Intercontinental Exchange, owner of the New York Stock Exchange, announced that it is establishing a new company called Bakkt. The new enterprise, which is planned to be launched in November, is intended to offer a regulated market for Bitcoin. With the formation of Bakkt, ICE aims to spear head the adoption of Bitcoin.
Reason for creating Bakkt
According to Jeff Sprecher, the founder of ICE, Institutional money managers will be interested in creating digital currency funds only if they can purchase the tokens from a federally regulated exchange, and, then store it on behalf of their investors in exceptionally secure accounts provided by the exchanges.
Backed by Industry heavy weights
To achieve the objective, ICE is partnering with tech, retail and financial giants: Microsoft, Starbucks, and Boston Consulting Group. Other prominent investors in the project include Fortress Investment Group, Susquehanna International Group and Eagle Seven. ICE has not provided details about the investments made by the partners.
Fourteen months of ‘secret’ work
The project has been in the pipeline for about 14 months. According to Fortune, ICE and its partners were constructing the factory that will form the backbone of Bakkt in extreme secrecy. In fact, the company’s name was finalized only a fortnight ago. Kelly Loeffler, ICE’s head of digital assets and life partner of Jeff Sprecher, explained that “Bakkt” is a twisted word of “backed,” just as “asset-backed securities,” and it indicates that the investment is highly secure and trusted.
Objective of Bakkt
The primary aim of Bakkt is to make Bitcoin a solid and safe investment for some of the world’s big financial institutions that shy away from it right now. Bakkt also hope to lay the path for major money managers to offer Bitcoin mutual funds, ETFs, and pension funds as totally regulated, traditional mainstream investments.
If everything goes as per plan
According to ICE, if the plan works out as intended then it would pave way for millennials to get this first 401(k), a retirement savings plan sponsored by an employer. It allows workers save and invest a portion of their monthly paycheck before taxes are removed. Taxes are paid only when the money is withdrawn from the account.
ICE expects an array of Bitcoin funds to come up, leading to a rise in the demand for Bitcoin. This would also make it a secure and easy choice for millennials in getting their first 401(k). As the popularity rises, Wall Street could offer it as an alternative to stocks and bonds to push up trading volumes. The huge volumes created by institutional buying and selling could remove most of the terrifying volatility from Bitcoin.
Replacing credit card- the ultimate game
As discussed earlier, laying the foundation for 401(k) and IRA market for cryptocurrency is the primary aim behind establishing Bakkt. However, the effort does not stop with that. The startup is also having a mind boggling goal of replacing the entire credit card industry with Bitcoin. ICE wants to use Bitcoin to disrupt the retail payment industry by encouraging consumers from swiping credit cards to scanning the QR code using Bitcoin apps. Around the globe, people are paying considerably high fees for shopping $25 trillion worth goods using their credit card. In this regard, it can be noted that Starbucks is already leading the industry by encouraging its customers to pay using their smartphones rather than their credit cards.
While announcing the launch, Kelly Loeffler, ICE’s head of digital assets, said
“Bakkt is designed to serve as a scalable on-ramp for institutional, merchant, and consumer participation in digital assets by promoting greater efficiency, security, and utility. We are collaborating to build an open platform that helps unlock the transformative potential of digital assets across global markets and commerce.”
Maria Smith, vice president, Partnerships and Payments for Starbucks, said
“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 U.S. dollars for use at Starbucks.”
About ICE and founder Jeff Sprecher
Bakkt was established by Jeff Sprecher, the founder, chairman, and CEO of ICE, and an acknowledged disrupter par excellence. In his early years, Sprecher converted a failing electricity exchange, after purchasing for a mere $1, into a global trading and data business now valued at $44 billion.
Acknowledging Sprecher’s capabilities, Larry Tabb, chief of consultancy the Tabb Group, said
“In 25 years he’s gone from nothing to the most powerful exchange entrepreneur in the world. He hasn’t failed yet.”
ICE generated $4.6 billion last year from the two main ventures, with revenue almost split evenly between the two. The group owns twelve exchanges. Six clearing houses serve them. From investors’ perspective, profit matched growth. The company went public in 2006. Since then, ICE has generated annual returns of 24.1%. In 2017, the company recorded a 54% margin of net profits and stood fourth in the S&P 500.
Who will run Bakkt?
Kelly Loeffler, the soul mate of Sprecher and ICE’s head of digital assets will lead the venture. Loeffler has a successful track record of running marketing, investor relations, and communications for ICE. To head Bakkt, Loeffler will resign from her positions in ICE to head Bakkt.
Bakkt’s integrated package
Bakkt would offer a completely integrated package, combining a “regulated exchange, as well as the clearing and storage overseen by the exchange.” Bakkt plans to provide two main layers of security, which are absolutely necessary for money managers to show interest. Dealing through a regulated broker-dealer is the primary requisite of any money manager. In this case, money managers will be dealing with a member of the ICE futures exchange.
Those who wish to deal with the exchange must submit passports, origin of funds and articles of incorporation. Even patterns of illegal activity will be searched by ICE before accepting a member interested in purchasing cryptocurrencies.
ICE would make sure that
“only broker-dealers and futures commission merchants (FCMs) that are fully vetted by the regulated exchanges are allowed to trade on those venues as “members” of the ICE Futures U.S. On SEC and CFTC regulated exchanges, the exchange-approved members are trading with one another, on behalf of money managers that they, in turn, have fully vetted. Granted the same protections, investors could be absolutely sure they’re not buying Bitcoin from warlords who hacked a hedge fund to pilfer the tokens.”
The second requirement is providing regulated storage facility for digital currencies. Commenting on the importance of building a regulated storage facility, Loeffler said “A qualified warehouse is the difference between institutional investors’ getting in or staying out.”
As far as crypto storage facility is concerned, Bakkt’s would follow the same procedure adopted by vaults that secure gold bars on behalf of investors. Two main services are provided by ware houses serving futures exchanges. First, they prevent theft of assets.
In Bitcoin’s case, ICE plans to safeguard the tokens in super-secure digital lock-boxes. Multiple layers of cyber-security would ensure the safety of tokens. Second, exchanges thoroughly verify investors identity in accordance with their policies and procedures and make sure that the gold or other commodity brought into the warehouse was not acquired illegally.
The integrate package offered by Bakkt will combine a CFTC-regulated exchange with CFTC-regulated clearing and custody, pending the approval of regulators. Bakkt will also offer a new Bitcoin trading platform on the ICE Futures U.S. exchange.
Bakkt’s revenue
Loeffler revealed that Bakkt’s revenue will come from “the trading fees on the ICE Futures U.S. exchange and warehouse fees paid by the customers that buy Bitcoin and store with Bakkt.”
Competitor
The Dodd-Frank legislation allowed the creation of marketplaces called Swap Execution Facilities (SEF), monitored by the CFTC. The SEFs could prove to be a major competitior in the future.
“LedgerX, for example, owns a SEF that uses swap contracts to trade fiat currencies for Bitcoin called “Next Day Bitcoin”; it also provides custody services regulated by the CFTC. (Gemini and Coinbase also provide custody services.) The SEFs are far less established, and have far smaller base of institutional customers than the big exchanges such as ICE Futures U.S., but they are potential competitors in the years ahead.”
Exchange operation
In the proposed exchange, users would trade Bitcoin using something called as “one-day futures” contracts. The contracts would settle as quickly as trades executed in the cash market i.e., in a single day. The broker-dealer would close a trade at any time during trading hours on behalf of an institutional client. Once the market closes, the ICE clearinghouse would arrange for transfer of cash from the buyer’s to the seller’s bank account. Simultaneously, the Bitcoins would be moved to the Bakkt digital warehouse.
Spending Bitcoins
To spend Bitcoins from the digital warehouse, a client would make use of “private keys,” which are “randomly generated string of numbers and letters that resemble digital signatures.”
It is a known fact that Bitcoin hodlers store their private keys on PCs or servers, or in any other suitable unregulated places. This provides a chance for hackers to steal the key. Since 2011, cryptocurrencies worth $1.60 billion have been stolen by hackers.
To avoid this problem, Bakkt would store the private keys “offline” in its secure digital warehouse. When a fund manager asks for the Bitcoin, Bakkt would check the identity and transfer the Bitcoin using the private key. As an additional safeguard measure, the warehouse will also hold a second key, referred to as the public key that will provide access to the recipient’s account to receive Bitcoin. The double key security is similar to the manner in which a bank and its customer operate a vault.
If trades occur inside the warehouse, “Bakkt would be connected to the ICE Futures U.S. exchange, so that customers could seamlessly trade Bitcoin for dollars or Euros. Then, the Bitcoin would simply shift from the seller’s lockbox in the ICE warehouse to the buyer’s lockbox, as if a forklift were transferring gold bars from one storage locker to another.”
Speeding up Bitcoin transactions
One of the major issues faced by Bitcoin is low transaction speed. Bakkt is planning to change Bitcoin’s architecture to run at high speed. As long as transactions exist within the Bakkt’s ecosystem, a separate ledger will be maintained to record the Bitcoin debit and credits. At the end of the day only payments that come in or go out of the Bakkt’s ware house would be broadcast to the Bitcoin’s mainnet. Rest will not be broadcast to the mainnet. This will resolve the issue of speed. It should be remembered that the scenario envisages Bakkt to control a major share of the market.
Example of real-world use case
A real-world use case
“When an U.S. auto parts manufacturer buys components from Japan, for example, it can pay stiff fees to convert dollars to yen. The purchase, at a minimum, involves a broker-dealer that makes the trade, and the purchaser’s and the seller’s banks. It might take two days before the seller can collect the yen, costing the U.S. producer interest while the funds are in transit. By contrast, if both parties use Bitcoin the payments could bypass the brokers and banks, flowing via the ICE exchange from the buyer’s to the seller’s vault held at Bakkt, and reaping big savings.”
Sprecher said “Bitcoin would greatly simplify the movement of global money. It has the potential to become the first worldwide currency.”
Why Banks will encourage the project?
Banks may support the project for the simple reason that the new system could encourage borrowing in many ways.
If Bakkt succeeds, it could be the biggest breakthrough in the chapter of cryptocurrencies since an unidentified programmer under the pseudonym Satoshi Nakamoto released Bitcoin in 2009.
