This article comes fromFortune, by Shawn Tully
Odaily Translator: Nian Yin Si Tang
Odaily Translator: Nian Yin Si Tang
On September 23, a product aimed at reinventing Bitcoin as a mainstream investment tool for money managers around the world will go live. When one of the world's largest commodity markets, ICE Futures US, opens for trading at 8:00 p.m. ET, it will offer daily and monthly Bitcoin futures in the first-ever federally regulated exchange Cryptocurrency contracts for physical delivery.
Once the exchange is operational as planned, it will provide institutional investors with a safe, well-regulated venue to trade bitcoin, which may help ease bitcoin volatility and reliability by greatly increasing the asset's legitimacy. trustworthiness issues, and it is these issues that hinder the wider adoption of Bitcoin.
With Bakkt’s futures product, endowments or brokerage firms that trade these contracts will be able to channel payments through ICE clearinghouse, which secures the global oil major’s trade settlement contracts, and ensure their bitcoins are delivered. Their newly purchased tokens will be stored in a super-secure warehouse, overseen by the same team that deploys the same cybersecurity measures that protect their stock trades on the New York Stock Exchange.
This series of efforts to combine tradition and disruption and give blue chip (Blue Chips) asset management companies the opportunity to jump out of the traditional market and embrace cryptocurrencies should be attributed to Bakkt. It is so named because it is "backed" by the majority shareholders of the Intercontinental Exchange (ICE). ICE is a $52 billion trading giant that owns the New York Stock Exchange (NYSE), the world's largest ETF platform NYSE Arca, ICE Futures US, one of the major players in the global agricultural product market, and the launch of the main benchmark for global oil prices - Brent ( ICE Futures Europe on the Brent crude oil contract. Bakkt is the brainchild of ICE founder and CEO Jeff Sprecher. Sprecher has long been a leading figure in the transformation of large exchanges.
Odaily Note: Blue chips (Blue Chips) refer to long-term stable growth, large, traditional industrial stocks and financial stocks. The term "blue chip" originated from Western casinos. In Western casinos, there are three colors of chips, of which blue chips are the most valuable. In the securities market, the stocks of companies with better operating performance, stable and higher cash dividend payments are usually called "blue chip stocks".
Bakkt's CEO is Kelly Loeffler, who worked at ICE for 17 years and was Sprecher's right-hand man (and Sprecher's wife). Bakkt made its grand debut in August 2018, and a group of investors and partners, led by ICE, have also poured in capital, investing $182.5 million to date. These include Microsoft's venture capital arm M12, hedge fund Pantera Capital, billionaire money manager Alan Howard and Starbucks.
Now Bakkt is back. Despite the delay, its product will eventually go live ahead of Libra and will begin trading ahead of contracts planned by rivals LedgerX and ErisX. Bakkt received CFTC approval in June and cleared the final hurdle on August 16. On the same day, the New York State Department of Financial Services approved Bakkt to establish a trust company as its custodian. Over the past few days, Bakkt gave Fortune exclusive interviews with Sprecher, Loeffler, COO Adam White and other executives, as well as in-person conversations at Bakkt's main office.
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Make Bitcoin more popular
Bakkt executives emphasized that their immediate goal is to make bitcoin a popular alternative investment alongside gold and private equity. But an efficient, regulated money market could eventually change the way we pay for everything from coffee to plane tickets.
“Funds that trade on our exchange say they don’t want to trade in today’s unregulated market, they want end-to-end federal regulation at the NYSE level to ensure the security of bitcoin transactions.” Loeffler said. White added: “Pension funds, for example, are diversifying into alternative investments. Regulated bitcoin futures may be part of their investment choices, as they have different correlations to stocks, bonds, and other alternative assets such as gold. "
Once hedge funds, family businesses, as well as Charles Schwabs or securities giant TD Ameritrade accept bitcoin, the huge trading volume in the Bakkt contract should calm the violent price volatility of bitcoin that has spooked investors and potential users alike, thereby Create a stable and reliable currency. If that happens, it's not hard to imagine Bakkt developing a bitcoin app for retail needs. Bakkt has not yet disclosed its plans for retail payments, but acknowledged that its partnership with Starbucks is a harbinger of big plans for the future. The company is also in talks with other consumer brands that want to use the digital currency for payments. After all, the high fees that credit card companies and banks charge merchants have set the scene for disruption, and it just so happens that Sprecher is a veteran at speeding up and lowering the cost of a range of transactions.
Sprecher noted that it would take weeks or months for Bakkt's Wall Street "audience" to judge whether its work was a success or failure. "It was like opening night," he said. "Everyone was nervous."
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Make regulation less scary
The success of what Sprecher calls “some sort of moonshot” depends on Bakkt’s bet that traditional regulation is the bridge that will lead fund managers to bitcoin.
It's easy to see why endowments and pension funds think the crypto world is dangerous. In short, the industry lacks uniform, rigorous federal regulation to safeguard the U.S. securities and commodity futures markets. A recent study by crypto asset management firm Bitwise found that 95 percent of trades on digital currency exchanges are "fraudulent," meaning that the purpose of these transactions is to increase trading volume or drive up prices, rather than those who want to buy or sell. Legal transactions between clients of Bitcoin. Fraudulent practices include "spoofing," in which traders have no intention of buying but instead enter fake orders to manipulate prices. “Digital asset theft and loss is already rampant in the industry, thus preventing the entry of responsible fiduciaries,” explains Alex Daskalov, CEO of KNØX. KNØX is a company that provides custody and insurance for digital assets.
U.S. authorities consider bitcoin a "commodity," so it falls under the jurisdiction of the CFTC (rather than the SEC, which regulates securities). But the CFTC has not yet granted a license to operate a "spot" commodity market that trades oil, soybeans or currencies, where physical commodities can be bought and sold instantly for cash. As its name suggests, the CFTC's domain is commodity futures, a type of derivative contract such as a refiner paying a seller of crude oil for delivery at a future date.
Note: Currently, Bitcoin futures are traded on the Chicago Mercantile Exchange (CME), but unlike Bakkt's daily and monthly futures, these futures are not used to buy and sell physical Bitcoin. CME’s futures are based on changes in a bitcoin price index pulled from the spot market and settled in cash, not bitcoin itself.
In addition to these CME futures, cryptocurrencies have been traded on spot markets that are not federally regulated "exchanges," but which, for the most part, hold transfers issued by the state in which they are incorporated. license. Compared with CFTC's strict and unified standards for futures trading, investment companies are obviously not suitable for the decentralized supervision of these multiple trading venues. Over 200 cryptocurrency platforms dominate the trade, each with its own price. Therefore, Bitcoin does not have a clear, centralized price.
And that's exactly the benchmark Bakkt wants to provide.
In futures markets regulated by the CFTC, such as ICE US, only broker-dealers and futures commission merchants (Futures Commission Merchants) who are members of the exchange are allowed to trade. The trading records and capital reserves of these members are carefully vetted by the exchange and overseen by the CFTC. These firms are also members of clearinghouses -- such as ICE Futures US's clearinghouse is ICE Clear US -- which will make payments between buyers and sellers and protect participants from losses. For any contract traded on an exchange, if the buyer fails to pay, the clearing house enforces it to protect the seller from losses. If a producer buys an oil or soybean contract and the seller defaults, the clearing house arranges for the buyer to be compensated. The futures clearinghouse is also licensed and regulated by the CFTC.
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hosting is key
hosting is key
So what are the advantages of Bakkt? Bakkt believes that the trust of major customers in ICE will extend to its subsidiaries, and the use of ICE's technology will create a super safe vault for storing digital assets.
Protecting commodities such as stocks, bonds and gold from theft is known as "escrow". Top-level protection is especially important for cryptocurrencies. The CFTC has traditionally not regulated custody. Contracts such as oil futures are either settled in cash, or crude or corn is shipped to the buyer's warehouse; gold and silver are usually held in large vaults owned by banks or third parties. Many digital trading platforms offer custody services, but few operate as “qualified custodians” typically required of asset managers. The only exceptions are a handful of operators, which obtain trust banking licenses from one of four states: New York, South Dakota, Nevada and Wyoming. Warehouses operating under these state licenses must meet strict capital requirements, as well as security protocols for AML and KYC. Bakkt operates under the New York Charter, and rivals such as Gemini, run by the Winklevoss brothers, and Coinbase have also set up New York trusts as custodians.
ICE does not provide custody of securities or commodities. But it needs robust fraud detection tools to protect trades on its exchange and secure payments inside and outside its clearing house. At Bakkt Clearinghouse, known as Bakkt Trust Co., ICE is deploying the cybersecurity systems that underpin the NYSE. Unless customers want to transfer coins from Bakkt Trust to storage on a competitor's site, the process of transferring bitcoins from one customer to another is carried out in its warehouse. If Client A sells 100 tokens to Fund B, the transaction will take place on ICE Futures US. But Bakkt simply credits the 100 bitcoins to Customer B's account and debits Customer A's account through an entry on the centralized warehouse ledger, and then transfers the cash to A via ICE Clear US.
Bitcoin is like a commodity that moves from part to part but never leaves the warehouse. Since all balances are settled on the internal warehouse ledger, futures trading will avoid running on the blockchain, where bitcoins could be sent to the wrong address. It's like transferring cash from your checking to your own bank savings account.
Nothing is automatically approved. In order for Bitcoin to go from "cold" to "warm," multiple people in two or more offices at Bakkt or ICE must sign off on applying the cybersecurity protocols that protect everything from oil to ETF trades. The "cold to warm" migration then required approval from several other members of the security team, as well as other proprietary processes for authentication. A combined team from ICE and Bakkt is now ready to handle these signings, and that team should expand when the deal goes live.
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Will Fund Managers Accept Bitcoin?
Who is most likely to enter? Loeffler expects a lot of action from retail brokerages, partly due to millennials and Gen Xers eager to use bitcoin as an investment. “Brokers are always looking for an edge to attract new clients, and offering bitcoin could be a big draw,” she said. As for fund managers, Loeffler sees college endowments and pension funds as the most likely buyers: “They Often the first 'pioneers' to adopt new investment ideas."
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shop with cryptocurrencies
Bakkt’s partnership with Starbucks has led to speculation that its eventual goal is to bring bitcoin to retail payments, something confirmed by Loeffler and Sprecher. The high fees merchants pay are exactly the pain point they are trying to deal with. Today, consumers around the world spend $25 trillion a year on credit card purchases. The “players” who process these payments — notably credit card providers and banking intermediaries — reportedly charge retailers an average of 2.4% to 2.5%. Credit card companies return some of the "transaction fees" to consumers in the form of cash, airline miles, hotel points, or other loyalty-building rewards.
Merchants want to be able to control those funds and design rewards programs themselves, rather than offering customers miles or points that they may never use, nor do they do much to build loyalty. Retailers will most likely never accept bitcoin as payment. But millennials and Generation X have shown greater enthusiasm for bitcoin and other cryptocurrencies. They are also natives of the digital age, and many of them have difficulty imagining life without their mobile phones. They often prefer to pay via app rather than credit card.
If Bakkt succeeds in fueling a surge in institutional bitcoin trading, the tokens could function as a highly liquid alternative currency. People with the Bakkt app on their phones can easily buy items from merchants using bitcoin. Bakkt will be in charge of converting bitcoins into dollars so that merchants never see bitcoins but only traditional currencies. Experts compared the transaction costs of paying via bitcoin with those of credit cards and found that the former could reduce current transaction fees by around 75%. Merchants can use these cost savings to lower prices, or design their own incentives to expand the loyal user base of 20-somethings.
