Goldman Sachs has begun trading derivatives tied to digital assets, becoming the first major U.S. bank to trade crypto over the counter, CNBC reported. The firm has teamed up with crypto merchant bank Galaxy Digital to trade a bitcoin-linked instrument known as a nondeliverable option. 

Derivatives are financial contracts between two or more parties that derive their value from an underlying asset, group of asset or benchmark. Over-the-counter (OTC) refers to the process of securities being traded via a broker-dealer network as opposed to on a centralized exchange. Goldman's action is viewed as a notable step in the development of crypto markets for institutional investors, according to CNBC. Compared with the exchange-based CME Group bitcoin products that Goldman began trading last year, the bank is taking on greater risk by acting as a principal in these transactions. 

In an interview with CNBC, Galaxy co-President Damien Vanderwilt said, “This trade represents the first step that banks have taken to offer direct, customizable exposures to the crypto market on behalf of their clients.” He added that options trades are “much more systematically relevant to markets compared to cleared futures or other exchange-based products. At a high level, that’s because of the implications of the risk banks are taking on; they’re implying their trust in crypto’s maturity to date.” 

Hedge funds have been seeking derivative exposure to bitcoin, either to make wagers on its price without directly owning it, or to hedge existing exposure to it, according to these firms. The market for these instruments is mostly controlled by crypto-native firms including Galaxy, Genesis and GSR Markets. 

Back in December, Goldman’s global head of crypto trading, Andrei Kazantsev, said that  the bank has seen high demand for options tied to digital assets, “The next big step that we are envisioning is the development of options markets,” he said.