Morgan Stanley debuted the Morgan Stanley Bitcoin Trust, or MSBT, an exchange-traded product that tracks the performance of bitcoin, on Wednesday and drew $34 million in investment during the first day of trading.
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“We’ve definitely been happy about it,” Allyson Wallace, global head of ETF strategy and capital markets at Morgan Stanley Investment Management, told American Banker in a Thursday interview. “This is our first [digital asset] product that has reached more to the direct investor, so that has been a very pleasant surprise, because most of the volume has been through that direct investor channel.” Now the bank will approach institutional and intermediary channels with the new product.
The offering makes Morgan Stanley the first U.S. bank to offer a bitcoin-based ETF, though Grayscale, Franklin Templeton, Fidelity, WisdomTree and others have bitcoin ETFs. It comes at a time when many U.S. banks are considering offering digital asset services. Among large, national banks, 30% have already implemented or are piloting on-chain technology, while 15% are in early discussions about how to use the technology without the aid of outside partners, according to a recent American Banker survey.
Morgan Stanley saw “a decent amount of inquiry coming in through our wealth platform and high net worth clients, as well as through some institutional clients,” according to Wallace.
These clients were seeking to understand how bitcoin investment complements portfolios, she said.
“Those obviously were all impetuses for us to see that clients really wanted more information and that this is such a topical asset class right now for people to understand,” Wallace told American Banker.
Although the MSBT isn’t the first bitcoin ETF, it’s “a watershed moment because it comes from a major global bank,” said Paul Brody, former chairman of the Enterprise Ethereum Alliance and former global blockchain leader at EY, currently CEO of Nightfall Networks, a technology spin-off from EY. “All the other [bitcoin] ETFs are from good firms, to be sure, but they don’t have quite the same customer base and distribution as Morgan Stanley — though Fidelity comes close.”
One thing that makes Morgan Stanley’s ETF stand out is that it offers the lowest fee, “which I take as a sign of serious intent to catch up in the market,” Brody said.
“We tried to be very thoughtful in bringing it to market, because obviously, we understood we’re not the first to market, we are two years into this journey,” Wallace said. “We knew that we had to bring something that was somewhat differentiated. There’s a few levers that you can pull in differentiation, and obviously cost is one of them.”
Coping with the many risks
Bitcoin is down significantly from its high of $96,151 in January. On Thursday, the price was $71,165.
Volatility in the price of bitcoin is one of the risks the bank cited in the 50-page “Risk Factors” section of its prospectus for this product, which is in a small font, single spaced.
Fifty pages is a lot, Wallace acknowledged.
Most ETFs have several pages on risk factors, she said. “But this has an additional layer, of course, and that has really shown through in launching this product as well.”
About 200 people throughout the bank were involved in launching the bitcoin ETF, across risk, compliance, global financial crimes and other departments, she said.
“It was truly a firm effort and really trying to look under the hood for every risk possible that we would be exposed to launching this,” Wallace said.
Among the risks is the possibility of fraud and manipulation in the bitcoin market through “wash trading,” when offsetting trades are entered into for other than bona fide reasons, such as the desire to inflate reported trading volumes. Front-running, where someone uses technology or market advantage to get prior knowledge of upcoming transactions, is another form of market manipulation.
Other risks include security breaches, the possible loss or destruction of private keys, changes to the bitcoin network protocols and software, the massive amount of electricity needed to maintain the bitcoin network and the potential for moratoriums on bitcoin mining, lack of recourse in the event of fraud, and competing products are among the other risks cited in the prospectus.
Forward look
The bank will track the performance of bitcoin using the CoinDesk Bitcoin Benchmark 4PM NY Settlement Rate, which is calculated based on an aggregation of executed trade flow of major bitcoin spot exchanges. MSBT’s unitary delegated sponsor fee is 0.14%.
Coinbase and BNY are providing digital asset custody services for the bitcoin ETF. BNY also serves as the administrator and transfer agent and will provide accounting, recordkeeping and cash management services.
Going forward, Morgan Stanley has filed for a Solana ETF that will launch at the beginning of the third quarter. There are plans in place to allow direct crypto trading on the E-trade platform and to add custody services to the wealth platform.
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