A new Morgan Stanley report aimed at assessing whether blockchain is a threat to big banks agues that the short-term benefits of the technology are likely minimal, but that future growth is likely.
Published yesterday, the report features a timeline of when Morgan Stanley predicts certain blockchain milestones will be reached. Culminating in 2025, Morgan Stanley identifies 10 roadblocks to banks integrating blockchain.
However, the report includes language that suggests the global investment bank may be seeking to understand how blockchain tech may impact its portfolio or perhaps its own earnings.
The report reads:
“While the long-term opportunity is clear, the blue sky is still too far to the right to affect 2017/18 EPS [earnings per share], we think, so our stock positioning generally reflects medium-term earnings issues for our banks.”
That aside, the report is perhaps most focused on developing a timeline for how Morgan Stanley expects blockchain tech to progress over the next decade.
For instance, the report pegs the banking industry’s current proof-of-concept phase as completing in 2018. It further lists key milestones the industry could use to determine the success of such projects within this time frame.
According to the report, institutions must successfully scale the technology, enable the transacting of assets and assess if the tech offers benefits that go beyond traditional legacy systems.
The next phase of blockchain adoption by financial institutions overlaps slightly with the current phase, running from 2017 to 2020, according to the Morgan Stanley report.
During the “Shared Infrastructure Emerges” phase, Morgan Stanely predicts that proven technologies will be adopted “well beyond” proof-of-concept. An interface for external users will be developed including APIs giving others access to the tools will begin to be leveraged.
The final phase of the report picks up where the previous one left off, in 2021, and continues to 2025. During this “Assets Proliferate” phase Morgan Stanley predicts that more assets will move onto a blockchain “as efficiencies prove out”.
Obstacles to adoption
But standing between this final phase of blockchain adoption are roughly 10 obstacles, according to the report.
These include the need to:
- Align incentives
- Choose standards
- Determine which stakeholders pay for the upgrade
- Ensure that solutions are simple and interoperable
- Establish governance standards
- Evaluate the legal risks, cost benefits and security
- Respond to regulatory concerns
- Successfully scale the technology.
Each category was graded by four criteria and only one — simplicity — was important in all four areas: economics, technology, cooperation and policy.
From the report:
“Any killer app in software has to deliver simplicity. This goes for blockchain solutions too. Uncomplicated and easy to understand. It needs to interface with other parts of the tech food chain seamlessly, enabling faster setup time, training time and fixing time.
“It must deliver on the promise of efficiency and be easy enough for all parties to understand and leverage,” the report continues.
Morgan Stanley concludes its report with a list of “tentative conclusions” and predictions, asserting the best use cases for blockchain in the near future are in post-trade, especially loans, credit default swaps and securities.
“Further off” in the future, Morgan Stanley predicted the payments industry stands to be positively impact by blockchain.
“The bearish case,” as the report describes it, is a “dramatic reduction of margins” and the risk that “profit pools” might leak to “other players.”
For custodians that generate profits from ensuring securities are accurately measured and moved blockchain technology “threatens their value add” as shorter settlement periods could cut into their revenues. The report specifically mentions BNY Mellon, State Street, Northern Trust, Citi and JP Morgan Chase.
From the report:
“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.”
Read the full report below: