know there. I think the risk is a key thing and from a regulatory perspective you know safety and soundness of the market is obviously a big focus and as you start to kind of create greater utility in certain asset classes that doesn't exist today that ability to kind of allocate, you know that collateral mobility point assets on a t plus zero basis, it really does enable the market to reduce some of the risks that kind of sits there today. So, they're kind of like, you know, three kind of real core areas.

Do you think it opens up the opportunity, you know with fractionalisation of ownership for new products and new derivative products. Do you think that there is a whole new spectrum of opportunity there?

Yeah, I kind of flip it a little bit actually, I would say that what it does do it allows you going back to the point of an enhanced functionality to kind of add you know kind of new features to transactions. So for example, if you're looking to do a digital green debt issuance you can start to think about embedding KPIs and use of proceeds and things like that actually in the token so there is greater transparency.

In a world where you know, people are looking to go carbon neutral that's very powerful. And one of the things that you know, a number of asset managers we talked to focused on, is that transparency and but then also, you know even thinking about some of the more traditional assets and you know there's a lot of discussion around tokenisation of real-world assets, that broadening of the investor base sounds, you know it's a very generic statement and used quite liberally.

But the ability to kind of have funds which say today have a minimum denomination of a million dollars for reasons of admin and operational efficiencies and the like, that ability to seamlessly reduce that say 50 or 100 just opens up to a new universe of private wealth finance, for example doesn't need to be necessarily consumer point in time. So that increased transparency, you know over time and that's the key thing as you kind of increase the adoption, should broaden the investor base and by you know default increase the liquidity. I do think you're right in the context of certain markets you actually can create, you know kind of new opportunities I think the tokenisation of some fund types is a really good example of that because fund units today are often non-transferable so if you suddenly can transfer them, you suddenly can de facto create liquidity and then create greater use case for those.

Similarly thinking about the intraday liquidity, you can change the risk profile of that, and you can actually create a two-way market which you know from the discussions I've had across the bar in the sell side will be very profound and it's something that doesn’t exist today because the settlement systems don't really allow that.

Yeah, I mean, it's a whole new world isn't it, of opportunity.

What are the things that might hold back tokenisation? Is regulation on a sound footing and what about interoperability between different platforms?

Yeah, I mean look how it's good question and actually there's a report that came out yesterday from Euroclear ClearStream and ETCC and I think they kind of touched on some of these points. And while I feel that they're all positively moving in the right direction you know, there's still you know kind of things that need to be navigated and you know in a collaborative way So yes, we are getting regulatory clarity anyone who's heard me talk will have said, you know four years ago there was nothing in terms of regulations we've just seen a huge shift in terms of kind of where you know, we are today, we've got the markets and crypto assets in in the EU there's many other jurisdictions that have obviously kind of moved very quickly, the civil or common law, UK's moving forward and so, so I think we're getting regulatory clarity, but there's still naturally more to do there.

There is a focus on interoperability, you know, and I think you know one of the things that I'm often asked is do you create a number of islands and therefore kind of create inefficiencies even by using DLT, and which kind of just defeats the whole objective of using the underlying technology. I think there's a big focus on that so I'm kind of less concerned because I think that's something that's being addressed, and you know we use the Dammel smart contract language ourselves and there's you know kind of interoperability that we've kind of had with different platforms.

There's been relatively seamless but still something that needs to be focused on. And then scalability, you know for me the adoption scalability is the key thing and that's where you want to start to see kind of two-way markets the ability to make secondary markets and then kind of more seamlessly move collateral across the system and that kind of feeds back into that regulatory clarity point.

Yeah, it's a fascinating new world. I think the digitalisation, well the tokenisation in particular and we look forward to hearing much more about this at the conference sadly, we've run out of time on this interview today, but Mathew thanks very much for sharing those insights with us.

My pleasure. Good talking.

Of course, these are many other issues related to tokenisation will be discussed at the Tokenisation and Digital Assets Leaders Summit at Guildhall in London on the 21st of May, which of course is being held as part of City Week, I very much hope that our viewers will be able to join us in person at that event.