The Future of Capital Allocation Is Bitcoin

Good afternoon, everyone. Amy, thank you for being here. We're talking about a lot of news that's come out of Morgan Stanley over the last 90 days, really since you took this new role. But first, I want to start with your background. You spent most of your career in emerging markets, where the focus is really pricing, regulatory risk information, and infrastructure gaps. How has that informed your time taking over digital asset strategy at Morgan Stanley? What's been helpful or harmful with that lens?

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Tyler, good to see you and nice to be here today. One of the interesting things since taking this role just four months ago is that some folks will come up to me and say, let me tell you everything you need to know about digital assets, as if I have never spent any time in the space. To your point, being associated with emerging markets, you know they were some of the first users of Bitcoin across the world.

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Even as we see crypto adoption now, 17 of the top 20 countries in terms of crypto adoption are coming from the developing world, for many reasons. So this has been a very long-time interest of mine, to see different financial models underpin the financial system across the world.

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And in those first four months, your team launched the first Bitcoin-backed ETP from a U.S.-chartered bank. Do I have that right?

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That's right. The first bank-owned asset manager to launch a Bitcoin ETP. And we have to start with Bitcoin. We have a path forward, but Bitcoin is $1.5 trillion. It's different. One thing to highlight is that I do think there still needs to be much more research on why Bitcoin is different than many of the other cryptocurrencies.

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As we've seen many of these ETFs come to market, they're often all clubbed together as crypto ETFs. But I think there is distinction in terms of what the underlying asset is. We have to bring some of that fundamental research back as to what you're taking exposure to.

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Let's give it up for that. I want to dig a little deeper there in terms of the work that Morgan Stanley did. How is that work being done externally and internally to drive those decisions? And how do you see that specifically spilling over to the asset management side of your business?

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It's been many years that we've been involved in the broader digital asset space, watching these different models evolve over time. The regulatory environment made it more difficult for the traditional banks to get involved. One of the reasons we've been able to make more progress, even in the last year, is because the regulatory environment has been more supportive for us doing that.

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So it's been something we've been working on for years. It's not like we didn't care. I know there's been some discussion that there have been very negative comments around Bitcoin or what it was used for, but I think that's an education issue. I still think there's a lot of education that needs to be done around the real use cases, in the past and going forward, to understand why people are using Bitcoin or other digital assets to transact.

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That's something that we can continue to build into now. We start with Bitcoin, and we have a roadmap across the board. One other point to make is that we are rolling out spot crypto trading. I know there are a lot of people in this room and beyond this room who don't believe in the structure of ETPs, and I understand that. For some clients, there's a lot of usefulness around that structure.

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At Morgan Stanley, we design products for different client needs. If an ETP is something that fits your portfolio, that's what we're able to offer you. If it's spot crypto, that's something that we'll be able to do in the future. One of the things we were talking about before we came on stage today is whether there is a future where some of the banks or wealth management platforms will be able to offer services to self-custody wallets or non-custodial wallets.

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That's a future that will continue to be explored, and there are new models that have yet to be discovered that we will continue to stay on top of.

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In terms of offering access to spot Bitcoin trading in the future, and even having a bank like Morgan Stanley really interfacing with the underlying digital asset, what has that infrastructure process looked like in terms of the decisions and the risk frameworks? How is your team approaching that and getting comfortable interfacing directly with Bitcoin rather than just through the securities market?

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The infrastructure buildout is not easy. You would think we could go and pick from 20 different providers, but it's not that easy, especially when, in many cases, if it's the servicing of an ETP, we're buying underlying Bitcoin. But we also have to operate the traditional infrastructure of that ETP or the ETF infrastructure.

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Everyone is a specialist. You're either a crypto custodian and you specialize in crypto custody, or you're an ETF tech stack. That's one of the things that we've been most challenged with: the multidisciplinary understanding that we have to continue to deliver on again and again as we roll out some of these products.

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In the last couple of months, Morgan Stanley also filed for an OCC charter. How does that fit into this infrastructure buildout you're describing, and what would that enable the bank to be able to do in the future for its clients?

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We have three main divisions within Morgan Stanley. We have our institutional securities business, we have our wealth division, and we have our asset management division. To be clear, the Bitcoin ETP was launched out of our asset management business. But one of our big initiatives on the wealth platform is spot crypto trading. As we continue to build that out, that digital trust will allow us to offer services around some of that spot crypto trading going forward.

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In terms of being able to offer these services, particularly for the ETP products, the custodian choice is what pins the security and the risk of the Bitcoin held inside those products. You mentioned that it was a lengthy decision to narrow down that list of custodians, and that you're taking a multi-custodian viewpoint on the landscape. Can you talk a little bit about that risk framework and that decision process for a bank like Morgan Stanley?

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We actually found it interesting as we went down the path to explore the different custody models that ETP providers used across the board. We found that there was really no standardization whatsoever. We felt strongly about trying to deliver a product that was also backed by another GSIB. So not only is it the first GSIB-issued ETP, but we're also using a GSIB as an underlying custodian.

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It's in the filings, and we've been public about it. Coinbase and Bank of New York are our custodians for that product.

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We've talked a lot about the infrastructure and how we got here. The ETP launched with a bang, pulling in over $100 million in its first six days of trading. I would love to hear what the feedback has been from advisors and from the institutional investors that you're interfacing with. What's been the reaction to the product, and what are the questions that allocators still have about Bitcoin?

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This is something to clarify because I think there's a view, and I've seen a number of headlines about it, that we launched this product specifically just to push our financial advisors to distribute it. Our wealth management platform is an open architecture platform. Those products are due diligenced the same way any other ETP in the market is due diligenced. So we compete as a manufacturer in the same way as any other asset manager on the Street.

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Interestingly enough, in those first days of trading, all of that was self-directed. It was not even available in advisory on the wealth platform. I think that's very interesting to see, although it does fall in line with a trend we see across all the exposure on the wealth platform, which is that 80% of it is self-directed.

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The advisors are still very limited in their exposure to allocating to Bitcoin at this point. One thing to mention is that we have made recommendations on allocation to Bitcoin. We've announced allocation recommendations to Bitcoin of 2% to 4%, and it's still been slow. So I think that still points to significant education that needs to be done, really understanding the fundamentals and going back to my earlier point on why you want to take exposure to this asset.

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Outside of just Bitcoin and the Bitcoin ETP, Morgan Stanley, through its asset management business, is one of the largest holders of Strategy securities, Strategy common stock, and increasingly the preferred perpetual securities. What does this market look like, and what has the bank learned about the digital credit and digital treasury company model?

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Strategy are good friends of Morgan Stanley. We've been on a journey with them even prior to them investing in Bitcoin. We've seen the entire evolution of the company, first buying Bitcoin on the balance sheet, and for many reasons that drove some of our allocation to that in our funds early on. But even now with STRK, it's still been less than 12 months in the market. So again, it's something that's designed for wealth clients. Most of the exposure is coming in through retail. But over time, I think we'll continue to see this topic of credit develop.

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Do you think it's just time, or are there specific things that credit investors or institutional allocators are really looking to see in these products to open that up and flip that ownership dynamic to be majority institutional?

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We were talking earlier that a credit rating would be helpful. Unfortunately, for better or worse, the traditional finance world likes to put things in a box, and it needs to look like something they're familiar with to gain comfort with it. If it doesn't, and they don't know what box to put it in, there is a hesitation there that will always be a challenge.

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It's something that's manageable. You can educate around it, but you're pushing a boulder up a hill. The question is, can we find a framework going forward to allow investors to feel more comfortable, or make it look a little bit more like what they're used to as they think about credit products?

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So credit rating and product history. What else do you think the market is really looking for, or has Strategy already cracked the code on it?

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I hate to go back to education on Bitcoin, but you really have to. You can present it as a preferred yield or double-digit yield, which is really interesting, but the underlying asset is still Bitcoin. I think there's still a lot of work to be done there. There's so much low-hanging fruit with just spot allocation, not even a credit allocation or derivative allocation. There's just so much more work to do. The credit products are an extension, and they get a little bit more complex than even the underlying asset.

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On that educational topic, which you've hit on a number of times, how is the bank approaching that? What is your team at Morgan Stanley doing to push Bitcoin education?

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Everything that we can possibly do on our wealth platform. We launched an entire financial advisor education effort. We continue to roll out different resources on the internal side, because even our employees need to be educated to support the business going forward. There are new governance dynamics and technology dynamics that all need to be supported.

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With clients, we spend hour after hour on the phone talking to them about this space overall and how to think about it in their portfolio. There's still probably more we can do. One thing I would like to see from the market is deeper research on the underlying asset and some of the dynamics.

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Over time, and I know if you're deep in the Bitcoin community, we all have personalities that we follow who write that research. But we need to bring that into the mainstream a little bit more and make sure that the advisors are getting access to it and the end clients are getting access to it.

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Zooming out a little bit to the title of our panel around the future of capital allocation is Bitcoin, from a 30,000-foot view, where are we in that journey, and what do you think the next couple of years look like?

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I still think we're so early in that journey. There is so little allocation in so many portfolios. We were talking last night about Bitcoin for corporations. I know that's been a theme in a couple of the conversations here. It's still very early.

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I said in a discussion earlier this year that one thing I think we missed with all the digital asset treasury companies is that we started with Bitcoin on the balance sheet for corporations broadly, and somehow the topic of digital asset treasury companies totally consumed that topic and ran away with the narrative. There's still work that has to be done on really thinking about Bitcoin on the balance sheet for a broad set of companies, not dominating the whole company, but maybe having even a single percentage of exposure on that balance sheet, and what that looks like and what it does to that balance sheet.

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Not to put you on the spot, but since we're taking a long-term view here, what do you think it's going to take in terms of decades, infrastructure, or regulatory changes before we see a bank like Morgan Stanley or a regulated financial institution be able to take that leap and put Bitcoin on the balance sheet?

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Bitcoin on the balance sheet. If we continue to see the progress that we've made over the last 16 months or so in regulation, that's something you may see going forward. It's not totally out of the question.

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But I think the other thing is we were talking about SAB 121 rolling back on capital treatment. It's not just that that holds us back. It's Fed guidance. It's Basel guidance. When you're a large bank, it's not just one agency that you report to. You have many oversight groups that you have to attend to. So we need a little bit more alignment across the board with some of those agencies.

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We're also global. It's one thing to focus on the U.S., but every jurisdiction has its own rules and regulations around the space, and we're still getting comfortable with that globally.

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Thank you very much, Amy. This has been great.

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Thank you.