Morgan Stanley has released a 31-page report examining the potential knock-on effects of blockchains and distributed ledger technologies on financial institutions.

The report, titled “Blockchain in Banking: Disruptive Threat or Tool?”, argues that the financial establishment will have the upper hand with their private blockchain innovations. According to Morgan Stanley’s report, regulatory issues will have negative effects on non-permissioned public blockchain networks.

“The market underestimates the advantages banks and custodians have already, given not a single policymaker we met with for this note would allow an ‘unpermissioned’ distributed ledger.”

The key argument here, at least according to Morgan Stanley, is that KYC/AML regulations are fundamentally at odds with “unregulated” public blockchains. Morgan Stanley also cites this fact as supporting evidence in their conclusion that VC-backed blockchain startups will not be able to compete with financial industry-backed blockchain firms and projects:

“Not one bank nor policymaker that we have met with on blockchain gives even a second thought to an unpermissioned public network. KYC, AML and other considerations means it has to be a permissioned network. This reduces the risk that a new start-up will be able to disintermediate entire value chains.”

In the Legal Risks section of the report, Morgan Stanley stresses the need for KYC/AML oversight once again:

“In particular, not one bank we have met wishes a disaggregated, open source model for identity. Banks and policymakers need close control for KYC and AML issues. Finding a single digital identity passport authoriser will be key.”

Furthermore, a whole section of the report focuses on the potential use cases of the technology: trade finance, post-trade settlement, international payments, reference data storage, regulations.

The concluding arguments of the report explain that widespread usage of blockchains in the financial industry is at least “5-10 years off” and that it is too early to make any specific predictions due to many uncertainties.

“As with any early-stage, highly complex technology that demonstrates the ability to change conduct business, we think it is too early stage to make any profound comments about winners and losers or breadth of adoption.“

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