Update: Bitcoin, Cryptocurrencies and Blockchain - MacroBusiness
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June 1, 2018 11:45 PM GMT Update: Bitcoin, Cryptocurrencies and Blockchain James Faucette, Betsy Graseck, Sheena Shah June 1, 2018 Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.
Summary of the Last 6 Months
1. Bitcoin believers fracturing: Maximalists vs. Diversifiers
2. Bitcoin/Crypto prices fall—Results:
a) Not surprising: trading volumes fall (generally), new funds formation slows, news
flow/interest growth slows
b) May look surprising but shouldn’t be: electricity consumption increases, still active
ICO market (but moving to unregulated geos)
c) Surprising: Existing funds continue to beef up, futures grow
3. ICO’s are largely failing, and failing fast. But not going to $0. Nobody seems to be
noticing accumulating massive losses.
4. Blockchain trials spread within financial services, but benefits mainly unclear
5. Early blockchain application successes: cross-border transfers, shipping and trade
finance, reinsurance.
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 2
I. What has happened with Bitcoin The Bitcoin/Crypto Factionalization Maximalists vs. Diversifiers and the Incrementals Maximalists think that Bitcoin will eventually win over all other crypto/digital/fiat currencies and view work on anything else as a distraction and waste of resources. Diversifiers are looking for there to be wide range of digital currencies, etc. It feels like the incremental participant in the space is either a blatant opportunist or harbors extreme political ideologies and sees cryptos as a path to realization. Noteworthy that sophisticated investors willing to give up traditional investor rights for potentially faster liquidity. BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 3
II. Bitcoin’s Market & Liquidity
Size of the Cryptocurrency market and liquidity
• Bitcoin and Ethereum Value
Bitcoin value ($) Ethereum value ($)
25,000 1,600
1,400
20,000
1,200
15,000 1,000
800
10,000 600
400
5,000
200
0 0
Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18
Source: blockchain.info, Morgan Stanley Research
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 4
II. Bitcoin’s Market & Liquidity
Size of the Cryptocurrency market and liquidity
• Trading volumes falling with prices
Bitcoin Daily Trading Volume ($mn) Ethereum Daily Transaction Count
(thousands)
6,000
1,600
5,000 1,400
1,200
4,000
1,000
3,000 800
2,000 600
400
1,000
200
0 0
Jan-11 Jan-13 Jan-15 Jan-17 Jan-11 Jan-13 Jan-15 Jan-17
Source: blockchain.info, Morgan Stanley Research
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 5
II. Bitcoin’s Market & Liquidity
Size of the Cryptocurrency market and liquidity
• 39% of total cryptocurrency value is in Bitcoin
• Over $300bn spread over 1,300 coins
Total Float Volume 24h Supply (% Max coins
# Name Symbol Price (USD) Supply (USDmn) Mined?
(USDbn) (USDmn) max) (mn)
1 Bitcoin BTC $7,430.05 127 3140 17 81% 21 Y
2 Ethereum ETH $558.77 56 1000 100 NA No Y
3 Ripple XRP $0.59 23 259 38,306 38% 100,000 N
4 Bitcoin Cash BCH $980.62 17 455 17 82% 21 Y
5 Eos EOS $12.07 12 1060 1,000 100% 1,000 Y
6 Litecoin LTC $119.01 7 234 57 68% 84 Y
7 Stellar XLM $0.28 5 49 18,579 19% 100,000 N
8 Cardano ADA $0.20 5 118.9 25,927 58% 45,000 Y
9 Iota IOT $1.59 4 91.1 2,780 100% 2,780 N
10 Tron TRX $0.06 6 244.4 100,000 100% 100,000 N
Source: blockchain.info, CryptoCompare.com, Morgan Stanley Research
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 6
II. Bitcoin’s Market & Liquidity
What is bitcoin traded against?
Still mainly Asia but increasingly vs other cryptocurrencies
Crypto
40% Fiat
60%
Source: CryptoCompare, Morgan Stanley Research
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 7
II. Bitcoin’s Market & Liquidity
Expanding alt-coin market
Bitcoin is the price setter for the broader market.
Correlations with other tokens/coins is very high
Bitcoin trading by currency (28-May-18, 1m av)
EUR, Others,
2.6% 7.2%
LTC,
3.3%
KRW,
3.4%
JPY,
BCH,
35.4%
6.4%
ETH,
9.8%
USDT,
14.4% USD,
17.4%
Source: CryptoCompare, Morgan Stanley Research
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 8
II. Bitcoin’s Market & Liquidity
Bitcoin bear market: nothing new
Historical bear
markets
20000 5600
18000 5100 Nasdaq composite
16000 4600 Bitcoin (left axis)
14000 4100
Still tracking the peaks 12000 3600
3100
10000
and troughs from Nasdaq 8000 2600
6000 2100
in the year 2000 4000 1600
1100
2000
600
0
Nasdaq
Bitcoin
Source: CryptoCompare, Bloomberg, Macrobond, Morgan Stanley Research
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 9
III. Unanticipated problems/limits
Bitcoin Questions
Key elements of Bitcoin thesis continue to breakdown (evolve?)
• Investment tenet: Limited quantity—21M
– Why it is failing: Anybody can create a “hard fork” of the open source code, which in
turn can create a new currency for those that already hold Bitcoin. We view these hard
forks as being like stock splits or new class creations.
– Bitcoin’s Hard Forks:
• 1 Aug 2017—Bitcoin Cash
• 24 Oct 2017—Bitcoin Gold
• 24 Nov 2017—Bitcoin Diamond
• 12 Dec 2017—UnitedBitcoin
• 12 Dec 2017—Bitcoin X
• 12 Dec 2017—Super Bitcoin
• 28 Feb 2018—Bitcoin Private
– But unlike a stock split, the fork is not lowering the price per Bitcoin
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 10III. Unanticipated problems/limits
Bitcoin Questions
Key elements of Bitcoin thesis continue to breakdown (evolve?)
• Investment tenet: New electronic payment system for underbanked—only need a
phone.
– Why it is failing: Financial inclusion is of increasing priority for all payment players. The
new QR-based payment schemes in India show that reaching the underbanked can be
done much less expensively than Bitcoin.
• Investment tenet: Become part of the global financial system fabric.
– Why it is failing: the high costs of operating a fully trustless system is pushing early
players to balkanize systems into trusted blockchains/distributed ledgers.
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 11III. Unanticipated problems/limits
Current compromises
Bitcoin and SRI: Mutually Exclusive
Total Energy Consumption (Megawatts)
17,000 Electricity Consumption in a year based
15,000 on estimated chip orders = Monthly
power consumption of 14-16 mn US
13,000 homes
11,000
9,000 Electricity Consumption a year from
now based on Bitcoin value at $10K =
7,000 Consumption of ~5mn US homes
5,000
Electricity Consumption of
3,000
3-4 million US homes
1,000
-1,000
23-Dec-11 23-Dec-12 23-Dec-13 23-Dec-14 23-Dec-15 23-Dec-16 23-Dec-17
Note: Energy consumption estimated based on global mining hash rate multiplied by average Joule/gigahash/s energy usage, which we assume declines linearly from 1.5 in
2014 to 0.16 in May 2018
Source: blockchain.info, Morgan Stanley Research estimates
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 12III. Unanticipated problems/limits Current compromises Falling equipment prices: Predictable. And will drive electricity use higher. Source: camelcamelcamel.com, Morgan Stanley Research BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 13
III. Unanticipated problems/limits
Current compromises
Transaction costs growing
• Transaction cost over $70, FX spread varies widely by exchange, from 0.25% - 3%+
Cost per Transaction ($)
160
140
120
100
80
60
40
20
0
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18
Source: blockchain.info, Morgan Stanley Research
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 14III. Unanticipated problems/limits
Current compromises
Virtually no acceptance among US eCommerce merchants
Bitcoin acceptance among top 500 eCommerce merchants
500
400
300
200
100
5 5 5 5 3 3 3 4 4
0
1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18
Source: Morgan Stanley Research
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 15III. Unanticipated problems/limits Current compromises The unintended consequences • Frequency: Every ~9 minutes • Concentration: 82% of mined transactions done by 6 mining pools (AntPool, BTC.COM, BTC.TOP, SlushPool, ViaBTC, and F2Pool) • Transaction costs: $72/txn+ in transaction fees to miners (vs. $21 last year) • Frequency: ~3 transactions / second (About 2,500 txns fit in a “block”) • Cold Storage: 98% of Coinbase customer funds stored “offline”; USB drives and paper in boxes and vaults (the literal kind) Source: blockchain.info, Morgan Stanley Research BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 16
V. Unanticipated problems/limits Hacks and losses Sorry about that, no recourse • WSJ flagged 271 ICOs, which cumulatively raised over $1bn, for having plagiarized investment documents, missing/fake executive teams, etc. Investors have claimed $273mn of losses in these projects. • Titanium, April 2018, $21mn • LoopX, Feb 2018, $4.5mn • PlexCoin, Dec 2017, $15mn • NiceHash, Dec 2017, $63mn • Bitfinex, Aug 2016, $72mn • Bitstamp, Jan 2015, $5.2mn • Mt. Gox, Feb 2014, $487mn Over $630mn total, not including other cryptocurrencies BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 17
III. Unanticipated problems/limits
Volatility
Volatility is creating many of the unintended consequences, questions
Average daily BTC/USD change (30 day trailing average)
16%
14%
12%
10%
8%
6%
4%
2%
0%
Aug-10 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17
Source: bitcoinity.org, Morgan Stanley Research
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 18IV. Regulatory view on Bitcoin Bitcoin Risks Remain • No Regulatory Oversight • No Safety and Soundness Measures • No Recourse in the Event of Mistaken or Misallocated Transactions • High Cyber Risk • No Deposit Insurance BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 19
IV. Regulatory view on Bitcoin Regulation of ICOs and Cryptocurrencies Globally Degree of regulation varies significantly, with the US seeing moderate levels Note: Green area represent country where government has not provided guidance on regulation. Red area indicates that country has prohibited blockchain in some capacity. Source: Medium BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 20
0
1,000
1,200
1,400
200
400
600
800
Malta
South Korea
Belize
Seychelles
USA
British Virgin Islands
Hong Kong
Japan
UK
Singapore
Estonia
Russia
Vanuatu
Cayman Islands
Scam
Ukraine
Bahamas
Data as of April 2018
Samoa
Turkey
India
Argentina
Armenia
Mongolia
Poland
Canada
New Zealand
N/A
Indonesia
Luxembourg
Taiwan
Dubai
Australia
Brazil
Singapore
Thailand
Switzerland
Panama
Decentralised N/A
Netherlands
Mexico
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS
Denmark
Chile
South Africa
Czech Republic
Isle of Man
France
Cryptocurrency trading volume by legal location of exchange (USDmn)
Israel
Finland
Bulgaria
Croatia
Norway
Crypto activity driven by regulation
10
15
20
25
0
5
UK
Hong Kong
N/A
USA
Singapore
Turkey
South Korea
Brazil
Canada
Decentralised N/A
India
Japan
Netherlands
Poland
Scam
Argentina
Australia
from one day in April but the relative exchange rankings are still comparable if several days are averaged
British Virgin Islands
Russia
Cayman Islands
Chile
Seychelles
Ukraine
Malta
Belize
Bahamas
Estonia
Finland
New Zealand
Norway
Panama
Switzerland
Thailand
Armenia
Bulgaria
Croatia
Czech Republic
Denmark
Dubai
France
Indonesia
IV. Regulatory view on Bitcoin
Isle of Man
Exchanges are legally moving to Malta (they call themselves Blockchain Island)
Israel
Luxembourg
Number of cryptocurrency exchanges by legal location of exchange
Mexico
JUNE 2018
Mongolia
Samoa
Source: CountMarketCap.com, company websites, Morgan Stanley Research. For the left chart Binance is in Malta and OKEx in Belize. Volume
Singapore
South Africa
21
TaiwanIV. Regulatory view on Bitcoin
Regulators Watching Closely… in the US
• “ (I am) very optimistic that developments in financial technology will help facilitate capital formation,”
but “promoters of ICOs and cryptocurrencies” are creating “significant risks” by failing to comply with
securities laws”. SEC staff have been instructed “to be on high alert for approaches to ICOs that may
be contrary to the spirit of our securities laws.”
-- Jay Clayton, SEC Chairman
• The CFTC has issued new guidance to exchanges and other trading platforms that are interested in
listing bitcoin futures and other cryptocurrency derivatives products. “CFTC staff is providing this
information, in part, to aid market participants in their efforts to design risk management programs that
address the new risks imposed by virtual currency products.”
-- Brian Bussey, Director of CFTC’s Clearing and Risk division
• “They (cryptocurrencies) are speculative markets. They are not a currency. If you have money you
really need, do not put it in these markets.”
-- Raphael Bostic, President, Federal Reserve Bank of Atlanta
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 22IV. Regulatory view on Bitcoin
Regulators Watching Closely… in Europe
• “This (cryptocurrency) is a global phenomenon and it’s important there is an international follow-up at
the global level. We do not exclude the possibility to move ahead (by regulating cryptocurrencies) at
the EU level if we see, for example, risks emerging but no clear international response emerging.”
-- Valdis Dombrovskis, the EU’s Financial Chief.
• Cryptocurrencies do not threaten “financial stability” at the moment, but they could after more
consumers get involved. It is time to incorporate the cryptocurrency ecosystem into the rest of the
financial system, applying to it the same regulatory approach and the same “rigorous standards”
-- Mike Carney, Bank of England Governor
• It could be more efficient to prohibit banks and other financial institutions from holding and selling
cryptocurrencies, than to directly regulate crypto.
-- Andrea Enria, Chairperson, European Banking Authority
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 23IV. Regulatory view on Bitcoin
Regulators Watching Closely… Asia
• “Some complainants claimed that cryptocurrency exchanges had misappropriated their assets or manipulated the market,
or that technical breakdowns of the exchanges’ platforms had caused them significant losses. Several complaints against
ICO issuers alleged unlicensed or fraudulent activities. We will continue to police the market and enforce when necessary. ”
-- Ashley Alder, Chief Executive, Securities and Futures Commission, Hong Kong
• “When it comes to money laundering or terrorism financing, Singapore’s laws do not make any distinction between
transactions effected using fiat currency, virtual currency or other novel ways of transmitting value. ” MAS will seek to
impose anti-money laundering and anti-terrorist financing requirements on intermediaries that exchange fiat for virtual
currencies – such as exchanges and brokers.
-- Tharman Shanmugaratnam, Deputy Prime Minister and Chairman of the Monetary Authority of Singapore
• “Virtual Currencies (VCs), also variously referred to as crypto currencies and crypto assets, raise concerns of consumer
protection, market integrity and money laundering, among others. Reserve Bank has repeatedly cautioned users, holders
and traders of virtual currencies, including Bitcoins, regarding various risks associated in dealing with such virtual
currencies.” Entities regulated by RBI shall not deal with or provide services to any individual or business entities dealing
with or settling VCs. Regulated entities which already provide such services shall exit the relationship within a specified
time.
-- Jose J. Kattoor, RBI Chief General Manager
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 24V. Bank/Institutional efforts Central bank response • Monetary policy: Several central banks are actively debating whether or not to introduce a digital version of paper notes and coins (cash). These include countries with managed exchange rates or seeing low cash usage in the economy. • Financial stability: Crypto-assets are not considered to be a financial stability risk today as financial slows are small. • Countries investigating digital coins, blockchain and new payment networks include China, Sweden, Russia and Switzerland. • One country is already launching a digital coin. The Marshall Islands will issue 24 million SOV units that will be legal tender along with the USD. Their goal was to raise funding for the government and make transactions transparent. BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 25
V. Bank/Institutional efforts Central bank digital currencies (CBDC) Source: BIS, Morgan Stanley Research BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 26
V. Bank/Institutional efforts Why a Country May Be Interested in Digital Currency High service-driven economies more likely to invest in blockchain Source: Macrobond, Morgan Stanley Research; Countries are labelled using their local currencies. Note that high service-driven economies tend to also be wealthier so may invest more in the first place BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 27
V. Bank/Institutional efforts
Bank’s Response to Bitcoin: Limited
Who clears Bitcoin futures?
Yes No / Still Reviewing
GS JPM
• On a case-by-case basis BAC
• Requires 100% margin for some trades
C
• Exploring the potential for market-making
RBC
ABN Amro
SocGen
• Only for certain clients who request
approval in writing
• Assesses client’s trading systems and track
record in meeting risk limits
Interactive Brokers
• Allows investors to take a short position
Wedbush Securities
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 28V. Bank/Institutional efforts
Institutionalization of Crypto Trading
Pull back has paused new funds…
• Over $3.5bn in estimated AUM from over 250 crypto-dedicated funds
Number of cryptocurrency funds created
200 175
175
150
125
100
75
50 26
12 20
25 1 0 3 8
0
2011 2012 2013 2014 2015 2016 2017 2018
Source: Autonomous Next, Morgan Stanley Research
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 29V. Bank/Institutional efforts
Bitcoin Futures Trading
Daily CME Exchange Futures Volume
10000
8000
6000
4000
2000
0
02/01/18
02/28/18
12/18/17
12/21/17
12/27/17
01/02/18
01/05/18
01/10/18
01/16/18
01/19/18
01/24/18
01/29/18
02/06/18
02/09/18
02/14/18
02/20/18
02/23/18
03/05/18
03/08/18
03/13/18
03/16/18
03/21/18
03/26/18
03/29/18
04/04/18
04/09/18
04/12/18
04/17/18
04/20/18
04/25/18
04/30/18
05/03/18
05/08/18
05/11/18
05/16/18
05/21/18
05/24/18
• Contract Unit: 5 bitcoins
• Price Quotation: USD per BTC
• Final Settlement Procedure: Delivery is by cash settlement by reference to the Final Settlement
Price, equal to the CME CF Bitcoin Reference Rate (BRR) on the Last Day of Trading
Source: CME Group, Morgan Stanley Research
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 30V. Bank/Institutional efforts
Initial Margin on Bitcoin Futures are Significantly Higher
Initial Margin as a % of Notional
60%
50%
40%
30%
20%
10%
0%
Source: Bloomberg, Morgan Stanley Research
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 31VI. Investment case
VCs Recognizing FinTech Reality/Shifting to ICOs
Total global investment in fintech companies ($bn)
50 47
40
29 35
30 ICOs
25 Asia
20 Europe
12 US
9
10 6 4
0
2010 2011 2012 2013 2014 2015 2016 2017
Source: Token Economy, KPMG, Morgan Stanley Research
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 32VI. Investment case
Crypto/ICO Interest Remains High
Estimated ICO Capital Raised Over Month (USDmn)
1800
1600
1400
1200
1000
800
600
400
200
0
M A M J J A S O N D J F M A
2017 2018
S
ource: Token Economy, Morgan Stanley Research
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 33VI. Investment case
Success of ICOs is Low
• Approximately 32% of ICOs failed after raising money in 2017. They managed to raise $1.3B.
2017 ICOs by Status Capital Raised by ICOs ($B)
12 Defunct Coins Active ICOs
10 $1.62B
Failed since 8
Active ICOs
ICO
36% $1.30B
32% 6
$9.39B
4
Failed at
$5.85B
Funding 2
32%
0
2015 2016 2017 2018
Source: DigRate, Morgan Stanley Research
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 34VI. Investment case
ICO vs. VC Failure Rate
• Approximately 64% of potential ICOs failed before or after their ICOs in 2017. This is a higher failure
rate than seen among startups in the first year.
ICOs vs. Startups Number of ICOs that Failed Before/After ICO
200 ICOs that Failed at Funding Later Defunct Coins
0% 20% 40% 60% 80% 100%
180
160
Startups 25% 140
Fail within the first year 120
ICOs* 64% 100
80
60
40
Startups 71%-75% 20
Fail over 10-yr period 0
?
Nov-16
Nov-17
Jul-16
Jul-17
May-16
Mar-17
May-17
Mar-16
Sep-16
Sep-17
May-18
Mar-18
Jan-16
Jan-17
Jan-18
Note: ICO failures includes ICOs who failed at funding and those that failed after their ICOs
Source: DigRate, Morgan Stanley Research
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 35VI. Investment case Value of Top “Dead” ICOs Not Zero Source: DigRate, CoinCodex, Morgan Stanley Research BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 36
VI. Investment case
Bitcoin Correlation to S&P 500
Trailing 30 day Correlation between daily S&P500 and Bitcoin Price movements
0.4
0.3
0.2
0.1
0.0
-0.1
-0.2
-0.3
-0.4
Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18
Source: bitcoinity.org, Thomson Reuters, Morgan Stanley Research
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 379,,%ORFNFKDLQDVDGLVUXSWRU %ORFNFKDLQWKURXJKWKH06)LQ7HFK*DXQWOHW 6RXUFH 0RUJDQ6WDQOH\5HVHDUFK %,7&2,1'(&5
VII. Blockchain as a disruptor Where Blockchain Works Best, First • Trusted/known participants on both sides of transaction – e.g. B2B payments • Transaction fee rates at risk from more efficient technology – Cross-border payments • Trade settlement • Client data handling – KYC, Client Onboarding etc. (although APIs may be more efficient) BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 39
VII. Blockchain as a disruptor
Incumbents Take the Lead
VCs Increase
Investment in Fintech
A. Paid to Wait V B. Some Winners, but
Startups create, and
C Mostly Losers
incumbents try to mimic. S Excessive spend hurts
Some instances of p
e returns for all
disruption n
d
Where
we've
Incumbents Scale been
Back R&D; Incumbents
Incumbent Spend
Redirect Focus to Accelerate R&D
Partnerships/M&A Where
we're
D. Forget the Hype C. Incumbents
headed
Take the Reins
Spend on innovation
slows as it becomes Incumbent investment
clear Fintech ROI is restrains VCs, and
generally lower than first industry benefits from
assumed better efficiencies
VCs Scale Back
on Fintech
Source: Morgan Stanley Research
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 40VII. Blockchain as a disruptor
Banks’ Experiments with Blockchain
Europe Use case Status
ABN Amro Escrow management solution Commercially launched
Allied Irish Bank Domestic interbank payments Pilot
BNP Paribas Trade finance Pilot
Credit Suisse Syndicated loans Commercial launch expected in 2018
Deutsche Bank Know Your Customer Proof of concept
Societe Generale Agricultural commodity trade Successful testing
North America Use case Status
Bank of America Trade finance Proof of concept
Bank of New York Mellon US Treasury bond settlement Rolled out
Citigroup Digital payment solution for private securities Pilot
Goldman Sachs Equity swap trading Testing
JP Morgan Cross-border payments Patent filed
Wells Fargo Private label MBS securitization Testing
Asia Use case Status
HSBC Trade finance Successful testing
Hana Financial Group Digital loyalty network Building
Korean Banks Customer identification Pilot
Mizuho FG Derivatives trading Successful testing
Woori Cross border transaction processing Pilot
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 41VII. Blockchain as a disruptor
Banks’ Response to Blockchain: Proofs of Concept Proliferate
Major Examples Spearheaded by Banks
Marco Polo Initiative Interbank Information Network
• Who: BNP, Commerzbank, ING, TradeIX, R3
• Who: JPM
• What: a solution for post-shipment trade financing powered by
• What: enables encrypted P2P messaging between banks to
the TiX platform from TradeIX and R3 Corda blockchain
address compliance issues in cross-border payments
technology
• When: Launched in Oct. 2017
• When: Announced intentions to pilot
Fusion LenderComm Distributed Ledge for Swap Trading
• Who: BNP, BNY Mellon, HSBC, ING, State Street • Who: GS, JPM, Citi
• What: blockchain-based online marketplace for syndicated • What: tracks swaps contracts post execution, record
loans, offering real-time credit agreement, etc. directly from amendments or terminations of the deals, stock splits and
agent bank loan servicing platforms to lenders dividends.
• When: Became commercially available in Apr. 2018 • When: Completed pilot
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 42VIII. MS Research coverage MS Research on Cryptos/Blockchain • Cryptocurrency: Why a Country May Be Interested in Digital Currency (8 May, 2018) • Crypto Mining: After the Gold Rush (1 May, 2018) • Cryptocurrency: Where are Exchanges Based? (25 April, 2018) • Cryptocurrency: Features of a Bitcoin Bear Market (March 19, 2018) • Global Utilities: Bitcoin demand > EV demand? (10 Jan 2018) • Global Payments, Banking, and Technology: Bitcoin Decrypted: A Brief Teach-in and Implications (18 Dec 2017) • Brokers: Will Bitcoin Futures on CME & CBOE Open the Door for Discount Brokers? (7 Dec 2017) • Freight Transportation: Blockchain in Freight Transportation: Early Days Yet but Worth the Hype (24 Nov 2017) • Payments and Processing: Bitcoin, Ethereum, XRP: Decrypted! Takeaways (21 Sep 2017) • Payments and Processing: Decrypted! 9 Key Questions Going into our Crypto/Blockchain Event (18 Sep 2017) • MasterCard Inc: AI vs. Bitcoin: Buzzword Battle for Supremacy. Or eventual cooperation? (21 Aug 2017) • Western Union Co: Circle and Ripple Bringing the Blockchain Risk (19 Jun 2017) • Global Financials and Payments: Blockchain: Unchained? (16 Jun 2017) • Global Financials and Payments: Fintech – A Gauntlet to Riches (17 May 2017) BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 43
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The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they
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Important US Regulatory Disclosures on Subject Companies
As of April 30, 2018, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan
Stanley Research: Automatic Data Processing Inc, Citigroup Inc., Discover Financial Services, Goldman Sachs Group Inc, J.P.Morgan Chase & Co.,
LendingClub Corp, MasterCard Inc, Square Inc, Visa Inc..
W ithin the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of BB&T Corporation, BNY Mellon, Capital
One Financial Corporation, Citigroup Inc., Discover Financial Services, First Data Corp., MasterCard Inc, PNC Financial Services, Regions Financial Corp,
SunTrust, Synchrony Financial, U.S. Bancorp, Wells Fargo & Co., Worldpay Inc.
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 44Disclaimer (cont’d)
W ithin the last 12 months, Morgan Stanley has received compensation for investment banking services from Ally Financial Inc, Automatic Data Processing
Inc, Bank of America, BB&T Corporation, BNY Mellon, Capital One Financial Corporation, Discover Financial Services, First Data Corp., Goldman Sachs
Group Inc, J.P.Morgan Chase & Co., MasterCard Inc, PayPal Holdings, Inc., PNC Financial Services, Regions Financial Corp, SunTrust, Synchrony Financial,
U .S. Bancorp, Wells Fargo & Co., Worldpay Inc.
In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Ally Financial Inc, American
Express Company, Automatic Data Processing Inc, Bank of America, BB&T Corporation, BNY Mellon, Capital One Financial Corporation, Citigroup Inc.,
Discover Financial Services, Evertec Inc, First Data Corp., Fleetcor Technologies Inc, Global Payments Inc, Goldman Sachs Group Inc, Green Dot Corp,
J.P.Morgan Chase & Co., LendingClub Corp, MasterCard Inc, MoneyGram International Inc, Northern Trust Corp., On Deck Capital Inc, Paychex Inc, PayPal
Holdings, Inc., PNC Financial Services, Regions Financial Corp, Santander Consumer USA Holdings Inc, Square Inc, State Street Corporation, SunTrust,
Synchrony Financial, Total System Services Inc., TriNet Group Inc, U.S. Bancorp, Visa Inc., Wells Fargo & Co., Western Union Co, Worldpay Inc.
W ithin the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from Ally Financial
Inc, American Express Company, Automatic Data Processing Inc, Bank of America, BB&T Corporation, BNY Mellon, Capital One Financial Corporation,
Citigroup Inc., Discover Financial Services, First Data Corp., Fleetcor Technologies Inc, Goldman Sachs Group Inc, J.P.Morgan Chase & Co., MasterCard Inc,
Northern Trust Corp., Paychex Inc, PayPal Holdings, Inc., PNC Financial Services, Regions Financial Corp, State Street Corporation, SunTrust, U.S. Bancorp,
VeriFone Systems Inc., Wells Fargo & Co., Western Union Co, WEX Inc, Worldpay Inc.
W ithin the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with,
the following company: Ally Financial Inc, American Express Company, Automatic Data Processing Inc, Bank of America, BB&T Corporation, BNY Mellon,
Capital One Financial Corporation, Citigroup Inc., Discover Financial Services, Evertec Inc, First Data Corp., Fleetcor Technologies Inc, Global Payments Inc,
Goldman Sachs Group Inc, Green Dot Corp, J.P.Morgan Chase & Co., LendingClub Corp, MasterCard Inc, MoneyGram International Inc, Northern Trust Corp.,
On Deck Capital Inc, Paychex Inc, PayPal Holdings, Inc., PNC Financial Services, Regions Financial Corp, Santander Consumer USA Holdings Inc, Square
Inc, State Street Corporation, SunTrust, Synchrony Financial, Total System Services Inc., TriNet Group Inc, U.S. Bancorp, Visa Inc., Wells Fargo & Co.,
W estern Union Co, Worldpay Inc.
W ithin the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has
entered into an agreement to provide services or has a client relationship with the following company: Ally Financial Inc, American Express Company,
Automatic Data Processing Inc, Bank of America, BB&T Corporation, BNY Mellon, Capital One Financial Corporation, Citigroup Inc., Discover Financial
Services, First Data Corp., Fleetcor Technologies Inc, Goldman Sachs Group Inc, J.P.Morgan Chase & Co., LendingClub Corp, MasterCard Inc, MoneyGram
International Inc, Northern Trust Corp., Paychex Inc, PayPal Holdings, Inc., PNC Financial Services, Regions Financial Corp, State Street Corporation,
SunTrust, Synchrony Financial, TriNet Group Inc, U.S. Bancorp, VeriFone Systems Inc., Visa Inc., Wells Fargo & Co., Western Union Co, WEX Inc,
W orldpay Inc.
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 45Disclaimer (cont’d)
A n employee, director or consultant of Morgan Stanley is a director of LendingClub Corp. This person is not a research analyst or a member of a research
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Morgan Stanley & Co. LLC makes a market in the securities of Ally Financial Inc, American Express Company, Automatic Data Processing Inc, Bank of
America, BB&T Corporation, BNY Mellon, Capital One Financial Corporation, Citigroup Inc., Discover Financial Services, Evertec Inc, Fleetcor Technologies
Inc, Global Payments Inc, Goldman Sachs Group Inc, Green Dot Corp, J.P.Morgan Chase & Co., LendingClub Corp, MasterCard Inc, Northern Trust Corp., On
Deck Capital Inc, Paychex Inc, PayPal Holdings, Inc., PNC Financial Services, Regions Financial Corp, Santander Consumer USA Holdings Inc, Square Inc,
State Street Corporation, SunTrust, Synchrony Financial, Total System Services Inc., TriNet Group Inc, VeriFone Systems Inc., Visa Inc., Wells Fargo & Co.,
W estern Union Co, WEX Inc, Worldpay Inc.
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BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 46Disclaimer (cont’d)
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BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 47Disclaimer (cont’d)
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Analyst Stock Ratings
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risk-adjusted basis, over the next 12-18 months.
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Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a
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Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.
BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 48Disclaimer (cont’d)
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Analyst Industry Views
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BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS JUNE 2018 49Disclaimer (cont’d)
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