Author: Shawn Tully Translated by: Cai Kailong Cindy Huang
September 20, 2019
On September 22, a product aimed at transforming Bitcoin into a mainstream investment product for global investment managers will be launched. When ICE Futures America, one of the world's largest commodity trading markets, opens for trading at 8 p.m. ET that day, it will offer Bakkt daily and monthly Bitcoin futures,It was the first physically delivered cryptocurrency contract ever traded on an exchange under federal regulation.
If the exchange goes ahead as planned, it will provide institutional investors with a safe, well-monitored venue to trade bitcoin, the world's most widely used cryptocurrency. This could also help alleviate Bitcoin's volatility and reliability issues that have kept it from being more widely used.The Bakkt exchange will greatly increase the legitimacy of Bitcoin as an asset.
With Bakkt futures, endowment funds or securities firms that trade these contracts can not only pay through the payment channels of the ICE clearing system, but also ensure that the purchased bitcoins can be delivered through the ICE clearing system. This ICE clearing system is already providing clearing services for global oil giants trading oil contracts. Their newly-purchased tokens will be stored in a super-secure token warehouse managed by the same team and with the same cybersecurity protections as the NYSE stock custody system.
Bakkt is committed to combining tradition and disruption, allowing traditional big-name asset management companies to embrace cryptocurrencies.
The reason why Bakkt can do this is because of the "endorsement" of Intercontinental Exchange ICE, the major shareholder behind it. ICE is a US$52 billion market value trading giant with the New York Stock Exchange. At the same time, ICE also owns the world's largest ETF trading platform: NYSE ARCA; ICE US Futures Exchange, one of the major players in the global agricultural product market; ICE European Futures The exchange, home to the Brent crude contract, the main benchmark for global oil prices. Bakkt is the brainchild of ICE founder and CEO Jeff Sprecher. Jeff Sprecher has long led ICE to lead the transformation of large exchanges from the open-outcry venues dominated by rowdy offline brokers to today's electronic markets.
Bakkt’s CEO is Kelly Loeffler, Sprecher’s 17-year ICE senior associate (and Sprecher’s wife). Bakkt made its grand debut in August 2018 with a group of investors and partners led by ICE that has invested $182.5 million to date. These include Microsoft's venture capital arm M12, hedge fund Pantera capital, billionaire fund manager Alan Howard and Starbucks.
Trading was initially expected to begin in December last year, but that timeline proved overly optimistic. The federal government shutdown in December and January delayed talks with the Commodity Futures Trading Commission, Bakkt's main regulator. The CFTC has also reportedly taken some time to consider whether to oversee the custody of digital assets, but so far it has not publicly committed to that regulatory role, further prolonging the approval process. Meanwhile, the Bakkt hoopla receded, and news that a prominent consortium including Facebook and Visa planned to create a global encrypted digital currency called Libra dominated the headlines.
Now, Bakkt is back. Despite the delay, its product will beat Libra and will begin trading before competing futures contracts planned by LedgerX and ErisX land.
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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 the ultimate goal of the future is an efficient, regulated digital currency market that changes the way we pay for everything from coffee to airline tickets.
“The fund managers who trade on our exchange have shown us that they don’t want to trade in an existing unregulated market, they want federal regulation from start to finish at the NYSE level to ensure that Bitcoin The security of the transaction," said Bakkt CEO Loeffler. COO White added: “For example, pension funds are diversifying into alternative investments. Regulated bitcoin futures may be part of their investment direction, because bitcoin is compared with stocks and bonds and other alternative investments such as gold. have different correlations".
Once hedge funds, family offices and securities firms such as Charles Schwabs or TD Ameritrades accept bitcoin, the huge trading volume in the Bakkt contract will make investors and potential users feel uncomfortable. The price volatility of fear is flattened, creating a stable, trustworthy digital currency. If that happens, it's not hard to imagine Bakkt developing an app for individual users to buy bitcoin. Bakkt has not disclosed its personal plans, but acknowledged that its partnership with Starbucks is a harbinger of similar grand plans in the future. Bakkt is also in talks with other consumer brands looking to pay with digital currencies. After all, the high fees that credit card companies and banks charge merchants desperately need to change, and ICE CEO Sprecher is a master at speeding up a range of transactions and reducing transaction costs.
Bakkt's partnership with Starbucks has fueled speculation that the exchange could help accelerate the adoption of bitcoin in retail.
Sprecher told Fortune that for now, it’s unclear whether asset managers will translate their strong interest in Bitcoin into actual purchases, which puts the futures launch in doubt.
“It’s not real transactional demand yet, it’s just intense curiosity right now,” he said, continuing, “In a sense, wealth managers want to be leaders on this bitcoin train, not be left out. Outside. The daily news is reporting how the price of Bitcoin is going up or down, but behind the scenes, we see some experienced people making contributions to infrastructure and compliance license applications that are not directly related to the price of Bitcoin. As. Wealth managers won’t be using this infrastructure, and unless we can build the tracks on which the bitcoin train runs in a compliant and legal way, there won’t be true global acceptance.”
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alleviating regulatory fears
The success of what Sprecher describes as a “moonshot-like feat” depends on whether traditional regulation, which Bakkt is betting on, can act as a bridge leading money managers to bitcoin.
It's easy to see why endowments and pension funds view the world of cryptocurrencies as dangerous territory. In short, the industry lacks a unified, rigorous federal oversight system similar to the one that protects U.S. securities and commodity futures markets. New research from crypto asset management firm Bitwise found that 95% of trades on digital currency exchanges are fraudulent, meaning they are designed to inflate quantities or prices, rather than for customers who want to actually buy or sell bitcoin Designed for legal transactions between. Among the fraudulent activities, there is "pretend trading", that is, traders have no intention of buying, but enter false orders to manipulate prices. Alex Daskalov, chief executive of KNØX, a company that provides custody and insurance for digital assets, said, "Theft and loss of digital assets is rampant in the industry, so it is very difficult for a responsible fiduciary to do so." would like to be involved.”
U.S. authorities have considered bitcoin a "commodity," so it falls under the jurisdiction of the US Commodity Futures Trading Commission (CFTC) (as opposed to the Securities and Exchange Commission, which regulates securities). But the CFTC has not yet granted a license to operate "spot" commodity markets, which trade oil, soybean or currency futures, all of which are settled in cash. As its name suggests, the CFTC has jurisdiction over commodity futures, a type of derivatives contract that ultimately dictates how much a refiner will pay crude oil sellers in the future for delivery at a future date.
(Currently, bitcoin futures are already traded on the Chicago Mercantile Exchange (CME), but unlike Bakkt daily and monthly futures, these futures are not used to buy and sell physical bitcoin. CME futures are settled in cash rather than bitcoin tokens , the settlement price is based on the comprehensive price index of the bitcoin spot market)
In addition to these Chicago Mercantile Exchange (CME) futures, cryptocurrencies have also been traded on spot markets that do not qualify as "exchanges" under federal regulations and, in most cases, cryptocurrency exchanges Hold a money transmitter license issued by the state in which they are incorporated. Compared with CFTC's strict and unified standards for futures trading, investment companies are obviously not at ease with the fragmented and immature supervision of these trading venues. More than 200 cryptocurrency platforms dominate transactions, each with its own price. Therefore, Bitcoin does not have a clear, centralized price.
This is exactly the Bitcoin pricing standard that Bakkt wants to provide.
In CFTC-regulated futures markets such as ICE US Futures, only broker-dealers and Futures Commission members 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, which is overseen by the Commodity Futures Trading Commission (CFTC). These trading member companies are also members of the clearing organization (the trading members of ICE US Futures are also members of the ICE US Clearing Organization), and transactions are settled between members and protect participants from losses. For any contract traded on an exchange, if the buyer fails to pay, the clearing house enforces an agreement designed to keep the seller intact. For example, if a producer buys an oil or soybean contract and the seller defaults, the clearing house will arrange to reimburse the buyer. Futures clearing houses are also licensed and supervised by the CFTC.
Bakkt's neat trick is to create a futures contract that trades like a spot contract.By purchasing daily futures, the buyer's account will receive physical bitcoins on the same day, just like on a spot exchange. The difference is that Bakkt products have strict trading and clearing capabilities under the supervision of the CFTC, and at the same time have the outstanding advantage of using margin plus leverage, which investors pay special attention to. Bakkt Monthly Bitcoin Futures will launch a 12-month Bitcoin futures contract.
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hosting is key
So what are the advantages of Bakkt? Bakkt believes that the trust of large customers in ICE will extend to its holding company, and that utilizing ICE's technology will create a super-secure vault for storing digital assets.
The act of protecting stocks, bonds and commodities such as gold from theft is known as "escrow," and unbreakable protection is especially important for cryptocurrencies. If bitcoins are sent from the owner's wallet to the wrong digital address, the recipient will get a private key, which means that the recipient owns these bitcoins-the owner has no way to get their digital currency back. Likewise, there is no way for anyone to get back bitcoins from a thief who broke into a wallet.
It is important to realize that the CFTC has historically not regulated the custody business. Contracts such as oil futures are either settled in cash, or crude oil or corn is shipped to the buyer's warehouse; gold and silver are held in large vaults, often owned by banks or third parties. Many digital trading platforms provide custody services, but few institutions can meet the strict requirements of asset management companies to become "qualified custodians". 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. Custody operating under these state licenses must meet strict capital requirements, as well as anti-money laundering (AML) and know-your-customer (KYC) security protocols. Bakkt operates under a New York state trust bank license, while rivals Gemini (run by Tyler and Cameron Winklevoss) and Coinbase have also set up custody as New York trusts.
ICE does not provide custody of securities or commodities. But it uses robust fraud detection tools to protect trades on its exchange and secure payments to and from its clearing house. The security and reliability of the network deployed by ICE in the clearing center called Bakkt Trust Co. is no less than that of ICE's New York Stock Exchange. Unless a customer wishes to transfer coins from Bakkt Trust to a competitor's site for storage, the transfer of bitcoins from one customer to another occurs entirely within the Bakkt escrow vault. If customer A sells 100 tokens to B, the transaction will be carried out in the ICE US futures system, and the subsequent delivery Bakkt only needs to add 100 bitcoins to customer B's account through the central escrow system, while reducing A's account by 100 bitcoins, and then Direct cash to A cash account through ICE Clear US.
Bitcoins are like a pile of lumber that moves from one branch of Home Depot, the home improvement storage chain, to another, but never leaves its warehouse system. Since all transactions are settled on an internal centralized account, Bitcoin futures transactions avoid running on the blockchain, preventing the possibility of sending to the wrong address. It is as convenient and safe as transferring cash from one of your own accounts to another of your own under the same bank.
With the help of ICE, Bakkt has also instituted fortress-solid protections for bitcoins leaving custodial warehouses. The vast majority of bitcoin in Bakkt's warehouses is stored in so-called "cold storage." To leave the warehouse, bitcoins must be moved from cold storage to "hot storage" and then out via electronic transfer over the internet. The "Hot Vault" is connected to the internet so that bitcoins can be sent from Bakkt Trust Bank to another exchange or wallet. Cold storage stores bitcoins in the safest vaults that are disconnected from the internet.
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Will Money Managers Accept Bitcoin?
Loeffler said asset managers told her that bitcoin could be a boon for balancing portfolios if it was sufficiently secure. Loeffler said: "Bitcoin volatility is currently a big negative for individual traders, but not for institutional investors. Many funds invest in commodities as alternative investments but their prices are very volatile. .Oil and coffee prices go up and down, often wildly.” She noted that bitcoin is the ultimate maverick, with price peaks and troughs independent of trends in stocks, bonds, gold and real estate. Despite Bitcoin’s volatility, over the past 10 years, Bitcoin’s total returns have outpaced its competitors. In theory, bitcoin should have a place in the basket of alternative assets that form a staple of large, well-diversified portfolios.
Who is most likely to accept bitcoin? Loeffler expects a lot of action from individual brokerages to buy bitcoin, partly because millennials and Gen Xers are eager to hold 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. For fund managers, Loeffler sees college endowments and pension funds as the most likely buyers. Funds: "They are often at the forefront of adopting new investment ideas."
In the past, typically cryptocurrency-only hedge funds were the major institutional investors in risk-taking, digital assets. The rise of Bakkt is likely to attract more hedge fund firms to participate. Just this week, for example, Elwood Asset Management, the firm that manages the personal cryptocurrency portfolio of billionaire fund manager and Bakkt shareholder Alan Howard, announced that it plans to put money into a variety of digital hedge funds that will provide institutional An investor creates a $1 billion portfolio.
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Shop with cryptocurrency
Bakkt’s partnership with Starbucks has led to speculation that its ultimate goal is to bring bitcoin to the retail payments space. This was corroborated by Loeffler and Sprecher, who love to attack high fees paid by merchants. Today, consumers worldwide purchase a staggering $25 trillion a year on their credit cards. The agencies that process these payments, especially credit card providers and bank intermediaries, reportedly charge retailers an average of 2.4% to 2.5%. Credit card companies return some of the "transaction fees" to consumers in cash, or in the form of airline miles, hotel points, or other rewards designed to build loyalty.
Merchants want to be able to control those funds, design their own rewards programs instead of offering customers miles or points they may never use, and they want to not be tied to the brand of a payment intermediary. Retailers may never accept Bitcoin as payment. But millennials and Gen Xers have shown great enthusiasm for Bitcoin and other cryptocurrencies. They are digital natives, many of whom have never lived without their phones. They generally prefer to pay with an app rather than a credit card if possible.
If Bakkt succeeds in unlocking Bitcoin’s institutional trading volume, the tokens could take on a new role as a highly liquid alternative currency. People with the Bakkt app on their phones can easily buy items from merchants using bitcoin. Bakkt is responsible for converting bitcoins into dollars so that merchants never touch bitcoins, 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 savings in transaction fees to lower prices, or design their own rewards programs to grow their 20-something fanbase.
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