Morgan Stanley sees best use for Blockchain in securities rather than payments

Rick Steves

“Global Insight: Blockchain in Banking: Disruptive Threat or Tool?”, published by Morgan Stanley to share its thoughts on distributed ledger technology and its place in the world, is a paper that suggests several misconceptions and identifies 10 hurdles to overcome to make blockchain a reality in banking. “The opportunity is clear but the blue sky […]

Morgan Stanley sees Blockchain's best use for Securities

“Global Insight: Blockchain in Banking: Disruptive Threat or Tool?”, published by Morgan Stanley to share its thoughts on distributed ledger technology and its place in the world, is a paper that suggests several misconceptions and identifies 10 hurdles to overcome to make blockchain a reality in banking. “The opportunity is clear but the blue sky is too far off to impact our 2017/2018e.

yay
Source: Morgan Stanley

The higher efficiencies that DLT bring won’t just change the Financial Services’ IT architecture, but also might change accessible profit pools, depending on how quickly incumbents move, and that explains early experimentations of Linux Hyperledger and R3 sponsored by JPM, BK and STT. Banks and custodians have a clear advantage as policymakers are unwilling to allow ‘unpermissioned’ DLTs, but the market doesn’t seem aware of that.

DLTs, however, could also pose a risk to them as well: “For custodians such as BNY Mellon, State Street, Northern Trust, Citi, JPM, which generate profits from ensuring securities are accurately measured and moved and which benefit from the carry fromT+2/3, blockchain technology threatens their value add and shorter settlement periods could cut into revenues more than they could free up capital for buybacks – but that’s why the custodians are at the leading edge of distributed ledger work to ensure that they can deliver the most efficient blockchain solutions to their clients”.

Morgan Stanley argues both bullish and bearish cases. The first being the reduction in post-trade activity costs, especially in investment banks, with potential savings between $15 billion and $20 billion a year for the banking industry. Savings from current utility-like structures is potentially one of the most compelling reasons, among speed and transparency, to develop the technology: “And we’re not talking five, ten, 15% cuts in costs. We’re talking 30/40/50% and there’s only one way to do that and that is to share a mutualized common infrastructure that previously was kept separately and run independently by every market participant.”, said Blythe Masters, CEO at Digital Asset Holdings, LLC.

However, higher IT spend at the same time as dramatic reduction in margins is destabilizing and disruptive, also risking profit pools leaking to other players.

According to the opinion of Morgan Stanley’s report authors headed by Huw Van Steenis, shared utilities are likely to have a bigger impact on bank earnings in 2017-2019 than blockchain implementation. But DLTs’ post-trade effiencies, particularly with loans, CDS and securities in general, should be the best use for the technology, rather than payments: “Financial institutions are required to allow regulators to review transactions. Financial institutions have to ensure that all the customers on their platform are reviewed under the know your customer (KYC) and anti-money laundering (AML) guidelines, which a permissionless blockchain like Bitcoin would not allow. That said, there could be some payments mechanisms between trusted, authenticated parties, in particular cross-border, which seems inefficient today”, said the report.

 

Read this next

Retail FX

Financial Commission adds FX broker Bold Prime to membership roster

The Financial Commission today announced that it has added Bold Prime to its member roster, which is made up of online brokerages operating in FX, derivatives and cryptocurrency markets.

Digital Assets

Despite crypto winter, Cake DeFi paid out $58 million in Q2 rewards

According to its latest ‘Transparency Report,’ Cake DeFi continued its growth trajectory in the three months through June 2022, even as the entire crypto industry experienced macro challenges this quarter.

Retail FX

SimpleFX Review: Cryptos, Spreads, Pros & Cons

SimpleFX combines years of Forex and cryptocurrency experience with a focus on offering resources to retail traders. 

Retail FX

Ironbeam becomes CME clearing member and launches MT5

“The direct clearing aspect along with our low-latency proprietary trading tools and technology solutions make Ironbeam the ideal trading destination.”

Institutional FX

Top 0.07%: oneZero makes it to Inc. 5000 of fastest growing companies in America

oneZero started out by serving the foreign exchange trading community, developing and executing technology that could scale with the growth of the FX market.

Industry News

CFTC wins case against broker for secretly taking other side of client orders in block trades

“As we said at the outset of this case, the illegal use of inside or confidential information undermines confidence in markets and will not be tolerated.”

Technology

BankiFi raises $4.8m to bring embedded banking platform to North America

“Our mission is to make all aspects of cash management and payments easier for SMBs everywhere, and this investment is another huge step to making that a reality.”

Executive Moves

Shieldpay hires ex-Payoneer Chris Andrews as Head of Sales

“We’ll be expanding our position in existing markets and accelerating growth into new verticals, whilst building on our direct and indirect channels.”

Digital Assets

Crypto.com secures preliminary approval to operate in Canada

Crypto.com, one of the longest-established crypto platforms, has become the first digital asset platform to sign a Pre-‘Registration Undertaking’ with the Ontario Securities Commission (OSC) in Canada.

<