{"id":36944,"date":"2018-11-15T01:20:01","date_gmt":"2018-11-15T06:20:01","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/blockchain-powered-asset-tokenization-protocols-threaten-goldman-sachs-investment-banking-business\/"},"modified":"2018-11-15T01:20:01","modified_gmt":"2018-11-15T06:20:01","slug":"blockchain-powered-asset-tokenization-protocols-threaten-goldman-sachs-investment-banking-business-2","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/blockchain-powered-asset-tokenization-protocols-threaten-goldman-sachs-investment-banking-business-2\/","title":{"rendered":"Blockchain Powered Asset Tokenization Protocols Threaten Goldman Sachs\u2019 Investment Banking Business"},"content":{"rendered":"

Open innovation has a strong foothold in the tech industry. Big tech companies create application programing interfaces, or APIs, to tap into the knowledge base of outside software developers. By doing this, centralized companies are able to access external pools of knowledge that enhance the value of their own proprietary application. One prominent such example is Facebook\u2019s \u2018Like\u2019 button API. Facebook made integrating the \u2018Like\u2019 free and easy because it let them tap into apps\u2019 users, giving them access to massive data they didn\u2019t have access to before.<\/p>\n

This type of open innovation isn\u2019t unique to Facebook \u2013 most all tech companies do it. This isn\u2019t, however, the case for all industries. Tech lies on one end of the open innovation spectrum while the financial sector lies on the other. This is especially true for underwriting services provided by large investment banks like Goldman Sachs. Cofounding Decipher Capital \u2013 a VC fund investing in blockchain-enabled projects \u2013 coupled with being an investment banker at Goldman gives me a unique perspective into how<\/em> and why <\/em>blockchain enabled technologies, specifically asset tokenization protocols, will disrupt investment banking.<\/p>\n

This inevitable disruption is best understood by looking at the status quo. Today, Goldman tends to underwrite deals exceeding $100mm. Deal size and limited capacity forces it to be selective with the clients it takes on. Administrative, management, labor, and the other costs related to underwriting a deal don\u2019t change based on deal size \u2013 they\u2019re more fixed than variable. As such, Goldman is incentivized to chase larger deals to maximize unit economics. This business model has worked till now because raising capital is expensive and time-consuming, incentivizing companies to minimize the frequency while maximizing the size of capital raises.<\/p>\n

That said, it won\u2019t be like this for much longer. Decentralized, open-source smart contract protocols are enabling the tokenization of real-world assets \u2013 including equity and debt.<\/p>\n

\"\"<\/a>
Figure 1: Explanation of Tokenization [1]<\/strong><\/figcaption><\/figure>Tokenization of equity and debt means that capital raises will be faster and more efficient. This is because blockchain limits inter-party dependency for access to relevant information. Compliance requirements, for example, can now be programmed into tokens via smart contracts, reducing time and money spent on on-going compliance efforts. Given this speed and efficiency, tokenized assets can be further fractionalized, allowing for wider ownership and deepening markets.<\/p>\n

\"\"<\/a>
Figure 2: Benefits of Tokenization [2]<\/strong><\/figcaption><\/figure>The benefits described above mean lower all-in issuance costs for companies. They reduce the time management spends raising capital, lower the fees paid to intermediaries, and minimize losses due to market inefficiencies like deep discounts and high interest rates. Just looking at IPO gross spreads gives us an indication of how costly capital raises are for companies. Given 2016 numbers, the average gross spread for a company raising $1.0bn through an IPO would have been 5.4%, translating to $54mm dollars in underwriting fees alone. Companies will find ways to reduce such costs once viable options are available.<\/p>\n

\"\"<\/a>
Figure 3:\u00a0 Average underwriter fee in IPO in the United States from 2014 to 2016, by deal size [3]<\/strong><\/figcaption><\/figure>Therefore, if Goldman wants to be competitive in this new blockchain environment, it needs to use blockchain to enhance its underwriting capabilities. Goldman will need to streamline information flow between syndicate banks and clients, reduce costs associated with on-going securities compliance, and increase market depth for its. If Goldman doesn\u2019t innovate, its underwriting business will suffer from decreased deal flow and margin compression as companies search for the cheapest, viable options.<\/p>\n

Goldman hasn\u2019t been sitting on the sidelines. They\u2019ve reacted by actively participating in the blockchain space. Although the press has been focused on Goldman\u2019s short-lived plans to open a bitcoin trading desk [4], its true strategy lies in its investments in blockchain companies. Goldman recently invested in Veem [5], and Tradeshift [6]. Both investments were made through its Principal Strategic Investment Group (PSI). PSI tends to invest in companies that they expect at least one other part of the bank to benefit from a partnership with the portfolio company [7]. These investments increase Goldman\u2019s exposure to blockchain, but the underwriting business is unlikely to be a direct beneficiary of such partnerships. Goldman needs to spend more time integrating blockchain into the day-to-day operations of its underwriting business and not rely on strategic investments by PSI to keep this business competitive.<\/p>\n

Final Thoughts and Questions<\/strong><\/p>\n

There is no doubt that tokenization has the ability to reduce capital issuance costs. At minimum, Goldman can implement blockchain to reduce the back-end costs of underwriting capital raises. The question remains, however, whether capital raised through tokenized assets will just be a niche alternative to traditional capital markets or whether it\u2019ll be used by large public companies, or the clients served by the Goldman Sachs.<\/p>\n

(Word Count: 783)<\/p>\n

 <\/p>\n

Citations<\/strong><\/span><\/p>\n

[1] Decipher Capital, \u201cPrimer on Security Tokens\u201d, August 2018.<\/p>\n

[2] Decipher Capital, \u201cPrimer on Security Tokens\u201d, August 2018.<\/p>\n

[3] statista, \u201cUnderwriter fees in U.S. IPO, 2014-2016, by deal size\u201d,\u00a0January 2017,\u00a0https:\/\/www.statista.com\/statistics\/533357\/underwriter-fees-in-usa-ipo-by-deal-size\/<\/a>, accessed November 2018.<\/p>\n

[4] Diptendu Lahiri, \u201cGoldman drops bitcoin trading plans for now: Business Insider\u201d, Reuters, <\/em>September 5, 2018, https:\/\/www.reuters.com\/article\/us-goldman-sachs-cryptocurrency\/goldman-drops-bitcoin-trading-plans-for-now-business-insider-idUSKCN1LL1M0<\/a>, accessed November 2018.<\/p>\n

[5] Veem, \u201cVeem Secures $US 25 Million to Expand Global Payments for Small Businesses\u201d, September 26, 2018, https:\/\/www.veem.com\/veem-secures-us-25-million-to-expand-global-payments-for-small-businesses\/<\/a>, accessed November 2018.<\/p>\n

[6] William Suberg, \u201cGoldman Sachs-Backed Tradeshift Eyes Blockchain After Successful $250 Mln Funding Round\u201d, May 30, 2018, https:\/\/cointelegraph.com\/news\/goldman-sachs-backed-tradeshift-eyes-blockchain-after-successful-250-mln-funding-round<\/a>, accessed November 2018.<\/p>\n

[7] Goldman Sachs, \u201cInvesting and Lending Principal Strategic Investments\u201d, https:\/\/www.goldmansachs.com\/what-we-do\/investing-and-lending\/principal-strategic-investments\/psi.html<\/a>, accessed November 2018.<\/p>\n","protected":false},"excerpt":{"rendered":"

Tokenization of assets, including equity and debt, will disrupt investment banking. <\/p>\n","protected":false},"author":11307,"featured_media":36945,"comment_status":"open","ping_status":"closed","template":"","categories":[2608,1731,1026,4239,2373],"class_list":["post-36944","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-blockchain","category-capital-markets","category-investment-banking","category-open-innovation","category-process-improvement","hck-taxonomy-organization-goldman-sachs","hck-taxonomy-industry-banking","hck-taxonomy-country-united-states"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/rc-tom-challenge-2018\/","yoast_head":"\nBlockchain Powered Asset Tokenization Protocols Threaten Goldman Sachs\u2019 Investment Banking Business - Technology and Operations Management<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/blockchain-powered-asset-tokenization-protocols-threaten-goldman-sachs-investment-banking-business-2\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Blockchain Powered Asset Tokenization Protocols Threaten Goldman Sachs\u2019 Investment Banking Business - 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