Goldman Sachs' application for "DeFi and Blockchain Stock ETF" was ridiculed. What is the reason behind it?

The footprints of the internationally renowned investment bank Goldman Sachs in the DeFi (open finance) field were discovered because of an application it submitted to the U.S. Securities and Exchange Commission (SEC).

On July 26, the preliminary instructions for the application of "Goldman Sachs Innovative DeFi and Blockchain Equity ETF" appeared on the SEC's official website.

Initially, this news was interpreted as meaning that "traditional investment banks are planning to invest in decentralized finance DeFi." However, a careful reading of Goldman Sachs' explanation revealed that although this fund is themed "the implementation of blockchain technology and financial digitization," the index it tracks is not directly related to blockchain, DeFi, and crypto assets closely related to these two new concepts. Instead, it tracks the performance of listed company stocks.

The fund's index was created by Solactive AG, a German index provider, and is designed to allow investors to hold stock positions in companies involved in blockchain and decentralized financial technology. At present, Goldman Sachs has not yet announced which companies are included in the index, but the "Blockchain Technology Performance Index" previously provided by Solactive AG is composed of listed technology companies. Because Nokia appeared in the index component list, Goldman Sachs' understanding of blockchain and DeFi was ridiculed by the public.

The reality is that there are not many native blockchain technology companies that have been listed, but there are many concept stocks. Compared with DeFi applications that have already used blockchain networks to run securities such as Tesla, Apple, Alibaba and related indexes on the chain, Goldman Sachs' "DeFi and Blockchain Stock ETF" seems to be full of gimmicks but too small a step.

Of course, for Goldman Sachs, under the reality of regulatory oversight, applying for such an "innovation" fund reflects that this traditional investment bank has begun to explore new financial paradigms. The depth of the exploration remains to be verified, but Goldman Sachs' interest in crypto assets is different from what it was three years ago.

Just a few days before Goldman Sachs submitted its application for the "Innovative DeFi and Blockchain Stock ETF", the group conducted its first survey of more than 150 family office decision makers and concluded that, taking inflation into account, about two-thirds of family offices believe that crypto assets will become a portfolio solution to hedge against inflation.

Goldman Sachs plans to launch a DeFi concept ETF that has nothing to do with crypto assets

On July 26, Eastern Time, the preliminary application statement for the "Goldman Sachs Innovative DeFi and Blockchain Equity ETF" appeared on the SEC's official website, and the media quickly captured this information.

At first glance, Goldman Sachs' ETF fund targets DeFi and blockchain, but in fact, the internationally renowned investment bank stated in its prospectus that the fund is an exchange-traded open-end index fund (ETF). The index is composed of stock data of regulated listed companies. The purpose of its creation is to seek investment results that closely correspond to the performance of Solactive's decentralized finance and blockchain index.

Goldman Sachs submits DeFi and blockchain stock ETF application to SEC

Goldman Sachs said in its application that the fund will invest at least 80% of its assets (excluding collateral held for securities lending) in securities included in the relevant index and in depositary receipts and related stocks representing the relevant index to achieve its investment objective.

The indices tracked by the fund are provided by Solactive AG, a German index provider, which is “designed to provide exposure to companies aligned with the two key themes of ‘blockchain technology implementation and financial digitization.’”

Goldman Sachs also defined "two key themes" in it: blockchain technology is defined as the underlying technology of distributed ledgers, suitable for fields and industries such as payment and currency that rely on trusted intermediaries; financial digitalization is defined as the digital transformation of traditional financial services, including support and delivery of payments, transaction services, loans and insurance.

Even though crypto assets are closely related to blockchain technology and DeFi, judging from the definition in the prospectus and the composition of the fund index, Goldman Sachs' "Innovative DeFi and Blockchain Equity ETF" fund has nothing to do with crypto assets, and the subscription and trading of this ETF are also completed in traditional financial venues.

The fund index is composed of listed company securities.

Since it is an index fund, there must be an index that the fund tracks. So what is the relationship between this index component and blockchain?

Goldman Sachs' application disclosed that Solactive AG is responsible for determining the components of the index, and the first condition for the companies that make up the index is to be listed on a regulated stock exchange; in addition, the stocks of these index companies must meet certain market requirements-the average daily trading volume in the last 6 months is at least US$1 million and the total market value is at least US$500 million. In order to minimize the risk of being unrelated to the theme in the index, these companies must not be classified as certain industries by FactSet industries and economic sectors.

How to verify that these index constituent companies are relevant to the theme of "Blockchain Technology Implementation and Financial Digitalization"?

Goldman Sachs wrote about Solactive AG's methodology - using keywords describing the theme and its proprietary natural language processing algorithm to screen publicly available information, such as regulatory filings, academic journals and patent applications filed by applicable regulators or major stock exchanges in certain developed markets, to confirm that the index constituents have or are expected to be involved in the theme on a large scale. In addition, Solactive AG will screen other companies and/or third-party information to verify the relevance of the index constituents to the theme, and securities that cannot be verified to be relevant to the theme will be removed.

After meeting the above conditions, each company will be assigned a score related to the theme, and the company with the highest score will be included in the index. Finally, the index constituent companies are weighted by market value, with a minimum weight of 0.5% and a maximum weight of 2% for companies with a market value of more than $100 billion, and 3% for other companies.

It can be seen that this fund is still a blockchain concept ETF. Solactive AG will reorganize and rebalance the index regularly. Although the company and Goldman Sachs have not yet disclosed which companies will be included in the index components tracked by this "DeFi and Blockchain Stock ETF", the German index provider already has a blockchain-related index called the "Solactive Blockchain Technology Performance Index", which includes 20 entities.

Solactive Blockchain Technology Index Composition

Interestingly, all the companies presented in this index component table are listed on the US stock market. The top five are Accenture, Alibaba, Google, Baidu and Cisco. Alibaba and Baidu are indeed on the list in terms of blockchain patents, but judging from the main business areas of these companies, they still belong to the traditional technology industry. In this index component table, Intel, Lenovo, Microsoft are also on the list, and there are even old mobile phone manufacturers such as Nokia. In addition, Facebook, which has been striving to promote the issuance of stablecoin Libra, is also on the list. It is considered to be the company most closely related to blockchain and encrypted assets.

With such a blockchain index precedent, the industry's interest in the "DeFi and Blockchain Stock ETF" provided by Solactive and created by Goldman Sachs has greatly decreased. From the information disclosed so far, this fund will neither be born on the blockchain nor have anything to do with DeFi applications. The name sounds good, but the blockchain gold content of this ETF is obviously insufficient.

Goldman Sachs takes small steps towards crypto assets despite regulation

Fearing that Goldman Sachs would include traditional companies and financial entities such as Nokia, Paypal, Visa, and Mastercard in DeFi's ETF funds, crypto asset enthusiasts began to use jokes and emoticons on Twitter to mock Goldman Sachs' understanding of DeFi.

Twitter users mock Goldman Sachs' understanding of DeFi

In the overseas public opinion field, some commentators criticized Goldman Sachs for fraud because the "Innovative DeFi and Blockchain Stock ETF" fund was just a name. Alex Svanevik, data analyst and CEO of Nansen, called Goldman Sachs' behavior a "scam" and said, "If a scam like this can be carried out in a regulated entity, then what is the point of regulation?"

Whether Goldman Sachs' new ETF can be approved remains to be reviewed by the SEC, but perhaps it is also the regulatory review that makes this traditional investment bank "only superficial" when integrating DeFi and blockchain into traditional financial instruments. Goldman Sachs is no layman when it comes to crypto assets.

As early as October 2017, Goldman Sachs first expressed its interest in crypto asset trading companies and even wanted to set up a dedicated trading department. In May 2018, it was reported that Goldman Sachs would use its own funds to trade Bitcoin futures products on behalf of clients from CBOE and CME; three months later, Goldman Sachs directly stated that it would launch crypto asset custody services. But in September of that year, Goldman Sachs backed down and decided to abandon the plan to establish a crypto asset trading department. In this regard, "people familiar with the matter" said that Goldman Sachs made this decision because crypto assets are still in a gray area in the US regulatory level.

As global regulators pay more and more attention to crypto assets, DeFi, which became popular in 2021, has also begun to enter the regulatory field of vision. In July this year, Japan's financial regulator issued a report suggesting that regulations for DeFi may be introduced; in June this year, Thailand explicitly stated that it would regulate DeFi; in the same month, officials from the U.S. Commodity Futures Trading Commission (CFTC) stated that unlicensed DeFi markets in the United States may be illegal; not long ago, Uniswap, the representative of DeFi on the Ethereum chain and the largest decentralized exchange, issued an announcement stating that it would impose restrictions on some tokens, and the outside world interpreted this as regulators starting to regulate DeFi.

It can be seen that no matter how decentralized DeFi or blockchain is, there is always a creator, and these creators are also the means for regulators to prevent risks and combat crime. For Goldman Sachs, which is already under regulatory control, it goes without saying that it strictly abides by regulatory rules.

Judging from its intention to launch the "DeFi and Blockchain Stock ETF", Goldman Sachs has shown its interest in blockchain and open finance (DeFi), although this interest is still at the conceptual stage. However, for crypto assets attached to the blockchain, this traditional player has been approaching it in small steps in the past two years.

Just a few days before proposing the "DeFi and Blockchain Stock ETF", Goldman Sachs conducted its first survey of more than 150 family office decision makers. "Taking into account inflation, about two-thirds of family offices believe that crypto assets will become a portfolio solution to hedge against inflation. About 40% of global respondents also regard currency depreciation as a top priority, and more than 40% of them said they would consider investing in crypto assets."

Earlier, overseas media Coindesk quoted two people familiar with the matter as saying that Goldman Sachs' prime brokerage department is clearing and settling crypto asset exchange-traded products (ETPs) for some hedge fund clients in Europe. Sources said that these services are currently provided to a limited number of customers, and the bank has been reviewing the matter internally as it looks to launch these services to more customers.

In the context of several Bitcoin ETF applications that have failed to pass SEC review in the past few years, Goldman Sachs' ETF packaged with DeFi and blockchain concepts, although seemingly unworthy of the name, may objectively serve as a test of regulation. (Fengchao Tech)