Morgan Stanley expects cryptocurrencies to disrupt the global financial system

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-Bitcoin’s market capitalization rivals that of major economies and its impact on global finance is undeniable, says Morgan Stanley.

-The rapid adoption of the stablecoin has spurred interest in the central bank’s digital currency, which accounts for more than 95% of global GDP.

-Morgan Stanley’s 2024 outlook emphasizes the critical role of cryptocurrencies in reshaping the global financial system.

The global financial system is at a crossroads as technology advances rapidly and the geopolitical landscape changes. The dominance of the U.S. dollar is challenged by emerging cryptocurrencies such as Bitcoin.

Morgan Stanley offers a nuanced view of the future of cryptocurrencies in 2024, especially in the context of new financial trends.

Cryptocurrencies disrupt the financial system

While the U.S. contributes about 25% of global GDP, the U.S. dollar accounts for nearly 60% of global foreign exchange reserves. However, this disproportionate impact is coming under scrutiny.Kaspa mining

In response to U.S. monetary policy and the strategic use of economic sanctions, countries are increasingly diversifying their currency reserves. The European Union and China are at the forefront of this shift, seeking to enhance the role of the euro and renminbi in international trade.

Meanwhile, the cryptocurrency market is growing exponentially. Bitcoin has evolved from an internet forum idea to a sovereign reserve asset. With a market capitalization that rivals the GDP of major economies such as Switzerland, and adopted by countries such as El Salvador and the Central African Republic, Bitcoin’s influence on the global financial stage is undeniable.Bitcoin Miner

Morgan Stanley Digital Asset Markets writes, “Bitcoin adoption beyond speculative purposes continues to evolve. The approval by U.S. regulators in January for BlackRock and 10 other asset managers to offer spot bitcoin exchange-traded funds (ETFs) is a potential paradigm shift in the global perception and use of digital assets.”

Meanwhile, stablecoins are seeing a staggering rate of adoption, especially those pegged to the U.S. dollar. By 2022, these assets will handle close to $10 trillion in transaction volume. This growth demonstrates their rising importance in the digital asset space, facilitating efficient, 7×24 transactions and near-instant settlement.

In response, Visa integrated Circle’s USD stablecoin (USDC) on Solana and PayPal launched PayPal USD (PYUSD), reflecting a significant shift to embrace blockchain technology.

Stablecoin Volume Comparison | Source: Morgan Stanley

The rapid adoption of stablecoins has also spurred interest in central bank digital currencies (CBDC). Countries actively exploring CBDCs account for more than 95% of global GDP by mid-2023. Unlike decentralized cryptocurrencies, these digital currencies provide centralized control over the monetary system and are expected to increase efficiency and innovation in financial services.

For example, the launch of China’s digital renminbi and plans for DREX, Brazil’s digital currency program, exemplify this trend.

Morgan Stanley predicts the future of cryptocurrencies

Morgan Stanley’s analysis highlights that these advances in cryptocurrencies (Bitcoin, Stablecoin and CBDC) are reshaping the financial system. Understanding the implications of these developments for global financial stability and monetary policy is critical for macro investors. Indeed, the adoption of digital currencies signals a shift in global economic power dynamics.

In this context, the role of bitcoin and stablecoins is particularly important. The widespread adoption of bitcoin, including its use as legal tender in El Salvador, reflects its growing legitimacy. Stablecoins have utility in cross-border transactions and stores of value, and will certainly impact the way money is transferred globally.

Peel concludes, “While changes in global trade and currency use may be gradual in the early adoption phase of these digital solutions, over time they are expected to gain mainstream acceptance …… As the world adapts to these technological advances, understanding the interactions and nuances between traditional currencies fiat, bitcoin, e-money, and stablecoins becomes critical.”

Similarly, the emergence of CBDCs presents both opportunities and challenges. These digital currencies promise to increase the efficiency and potential financial inclusion of financial transactions. However, they also require careful consideration of the implications for privacy, security, and monetary sovereignty.

Morgan Stanley’s outlook for 2024 paints a nuanced scenario: cryptocurrencies play a crucial role in reshaping the global financial system. The key is to remain informed and adaptable to capitalize on the opportunities presented by these transformative financial technologies.