The Intercontinental Exchange earlier this month launched Bakkt, an open, seamless global cryptocurrency platform and network that will allow consumers and institutions to buy, sell, store and spend digital assets simply, safely and efficiently. The ecosystem will also offer physically settled one-day bitcoin futures contracts and bitcoin warehousing.
According to the announcement, Bakkt is an open ecosystem launched in partnership with BCG, Microsoft and Starbucks. Ideally, the platform is meant to make it easy for ICE customers to access, trade and utilize Bitcoin and cryptocurrencies in the global marketplace and commerce or to "unlock the transformative potential of digital assets across global markets and commerce," according to Bakkt CEO Kelly Loeffler.
The move, which is expected to have a number of effects on crypto markets, is supported by many, including Thomas Lee, the co-founder of Fundstrat Global, who sees it as supporting "a roadmap that shows major institutions are creating supporting infrastructure for crypto." Following are some of the ways in which it will impact the cryptocurrency industry.
Bringing players together in a single crypto platform including influential firms
Institutions, merchants and consumers hoping to benefit from cryptocurrencies in the global commerce while without compromising on efficiency, security and utility. Further, it provides a wide range of services. It will have derivatives, custody solutions and asset-tokenisation systems. It will also have merchant and consumer applications.
Founder and Chairman and CEO of Intercontinental Exchange Jeffrey C. Sprecher said that building a connected infrastructure would help build "confidence" in crypto asset class on a "global scale" consistent with the company's track record of bringing transparency and trust to "previously unregulated markets.”
One effect is that the project could have given its structuring is to encourage large firms so called not currently into cryptocurrencies, to venture into cryptocurrencies. First, it is being led by influential firms with experience in global financing and in commodity markets and secondly, the structure favors any institutional investors. The nature and type of its services and features is also set to encourage adoption of cryptocurrencies by these firms.
Bakkt system will be operated by ICE, which has good standing with some of the largest financial leaders like Fidelity Investment, JP Morgan and Charles Schwab. Thus, it could ideally help inflow of more money and investments into cryptocurrency given the trust and help boost the markets.
ICE, which is the owner of the platform and expected to lead the way, is the parent company of the New York Stock Exchange and is world's largest owner of exchanges commodity markets and clearing houses. It operates 23 regulated exchanges and plays a sizeable role in the New York Stock Exchange and 6 clearing houses which host trading for and of thousands of different assets and derivatives. The firm also connects markets to let firms invest, trade and manage risk across global financial and commodity markets. It also provides market data and connectivity across virtually all asset classes. They have helped companies to raise more capital than any other exchange in the world.
Other partners in the Bakkt project include Microsoft and Starbucks. The announcement also said that the Bakkt will be funded by other affiliates including Fortress Investment Group, Eagle Seven, Galaxy Digital, Horizons Ventures, Alan Howard, Pantera Capital, Protocol Ventures, and Susquehanna International Group, LLP. The exchange has an excess of $85 billion in resources with an annual revenue of roughly $6 billion and this gives them more ability to use for their ambitions.
Encouraging cryptocurrency adoption and the institutional clients factor
Apart from encouraging participation of traditional firms in cryptocurrencies, the platform and undertaking will encourage participation of younger generation and firms in cryptocurrency markets most of whom have less trust for larger financial centers compared to older firms and generation. Research shows that more of the younger generation is increasingly adopting cryptocurrencies preferring to use digital assets as a store of value. In addition to cryptocurrencies being aligned more for digital economies, younger generation is more comfortable to transact using electronic systems compared to older individuals.
The debate of encouraging crypto adoption among institutional investors continues. The Bakkt platform will make it safer for institutional investors to venture into cryptocurrencies by reducing volatility -- ideally not for everyone market-wide but for ICE customers -- known as one of the greatest barriers to entry. It will reduce volatility by allowing institutional investors to hedge against Bitcoin and profit from Bitcoin volatility. There are many ways for traders to hedge against Bitcoin and crypto volatility but it is expected that the ecosystem will be more suited to institutional investors by providing liquidity and making it much easier to.
Using the platform, businesses and institutional investors will be able to unlock the potential of digital assets through regulated existing infrastructure from trading to exploiting the value of digital rewards and points systems for their customers.
Starbucks, for instance, will use the ecosystem to offer more payment options to customers -- customers can convert digital assets into U.S. dollars. Starbucks "as the flagship retailer, Starbucks will play a pivotal role in developing practical, trusted and regulated applications for consumers to convert their digital assets into US dollars for use at Starbucks" according to Maria Smith, vice president of partnerships and payments at Starbucks. These applications will also allow customers to redeem points accumulated for coffee in addition to paying with Bitcoin and digital assets. It is easier to see that the platform is headed towards encouraging usability of digital assets for daily expenditure and activities.
Encourage crypto usability and make it easier for anyone to do so
In addition to encouraging adoption by institutional investors, the platform will also make it easier for businesses wanting to accept digital currencies to do so and make it easier for conversion of digital assets into fiat. There are many reasons a business would want to accept cryptocurrencies and use it for global transactions and business -- for instance cryptocurrencies would be much better for firms' business in countries with ongoing high inflation rates or for avoiding gouging on both ends when paying overseas workers as well as to help avoid credit card fraud and fees when shipping globally. However, easier conversion between crypto and fiat -- which is clogged with many challenges today including conversion issues and related fees -- is important because companies cannot just wish away the benefits of fiat at least for now -- it is easier to store, much more stable and widely adopted much more than cryptocurrencies.
So the system will make it possible for any particular company or institutional investor to gain from both worlds of digital assets and fiat wherever possible, globally, and without worrying of the risks, volatility and regulatory issues. Besides that, it could encourage application of cryptocurrencies in many ways by institutions, through the merchant and consumer applications. An example is one given above for Starbucks and the other is discussed in the asset tokenization section in this article, below.
The announcement said that this ecosystem's first use case will be for trading and conversion of Bitcoin verses fiat currency. It will start with Bitcoin, being the most liquid digital currency that is also most widely accepted and adopted than all other cryptocurrencies. Moving forward, it could be unavoidable for such a system to support other digital currencies given that there are so many others that definitely have better usability than Bitcoin though not widely adopted like Bitcoin for now.
Bringing the ETF factor into crypto
Bakkt's one-day physically settled Bitcoin futures contracts and physical warehousing will be released or will kick off starting November this year subject to CFTC review and approval. Ideally, the ETF will allow customers to buy BTC one day and expect delivery of the currency the next business day in tangible form. Thus, it could practically lead to increased demand especially because it involves physical delivery of Bitcoin and cryptocurrencies or digital assets.
The two features will help institutional ICE customers to de-risk Bitcoin and cryptocurrencies. They will be able to hedge against and profit from bitcoin's volatility.
The clearing house plans to create a separate guarantee fund that will be funded by Bakkt. The warehousing solution will overcome the longstanding pain-point of actually needing to safely store cryptocurrency. This will reduce risks involved in using cryptocurrency and digital assets and expands possibilities of using cryptocurrencies.
Many have said how an crypto ETF could help boost crypto demand especially if it is physically settled. ETFs have historically boosted prices and lead to a 300% price surge in Gold prices after introduction n Gold markets in 2013. While Bitcoin futures are cash settled to mean that at the expiration period, the trader receives or pays out the difference between the price he or she bought, in the physically settled contracts, the trader will take ownership of the Bitcoin at the price established in the futures contract. Physical settlement could better facilitate an arbitrage trade,
Traditionally, an ETF, which is basically a basket of securities bought and sold through a brokerage firm or stock exchange, would remove the need for individuals and institutions to sign up with exchanges and buy crypto to own and store. This comes with a number of challenges including security and the technicalities to manage and track performance and markets. Instead, the investor signs a contract to see them own some shares in the fund while the crypto is owned by the fund. The shareholders then receive a portion of the funds profits through dividends or earned interest paid.
The move and announcement also comes even as ETF proposed by Winklevoss twins was rejected by SEC in July citing the potential for market manipulation and a lack of liquidity. The ruling expressed skepticism over whether the Winkelvoss’s proposal to source the Bitcoin for the ETF from their own exchange would provide an adequate source of liquidity. The twins had proposed to source Bitcoin from their exchange known as Gemini. Thus the new platform by ICE might be seeking to remove these obligations in order to pave way for possibility of acceptance of their ETF.
Ability to trade and tokenize anything 🙂
This mentioned, it should be clear to see that the ecosystem is targeting to combine all benefits of cryptocurrencies and make it possible for firms to enjoy them on a single platform. This feature is big, whether you are talking about tokenizing real estate, art or any other product or service. Once tokenized, any asset can be traded in parts or portions to a single or many investors.
Cryptocurrencies and blockchain make it much easier for this to work than would fiat, but this ecosystem will make it easier for those offering tokens and selling tokenized property to spend and receive or store fiat too for tokenization because it allows ease of conversion between crypto and fiat. The system could for instance help tokenize valuable data, computer processing power, bandwidth on a decentralized network etc.
Even the name of the platform -- Bakkt (for "backed") suggest that it will see the tokens launched on the platform backed by real assets in the real world. This feature will also encourage market innovation.