Backed by the Intercontinental Exchange (ICE), Microsoft, and Starbucks, crypto startup Bakkt is scheduled to go live on December 12, pending regulatory approval from the Community Futures Trading Commission (CFTC). The startup, which has the larger mission to transform Bitcoin into a global currency with broad usage, could be the launch the crypto world needs to be catapulted to the next level. Here are a few reasons why.
Jeff Sprecher, Intercontinental Exchange chairman and CEO and his wife Kelly Loeffler, an ICE Executive and CEO of Bakkt, believe that despite skyrocketing consumer interest, there are valid reasons that explain many financial institutions have not invested in crypto so far.
“Two things are missing,” Sprecher said. “Trading on an official exchange, and safe storage for digital currencies on an institutional scale.” Bakkt would provide the first fully-integrated package combining a major federally-regulated exchange, as well as as the clearing and storage overseen by the exchange.
Furthermore, the company’s first crypto product, a physically-sorted futures contract, is designed to attract institutional investors by resolving two of the issues that led to the rejection of the past 10 ETFs– lack of trusted price formation and reliance on futures markets and derivatives.
“A critical element to price discovery is physical discovery. Specifically, with our solution, the buying and selling of Bitcoin is fully collateralized or pre-funded. As such, our new daily Bitcoin contract will not be traded on margin, use leverage, or serve to create a paper claim on a real asset. This supports market integrity and differentiates our effort from existing futures and crypto exchanges which allow for margin, leverage, and cash settlement,” Loeffler said.
By combining an approved custody solution with a regulated exchange that has the capability to monitor cryptocurrency fraud and manipulation in market exchanges, Bakkt seems likely to appeal to institutional investors.
Bitcoin’s current capacity is about seven transactions per second, which is far too slow to operate at the enterprise level. Bakkt has a solution to address this.
“Our system would operate on a layer above the blockchain, and we’d keep our own omnibus ledger apart from the blockchain,” said Loeffler, describing a methodology similar to Bitcoin’s Lightning Network. By only reporting transactions leaving or entering the ICE exchange (rather than between asset managers within the ICE exchange) to the blockchain, the system will be able to operate at a warp speed and accommodate requests at the enterprise level.
Driver of Institutional Adoption
Many industry experts believe that the launch of Bakkt will be instrumental in driving industry leaders to the space.
“Traditionally volatility scares most investors no matter the asset class,” Christopher Bates, a former member of the NYSE, told Forbes. “Bakkt will draw resources from reputable companies with knowledge in fields of risk management and technology to create a federally regulated platform. Once investors feel at ease trading in a regulated environment volatility should ease.”
In the meantime, all we can do is wait for the exciting startup to (hopefully) launch next month.