Wall Street bank Morgan Stanley has a bitcoin swap trading product ready to go and awaiting internal approval, according to an unnamed source who spoke with Bloomberg.
By providing bitcoin swap trading that will be tied to bitcoin futures contracts Morgan Stanley will allow clients to go long or short on the price of bitcoin without them, or the bank actually owning any underlying bitcoin.
Lets Go Down the Bitcoin Swap Trading Rabbit Hole
The person providing the information to Bloomberg who asked not to be named because the information is private, indicated that the bitcoin swap trading would work as a ‘price return swap’.
A ‘swap‘ is a contract between two parties to exchange financial instruments. Typically what is exchanged are cash flows based on a specific principal where one party provides fixed cash flows over time and the other party provides cash flows which vary based on the price of an underlying asset, index price, interest rate or exchange rate.
Most often, one of the parties who is entering into the swap owns or has exposure to that variable asset and is using the swap as a hedge, but the swap itself does not require anyone to own anything. It is essentially an abstracted way for two parties to bet on the change in some other financial instrument similar to derivatives or options.
Swaps are also typically arranged through a bank or other intermediary who takes a fee as compensation for setting up the agreement. In the case of Morgan Stanley’s reported bitcoin trading swap, the bank would be the intermediary and the underlying asset would be bitcoin futures contracts. Those bitcoin futures will likely be the regulated ones available on the Chicago Mercantile Exchange (CME) or Chicago Board Options Exchange (Cboe).
The bitcoin futures on the CME and Cboe are yet another way for two parties to bet on the price of bitcoin over a certain period of time and are ‘cash-settled’ meaning that once again neither of those parties need to own or exchange bitcoin!
So what Morgan Stanley has apparently built in their bitcoin swap trading is a bet on the bets of others on the price of bitcoin.
Why Wall Street is Over-Complicating Investing in Bitcoin
Modern day banking has moved well beyond simple trading of stocks and bonds as banks have expanded their product offerings to mutual funds, exchange traded funds (ETFs), stock options, and even more complex derivatives such as the bitcoin swap trading.
But in the case of investing in bitcoin-related products, the banks are also trying to find ways to provide exposure to this new asset class to their customers while remaining in-bounds of current regulations. By tying the bitcoin swap trading to the regulated and approved bitcoin futures contracts, it’s unlikely that Morgan Stanley would face much regulatory headwinds.
Also, the fact that these types of swap products are almost exclusively built for institutional investors avoids much of the concerns previously expressed by US regulators about bitcoin-related products targeted at average retail investors.
Morgan Stanley isn’t alone in trying to find creative ways under existing regulatory frameworks that will provide its customers with access to the burgeoning crypto asset class. Earlier this week a Business Insider article (paywall) cited sources with knowledge that Citigroup has created what it is calling a ‘Digital Asset Receipt (DAR)’ for cryptocurrencies. This product would work similarly to an American depositary receipt (ADR) and would involve actual cryptocurrency held by a custodian and use the Depository Trust & Clearing Corp to provide clearing and settlement services.
One thing is for certain, despite many of the big Wall Street banks giving the cold shoulder to bitcoin and cryptocurrency last year, most if not all have begun to move onto the crypto big money board in one way or another.
Bitcoin’s Big Banking Dilemma
But for those who believe in the core principles behind bitcoin these types of moves by big banks trying to get a ‘piece of the action’ is a double-edged sword.
Much of the impetus for the crypto movement has been to eliminate the need for big centralized governments and banks. The bitcoin vision started as a decentralized peer-to-peer electronic cash. One that was independent of governments and bankers but has since grown into a broader vision of a better and fairer financial system as a whole.
Yet, in the current state of affairs, bitcoin’s reputation among the general public has been marred by the wild swings in price and the misleading stories of hacks. News that big banks are interested in the crypto asset class goes some way to repair that reputation and legitimize the asset class. Bitcoin’s volatility would also likely be eased by more institutional investment in the asset who could bring in liquidity and longer term trading outlooks.
If products like Morgan Stanley’s bitcoin swap trading actually involved bitcoin (real actual bitcoin stored on an immutable blockchain) then it may be helpful for the future of bitcoin. But banks are built for one purpose only, to make money. The bitcoin swap trading are just a piece of paper based on another piece of paper.
The product is actually reminiscent of the credit default swaps (CDSs) and collateralized debt obligations (CDOs) that helped create the subprime mortgage crisis in 2008. That crisis was reportedly one of the main drivers for bitcoin’s anonymous creator(s), Satoshi Nakamoto to create the cryptocurrency in the first place.
So while mainstream media outlets may play up the news of Morgan Stanley’s new bitcoin swap trading, you won’t find much if at all about it on crypto twitter (CT).
The real people building the future peer-to-peer cash and decentralized financial system don’t care about new fancy derivatives of bitcoin imagined up on Wall Street. They would just encourage you to go out and be your own bank.
So if you’ve done your own research and think crypto has a future, don’t go to Morgan Stanley looking for ‘synthetic exposure’, just buy your own crypto for fucks sake.