Cryptocurrency Regulation

Bakkt to begin offering deliverable crypto trading

October 1, 2018


Bakkt to begin offering deliverable crypto trading

Bakkt, a Bitcoin exchange firm founded by financial industry heavyweight Intercontinental Exchange (ICE,) announced via a tweet on September 25th that it would begin offering contracts for deliverable Bitcoin in November. Bakkt will be offering deliverable Bitcoin futures traded against the US Dollar, the Euro, and the British Pound. While not explicitly stated, Bakkt implies that Bitcoin settlement will be offered daily.

ICE launched Bakkt in August of 2018, while partnering with several major partners including Boston Consulting Group, Microsoft and Starbucks. Bakkt’s stated goal is to create a “global, regulated ecosystem for digital assets.” The hope is that Bakkt’s network of powerful partners could aid in broader Bitcoin adoption. Bakkt’s announcement hints at Starbucks beginning to accept Bitcoin for payment in the future, as an example. Bakkt’s technology will be powered by the Microsoft cloud.

While not a household name, ICE is one of the most important players in the global financial system. ICE owns a global network 23 regulated exchanges and markets, including the New York Stock Exchange. ICE also owns a network of 7 central clearing houses. Bakkt’s initial deliverable product slots nicely into ICE’s existing business lines, and trading will conform with the Commodity Futures Trading Commission’s (CFTC) regulatory structure for future products.

Bakkt’s initial product is designed to be straightforward and easy to understand, with the hopes that the product will lure institutional investors who to date have been turned off by the crypto market’s opacity and complexity. Bakkt futures won’t offer margin trading or cash settlement, for example. All trades will be settled by physical delivery of Bitcoin to the purchaser.

In contrast, the Chicago Mercantile Exchange (CME) and Chicago Board Options Exchange (CBOE) both offer synthetic Bitcoin futures. Synthetic futures are cash settled, which means no Bitcoin actually changes hands during a trade.

In an August 20th Medium post, Bakkt CEO Kelly Loeffler laid out the firm’s rationale for the design of the product. By using widely accepted and longstanding future market mechanisms, Loeffler and the Bakkt team believe they can speed adoption of digital assets by institutional investors. Loeffler states:

“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.”

ICE’s status as a regulated exchange in the US allows it to offer this new product to a global investor base, utilizing the “passport” mechanism. Passporting allows regulated financial institution in one jurisdiction to offer the same product in alternative jurisdictions. ICE’s network of institutions will allow it to easily offer this product to customers in the EU, for example, where ICE meets regulatory passporting requirements. Bakkt futures will initially be offered and supported by ICE Futures U.S. and ICE Clear U.S., both arms of ICE.

Bakkt’s new product has a bevy of features designed to calm institutional investor concerns about participating in the digital asset market. While most futures markets offer margin trading, Baktt’s prefunded, no margin model largely eliminates default and counterparty risk. Bakkt will use a separate guarantee fund to hold the Bitcoin assets of the firms trading clients.

In a follow-up Medium post on September 18th, Loeffler highlighted some of the unique features Bakkt is offering to lure institutional clients. FIX API connectivity access, a consolidated ticker, and access to regulatory reporting tools are highlighted as features currently missing from the digital market’s existing market infrastructure. While these tools provide little utility to retail traders, they are essential for institutional market participants.  

Bakkt’s launch is an exciting step forward for digital asset markets. While several stablecoins have recently been approved by the New York Department of Financial Services (NYDFS,) the continued rejection of Bitcoin ETF products by the SEC has been a large roadblock to greater investor participation in the market.

While the crypto community has largely been focused on the SEC’s ETF rejections, it is likely that Bakkt will play a much more important role in the institutionalization of digital asset markets. Indeed, the possibility of Bakkt developing an active and liquid futures market may allay some of the SEC’s concerns about a Bitcoin ETF. One of the SEC’s objections to various Bitcoin ETF’s that have been proposed has been the lack of a clear price discovery mechanism for Bitcoin.

The launch of live trading will require CFTC approval, but given ICE’s status and deep relationships with national and international regulators, this is not expected to be a roadblock. It will be interesting to see market reaction once trading begins, and the launch will be another exciting step towards the embrace of the digital asset market by the institutional investment community.