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On October 31, the multinational of investment banks and financial services companies, Morgan Stanley, published their latest report on Bitcoin. The report, titled "Update: Bitcoin, Cryptocurrencies and Blockchain", stated that bitcoins and altcoins have constituted a "new class of institutional investment" since 2017.
Compared to the Morgan Stanley report of 2017 on Bitcoin, their forecast for 2018 is bullish. The report contains an overview of how Bitcoin has evolved and how its investment purpose has changed over the course of its existence. Morgan Stanley analysts have also touched on the recent stovereco trend and the reactions of the central bank and regulator to Bitcoin over the past six months. The report listed several shortcomings that persist for Bitcoin, such as energy consumption and the lack of a robust regulatory framework. Analysts have revealed the "surprising" change in the flow of finance in the sector, along with a growing trend for encryption futures.
All eyes on the future
This latest development, described by the bank as "surprising", is set against the backdrop of Morgan Stanley, which offers derivatives trading linked to the largest cryptocurrency. It is important to note that the bank does not actually intend to directly negotiate Bitcoin or cryptocurrencies, but rather to offer Bitcoin swaps linked to future contracts. At the beginning of the year, CEO James Gorman said that a trading desk specialized in derivatives linked to digital assets could be a potential service offered to customers.
Futures are contracts in which the buyer has agreed to purchase an activity at a time and at a price agreed in the future. The same provision also represents the part that sells the good. These contracts note both the quality and quantity of traded, standardized assets and require the physical delivery of the assets being traded or are settled in cash.
According to Bloomberg, the bank already has measures to offer bitcoin exchange trading, however, it will not officially initiate any initiative without first ascertaining the level of demand from institutional clients and completing an in-depth internal approval process.
As previously reported by Cointelegraph, Morgan Stanley told customers that the Bitcoin was similar to the Nasdaq, even if it moved "15x" faster. The bank also predicted that the financial markets would increasingly orient themselves towards the use of the crypt in the future:
"In the coming years, we think that the attention of the market could revolutionize more and more cross trades between cryptocurrencies / tokens, which could only be negotiated through distributed registers and not through the banking system".
Despite the apparent willingness of the bank to launch this latest venture, the fact that their list of institutions actually willing to cancel Bitcoin futures has not changed since their 2017 report eases any short-term hope for a wider adoption:
Stablecoin a factor to keep an eye on
The report has made specific mention perhaps of the most recent development in the cryptocurrency sector: the stablecoin. The tendency to stablecoin began in late 2017 and underwent an outbreak throughout the summer of 2018, with several industry giants launching stablecoin.
Stablecoins are cryptocurrencies designed to maintain volatility at absolute minimum and are usually valued against fiat currencies such as the US dollar, commodities and other cryptographic assets.
While pointing out that 54% of the total value of the cryptocurrency remains Bitcoin, the report notes that the introduction of stablecoin on the encrypted market has led to a share of trading volumes subtracted from BTC. Analysts write that this has helped the subsequent fall in prices that has led to the current bear market.
According to the report, these consequences are due to the fact that a large number of existing exchanges currently do not facilitate the exchange of encryption in fiat. The researchers say that this is due to the fact that encrypted-> fiat trading involves the crossing of the main banking sectors and entails a higher cost. The report then explains that the resulting reduction in Bitcoin prices has also had a knock-on effect in the sector, which means that owners who tried to extricate themselves from Bitcoin holdings needed to find a resource whose assessment reflected more US dollar.
Researchers at Morgan Stanley also point out that, despite positive support for the recent industry trend, not all stablecoins will survive. The report postulates that only stablecoin with low transaction costs, high liquidity and a concrete regulatory framework will be successful in gathering widespread adoption.
While the report does not throw the bar on the future well-being of any specific stablecoin, it mentions four coins to its readers:
USDT (Tether) receives a mention as being responsible for the initial decrease in trade volumes of BTC and for trading at about the same price as the US dollar. However, the report does not touch the issue of the USD losing the dollar peg after falling below the $ 1 mark in October 2018. The decline in valuation has resulted in an apparent sell-off of the tokens in October and created a lack of trust among traders.
Although Tether was previously one of the most widespread and commonly traded stablecoin, it has recently been involved in a series of scandals due to its lack of transparency and reserve management. Tether has since rebounded after finding a new banking partner and is "fully supported" by the USD, according to a new statement.
The mention of the Morgan Stanley report is also GUSD, launched in September by billionaires and established actors in the cryptography industry, Tyler and Cameron Winklevoss.
The Gemini Dollar (GUSD) is covered by US dollars reserved in a bank located in the United States and is eligible for FDIC pass-through insurance. The twins hope that Gemini can revolutionize the stablecoin market by eradicating delays between 24/7 encrypted markets and legal markets operating under time constraints.
The Center's stablecoin, USDC, is the third stablecoin appointed by the report. Center, a consortium that includes the mining giant Bitcoin Bitmain Technologies Ltd., is set to serve as a platform for fiat deposits and conversions for the new stablecoin. The consortium is a subsidiary of Circle, but, according to Bloomberg, the company has announced plans to turn it into an independent organization.
USDC is starting with a different approach to compliance than its main competitor, Tether. Part of the agreement for issuers is that they allow certified auditors to monitor and review their USDC reserves.
The fourth stablecoin mentioned in the report is DGX (Digix Gold Coin). DGX is 99.99 percent of LBMA approved gold in USD. The corresponding gold is held in the Digix bank in Singapore.
"Thesis of morphing quickly" by Bitcoin
Another key aspect of Morgan Stanley's relationship is what defines Crypto's "morphing theory quickly". The report traces the evolution of Bitcoin from its various roles in digital money, a new fund-raising mechanism, a method of storing value, to its most recent incarnation as a "new class of institutional investment".
The report showed that 48% of Bitcoin funding came from hedge funds. Another 48 percent comes from venture capital with the remaining 3 percent found in the form of private equity.
In terms of the origins of the investment in Bitcoin, over half comes from investors based in the United States, with China and Hong Kong reaching 9% and the United Kingdom in third place at 6%.
Alongside financial statistics, the report also points out that the big players in the financial mainstream have launched their hats in the ring. Analysts draw attention to Bain's $ 15 million series B round of financing for the Seed Cx institutional gold trading platform, Goldman Sachs and $ 58.5 million of BitGo investment, as well as the $ 8 billion Coinbase, making comparisons with Charles Schwab, Fidelity and Nasdaq.
The report also touches on the new trend of the cryptoists to actively cooperate with the institutions, giving the prominent example of the twins company Winklevoss, Gemini Trust, which hires Nasdaq to conduct market surveillance.
Despite the seemingly upward presentation on institutional involvement, the report continues to mention that asset managers are not yet prepared to take reputational risks in an underdeveloped regulatory environment. The bank also highlighted the lack of a custody solution to contain both cryptocurrency and private keys along with that of the large financial institutions currently invested.
Central bank response
The report also reveals a change in the approach of central banks. According to Morgan Stanley analysts, the discussion of digital versions of paper notes and coins has been reduced, with the exception of Sweden, which has yet to decide to introduce an e-Krona.
The report documents that the South Korean province of Gyeongbuk is trying to replace gift certificates issued by the city with a digital alternative, along with Thailand's research to facilitate liquidity and risk management. The survey of India on the cost-efficiency of a digital rupee is also mentioned in the report, but no analysis is provided on the progress of these projects, nor are any predictions made about their future success.
The regulators mentioned in the report remain wary but crypto sees an increase in positive comments
Another section of the report is dedicated to comments from regulatory authorities. The Morgan Stanley report documents that regulators are still skeptical about the best way to classify cryptocurrencies, as well as how to adapt them to an appropriate framework in which they can be traded securely and legally.
William Hinman, head of the Corporate Finance division for the SEC, is quoted in the report, stating that more work needs to be done to establish customer expectations and classify cryptocurrencies:
"Central to determine if a stock is sold is how it is sold and the reasonable expectations of buyers."
The CFTC president, Christopher Giancarlo, has also been documented by Morgan Stanley as confident about cryptocurrencies and their potential to become a concrete part of the financial mainstream:
"Personally I think cryptocurrencies are here to stay, I think there's a future for them, I'm not sure they ever rival the dollar or other strong currencies, but it's a whole section of the world that is really hungry for working currencies that they can not find in their local currencies.There are 140 countries in the world, each of them has a currency.Probably two-thirds are not worth the polymer or paper they are written on, and those parts of the world rely on strong currencies.Bitcoin [or another] cryptocurrency can solve some of the problems. "
Morgan Stanley lists numerous blockchain benefits and companies that use it
In light of the fact that Morgan Stanley has used blockchain-based technology to perform process transactions and to back up records since March 2016, it may not come as a surprise that the bank has listed several advantages that it believes technology is capable of to bring to the table.
According to the report, blockchain is best implemented for B2B transactions where participants are trusted on both sides of the transaction. The bank also documents that blockchain technology provides benefits for cross-border payments, a technique increasingly used by migrant workers to send money back to their home countries as remittances. The researchers also noted that there are potential benefits in the KYC sectors and customer data management, although they also said that the APIs could be more efficient.
The report provides a list of the numerous financial institutions that are actively experimenting or implementing blockchain technology:
The researchers also provided examples of key cases of use of the blockchain infrastructure, particularly for banks:
Attitudes change, but reserves remain
Although the report represents a significant change both in the attitude of Morgan Stanley and in other major financial institutions, he highlights some areas in which he has remained apprehensive.
The report touches on one of the most discussed drawbacks of blockchain and cryptocurrency: the use of electricity. Morgan Stanley analysts predict that the fall in the price of mining equipment will increase electricity consumption:
This latest chart is based on the same concerns highlighted in the Morgan Stanley 2017 report:
The considerable use of Bitcoin energy has been widely reported. At the start of this year, Cointelegraph reported on how Bitcoin was on track to use 0.5% of world energy by the end of 2018 and face an impact on its cost-effectiveness electricity in the summer months.
Morgan Stanley issues a warning on the compatibility of AI and blockchain
The report has dedicated a whole page to show to what extent the AI and the blockchain are "deadly enemies". Strangely enough, the extension of their belief did not extend to providing any justification for this notion of sorts:
Morgan Stanley's research on cryptocurrency is published regularly. The cryptography bank's previous report, entitled "Diversified Financials: Exploring Global Criptovalute Regulations", was released on August 21st. The latest report published by Morgan Stanley to focus on Bitcoin was released in January 2018. The November 2018 report is the first to document a change in institutional investment models and to document the trend for encrypted futures. The bullish prospect of the relationship may be indicative of greater willingness for large institutional players to adopt Bitcoin more readily in the 2019 financial year.
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