Morgan Stanley Research recently released a Global Insights report asking the question, “Blockchain in Banking: Disruptive Threat or Tool?”

The investment bank’s in-depth study highlights various misconceptions about blockchain technology and identifies 10 hurdles to making blockchain a reality in
banking. The report stipulates that the opportunity for blockchain tech is evident but that mainstream adoption is too far off to impact its 2017/18 estimates.

Ten Key Hurdles to Blockchain in Financial Services
Morgan Stanley identifies 10 roadblocks for blockchains to become a reality in banking, namely determining cost/benefit in use cases, cost mutualisation and who funds the
overhaul of old systems, misaligned incentives, evolving to the right standard, scalability & performance, governance, regulatory issues, legal risks, cryptology & security, and simplicity & interoperability.

morgan stanley blockchain insights 10 key hurdles

Roadmap to Blockchain Adoption
In the report, the bank’s research team projects a roadmap for adoption of distributed ledgers by financial institutions, identifying steps that include assessing blockchain’s value for financial assets from 2014-2016, a proof of concept stage from 2016-2018, the emergence of a shared infrastructure from 2017-2020, and the proliferation of assets from 2021-2025.

morgan stanley digital ledger adoption roadmap

Emerging Use Cases
Morgan Stanley Research identifies emerging use cases that it believes come up most frequently when engaging with the industry, including post-trade settlement, trade finance, international payments, reference data, and regulatory uses.

In terms of trade settlement, this would include corporate loans, credit default swaps, repo, derivatives, equities and so on. Blockchain tech could enhance the audit function as specific securities become more easily tracked, create more visibility to speed up transactions and corporate loans approval, shorten the settlement window and thereby lower the cost of trade.

For trade and shipping finance, blockchains will enable all parties – financiers, trading houses, and other trusted intermediaries – to see when goods have shipped and can release funding appropriately. According to the research team, this should reduce time to confirm assets, confirm transactions, release payment and received confirmations.

Moving international payments to the blockchain should shorten settlement periods, speed up transactions and mitigate fraud risks, reports the bank. This would become even more significant as intra-country payments systems move to real-time.

The bank thinks that blockchain tech could offer significant efficiencies to transactors by “holding reference data for individual securities.” A “rules-based standard on data” might improve quality and auditability of transactions, as well as enhance resolution management.

In regard to regulatory uses, a blockchain holding data for regulators might be more efficient for banks assessing the data as well as for “regulators wanting to compare their regulated entities.”

Misconceptions about Blockchain Tech
Morgan Stanley is bullish on blockchain technology but notes there are some misconceptions that may overstate how disruptive distributed ledgers might be. The report lists six realities regarding how blockchains will be adopted by mainstream financial institutions.

  • Blockchain adoption does not mean unpermissioned networks, as no bank executive or policymaker will accept anything other than a permissioned network.
  • Blockchain adoption does not mean T+0 settlement timeframe, as regulatory and legal rules and market practice will require minimal settlement time.
  • “Venture capitalists don’t like projects that require industry consortia – but banks still need partners to share the expense given profitability challenges”
  • There is no “one size fits all” blockchain application. There will be different blockchains for different use cases.
  • Blockchains do not have to result in complete transformation of IT, as they will need to plug into existing technology to be affordable and early trials in particular may use some workarounds
  • Blockchain technology for financial services is not centered on payments. Financial institutions are required to follow KYC and AML guidelines, and allow regulators to review transactions.

(Source: Morgan Stanley, “Global Insight: Blockchain in Banking: Disruptive Threat or Tool?”)