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A new report from US bank Morgan Stanley has spoken of a world in which bitcoin payments are so convenient that we will use them to pay for coffee.
Morgan Stanley predicts that if retailers “make it easy” for consumers to pay for goods using bitcoin and other cryptocurrencies, “they will come”.
Looking at the progress of crypto payments so far, the report notes that the two biggest obstacles to going mainstream are high transaction fees and lack of merchant acceptance.
On average, making payments using the bitcoin blockchain can cost $1.50 per transaction, making it an unattractive candidate for everyday purchases.
However, these fees can be brought down to “close to zero” using a scaling solution called the Lightning Network, as the report explains.
In layman’s terms, the Lightning Network can lower fees by reducing the computational load associated with each transaction.
This is done by using a secondary layer that connects two bitcoin wallet holders — in this case, a consumer and a merchant — via a direct, bilateral channel.
Whenever the channel is closed, a single payment for the net amount transacted will be submitted to the bitcoin mempool — a kind of catch-all processing centre for all transactions on the bitcoin blockchain — where it will be confirmed by a bitcoin miner.
Ordinarily, each bitcoin transaction would have to pass through the mempool and be confirmed by a miner, hence the slow speeds and high fees, especially when the mempool is congested due to heavy usage.
In April 2021, for example, when Bitcoin’s price broke $60,000, transaction fees shot to as high as $60.
Lightning Network providers
Throughout its report, Morgan Stanley is keen to highlight a Lightning Network solution offered by Strike, a US crypto payments company headed by CEO Jack Mallers.
Earlier this month, while speaking at the Bitcoin 2022 conference in Miami, Mallers announced that Strike has partnered with point-of-sale provider NCR and Blackhawk, known primarily as a provider of branded gift and prepaid cards, in a bid to bring bitcoin payments to brick-and-mortar stores in the US.
In the same announcement, Strike also said it has partnered with e-commerce platform Shopify to enable Lightning Network payments online.
“The press headlines focused on Strike’s partnership with online merchant Shopify now also accepting bitcoin payments,” Morgan Stanley says in its report, “but we think the other partnership affecting physical stores is a much more significant milestone in the story and evolution of bitcoin usage as a medium of payment."
“We think that physical store acceptance of crypto is more important to monitor, as over 85% of sales in the US occur in stores rather than online.”
As Morgan Stanley points out, only eight out of the top 500 online retailers accept bitcoin today, namely Starbucks, Barnes & Noble, Baskin-Robbins, Bed Bath & Beyond, Nordstrom, Office Depot and The Coffee Bean & Tea Leaf.
Bitcoin-friendly retailers tend to come and go, however, as many more retailers have conducted crypto payments trials that have now ended without becoming a permanent fixture.
In Starbucks’ case, the coffee chain offers crypto payments in-store and in-app through a partnership with Bakkt, a US crypto payments company it partnered with last year.
To go mainstream, one final hurdle that crypto payments must overcome is their current tax status.
In the US, crypto users are taxed if they spend their bitcoin at a profit, just like they are taxed for selling assets or property at a profit.
As the report notes, in February this year, US House Representatives Suzan DelBene and David Schweikert introduced the Virtual Currency Tax Fairness Act, which would exempt personal transactions from tax where the gains are less than $200.
However, Morgan Stanley believes the bill is likely to face resistance, as it implies that crypto is a legitimate competitor currency to the US dollar.
“This is why we think the first step towards mass adoption of crypto as a means of payment will be through stablecoins,” the report notes, “where their value is typically held stable versus the US dollar.”
Morgan Stanley: A top ‘bulge-bracket’ holder of bitcoin
One detail that goes unmentioned in the report is the fact that Morgan Stanley has a nine-figure bitcoin investment, which might explain the bank’s enthusiasm for the idea of consumers purchasing bitcoin to use as currency.
According to filings submitted to the US Securities and Exchange Commission (SEC), at the end of 2021, Morgan Stanley held at least 13m shares in the Grayscale Investments’ Bitcoin Trust (GBTC) across 17 portfolios.
Last month, analysis by crypto analytics firm Blockworks put the value of Morgan Stanley’s bitcoin holdings at around $487m, but in today's prices this would have dropped to about $372m.
Moreover, as recently as February 28 this year, individual Morgan Stanley portfolios have declared holdings of millions of GBTC shares, as compiled by institutional trading intelligence firm Fintel.io.
According to MacroScope, an institutional trading and asset management expert, Morgan Stanley has steadily been increasing its GBTC shares, suggesting that the bank is positioning itself as a “top bulge-bracket name” in bitcoin.
Meanwhile, other large institutional investors in GBTC, such as Cathie Wood’s ARK portfolios, have been reducing their holdings since February 2021, according to the cathiesark.com tracking site.
This is despite the growing discount on shares of GTBC, whose premium turned negative on February 23 last year, and has been downtrending, almost without interruption, ever since.
In March this year, the discount hit an all-time high of 29 percent, before rebounding to 22 percent towards the end of April.
In other words, the last couple of months have offered the best opportunity bar none for institutions such as Morgan Stanley to accumulate bitcoin at a record discount.
