Former Managing Director of Morgan Stanley: Wall Street Can Never Control the Crypto Market

This article is from Business Insider and has been translated by Chain Catcher.

Now that cryptocurrency has become an undeniable trillion-dollar force, Wall Street is eager to take action.

But long ago, at the dawn of Bitcoin, there were already many Bitcoin enthusiasts within the big banks on Wall Street. People may remember J.P. Morgan banker Blythe Masters, who is credited with creating credit default swaps (CDS), left the bank in 2014 to join the crypto industry.

Caitlin Long, founder and CEO of Avanti Bank, is also one of them. In 2012, she was responsible for managing Morgan Stanley's pension solutions business and was trying to figure out the causes of the 2008 global financial crisis.

For her, the mainstream explanation that the crisis was caused by the spread of a credit bubble in the mortgage market was a facade rather than the root cause. In her daily work, she was involved in large pension transactions and encountered some settlement issues in the traditional financial industry.

In the securities industry, settlement refers to the time interval between executing an order in the market and when the transaction is considered final. Historically, stock trades could take up to five business days to settle, while electronic trades now settle in two business days.

Robinhood CEO Vlad Tenev attributed the halt of meme stock purchases on its platform in January to prolonged settlement times, stating, "It exposes investors and the industry to unnecessary risks."

Long was initially skeptical about Bitcoin, but when she considered these settlement issues and returned to cryptocurrency, it was an enlightening moment.

"All of these traditional financial services can be solved by the underlying blockchain technology of Bitcoin and Bitcoin itself," she told Business Insider in an interview.

By the end of 2014, Morgan Stanley had established an internal blockchain working group, but there was still little information about Bitcoin, and there were even fewer legitimate places to purchase this cryptocurrency aside from the Tokyo Bitcoin exchange Mt. Gox.

"At that time, I wasn't mature enough to understand the counterparty risk of leaving cryptocurrency on exchanges. For me, it was the cheapest tuition I paid when I lost money at Mt. Gox," she said. "I didn't invest too much, but when Mt. Gox went bankrupt, I learned a valuable lesson."

The True Value of Cryptocurrency

Today, as cryptocurrency becomes part of mainstream consciousness, enthusiasts have set price targets for a single Bitcoin ranging from $100,000 to $1 million.

"Price is the least interesting aspect of these markets," Long said. "Of course, most speculators only focus on price and headlines during bull markets, but the real value lies in the technology itself and what it can do."

What Bitcoin and its blockchain technology allow users to do is (1) transfer funds globally at the speed of light and receive confirmation within minutes, (2) ensure irreversibility, meaning once a transaction is made on the public blockchain, it cannot be reversed, and (3) it is programmable money, allowing users to write software to program it.

"These three features do not exist in fiat currency systems, so these three things are important," she said. "This will solve many settlement issues in traditional financial services."

Long began her Wall Street career at Salomon Brothers and later held senior positions at Credit Suisse, where she became very familiar with the well-known "market structure debt" in the financial and banking systems.

"We adhere to this layered market structure, where each intermediary must process transactions in order, and they cannot do so simultaneously," she said. "Due to these market structure issues that require delayed settlements, it creates counterparty risk and ties up capital. One of the fundamental principles of finance is that if you can turn your capital more frequently, you will increase returns."

Wall Street and the Decentralized Crypto Market

Due to the promising blockchain technology and the undeniable performance of major cryptocurrencies, institutional investors are increasingly interested in accessing this asset class.

However, in Long's view, the role that Wall Street can play in providing institutional-grade infrastructure for the crypto market is limited.

"The assumption that Wall Street is important to these markets is a fallacy because the information frontier of these markets is not in New York, nor is it in Silicon Valley," she said. "These markets are decentralized, and Wall Street will never be able to control them."

She explained that on average, 75% to 80% of BTC and ETH are held by individuals rather than intermediaries, and during bull markets, intermediaries hold even less cryptocurrency.

"This means that ultimately Wall Street will never be able to clear digital assets," she said, "because Wall Street will never be able to obtain enough collateral to create a true clearinghouse."