Morgan Stanley just announced a Bitcoin derivative product which allows exposure to Bitcoin without actually having to own Bitcoin. Customers will buy in with dollars and get paid out in dollars — but will never physically own Bitcoin. Doesn’t this type of Bitcoin “custody” defeat the decentralized nature of cryptos?
Banks are trying to remain relevant, but the whole point of crypto is that you get to be your own bank. Cryptos’ very nature makes banks irrelevant. So banks are grasping at straws to stay pertinent in a world where technology is quickly making them obsolete.
Bitcoin makes Banks obsolete
Banks are an old business model — a custody model. Banks began because they offered security, a safe place to hold valuables, such as gold and jewelry, securely. However, Bitcoin is the first currency that does not have physical properties that require it to be held in a concrete vault.
Unfortunately, the general public does not yet widely understand that Bitcoin is both a currency and a bank in one. Many will likely fall prey to this “custody style” business model. After all, it’s in the bank’s best interest to propagate that Bitcoin is unsafe for you to handle or store on your own and that they need to hold it for you — the precise business model that has kept them relevant until now.
On top of the unnecessary role which banks are attempting to play as a middleman between customers and Bitcoin, there are also some real risks associated with this type of service:
What if Morgan Stanley doesn’t actually hold any Bitcoin?
Who’s to say that Morgan Stanley actually owns any Bitcoin? If Bitcoin goes on another bull-run with sky-rocketing prices like it has in the past, is Morgan Stanley going to take that loss? No way. They’ll just do what banks always do and pass that loss along to the customers. People who thought they “had” Bitcoin could learn the hard way that unless you hold the private key, you don’t own the crypto.
Could this open the door to fractional reserve Bitcoin?
Let’s say Morgan Stanley does own some Bitcoin, but offers exposure to more than they actually possess? If they take the same liberties as any other bank, they could leverage the Bitcoin they own up to 10 times — a foolish and dangerous game to play on a currency with a verifiable limited supply of only 21 million.
This fractional reserve loaning could negatively impact Bitcoins price. Morgan Stanley could manipulate the price without actually owning Bitcoin, falsely influencing its price disproportionately in either direction.
Won’t people think they’re into Bitcoin, when they’re not?
If you don’t know what a private key is, have never heard of a blockchain, and you don’t know how to buy Bitcoin other than through a broker… you’re not really into crypto. This Bitcoin brokerage model plays to people’s laziness and disinterest in learning new technology. Those people who aren’t actually using the blockchain and private keys to control their own funds will not even know that they are missing the whole point to the movement.
Calling all blockchain detectives
It’s likely that this new Bitcoin derivative product will bite Morgan Stanley in the rear. The transparent nature of Bitcoin’s blockchain and open ledger allow all transactions on the blockchain to be monitored. So, if it turns out that Morgan Stanley doesn’t own the Bitcoin they claim to own, its only a matter of time before private blockchain forensic companies like Chainalysis will be able to identify their poor Bitcoin lending practices.
Remember, banks are the reason we need Bitcoin in the first place
This is a call to action! It’s time for people who believe in moving beyond central banking to double down and start educating other people about how harmful central banking, with its irresponsible policies, has been and how powerful being your own bank can be.
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