Interview with Fortune: Will Bakkt help Bitcoin become mainstream?

On September 22nd, products of the mainstream investment portfolio aimed at transforming Bitcoin into a global investment manager will be launched. When the ICE Futures American Exchange, one of the world's largest commodity trading markets, opens for trading at 8:00 pm EDT, it will offer Bakkt daily and monthly Bitcoin futures, which are the federally regulated exchanges. The first physical delivery of the cryptocurrency contract for the transaction.


If the exchange is on schedule, it will provide institutional investors with a secure, well-regulated trading venue to trade the world's most widely used cryptocurrency, Bitcoin. This can also help alleviate bitcoin volatility and trustworthiness issues that make Bitcoin less widely available. The Bakkt exchange will greatly increase the legitimacy of Bitcoin as an asset.

With Bakkt futures, endowment funds or securities companies that trade these contracts can not only pay through the payment channel of the ICE clearing system, but also ensure that the purchased bitcoin can be delivered through the ICE clearing system. The ICE clearing system is already providing clearing services for oil giants trading in global oil giants. Their newly purchased tokens will be stored in a super-secure warehouse that, like the New York Stock Exchange stock custodian system, is managed by the same team and has the same cybersecurity protection.

Bakkt is committed to combining tradition with subversion and allowing traditional big asset managers to enter the market to embrace cryptocurrencies.

Bakkt can do this because of the “endorsement” of the Intercontinental Exchange ICE, the major shareholder behind it. ICE is the $52 billion market capitalization giant with the New York Stock Exchange, and ICE also has the world's largest ETF trading platform: NYSE ARCA; ICE US Futures Exchange, one of the major players in the global agricultural market; ICE European Futures The exchange, the home of the world's major benchmark for oil prices Brent crude oil contract. Bakkt is the creator of ICE founder and CEO Jeff Sprecher. Jeff Spreecher has long led ICE to lead large exchanges from the open outcry market dominated by noisy offline brokers to today's electronics market.

Bakkt's CEO is Kelly Loeffler, a senior partner of Sprecher who has worked at ICE for 17 years (and is also the wife of Sprecher). Bakkt was unveiled in August 2018, and a group of investors and partners led by ICE have invested $182.5 million to date. These include Microsoft's venture capital arm office M12, hedge fund Pantera capital, billionaire fund manager Alan Howard and Starbucks.

The transaction was originally expected to begin in December last year, but it turns out that the time plan is too optimistic. The federal government closed in December and January, delaying talks with CFTC, the main regulator of Bakkt's commodity futures trading committee. According to reports, the CFTC also spent some time considering whether to supervise the custody of digital assets, but so far, it has not publicly promised to assume this regulatory role, which further extended the approval process. At the same time, Bakkt's retreat has retreated, and well-known consortiums such as Facebook and Visa plan to create a news headline called Libra's global encrypted digital currency.


Now, Bakkt is back. Despite the delay, its products will beat Libra and will begin trading before the LedgerX and ErisX planned competitive futures contracts land.

Bakkt received the approval of the CFTC in June, and on August 16, the New York State Department of Financial Services granted it a license to establish a trust company as the point of its hosting tool, Bakkt Cleared the last obstacle. In the past few days, Bakkt's Sprecher, Loeffler, COO Adam White and other executives have been interviewed exclusively by Fortune magazine. It also includes face-to-face interviews in a glass-cube office building at the ICE headquarters in the suburbs of Atlanta.

Make Bitcoin more popular

Bakkt executives stressed that their immediate goal is to make Bitcoin, like gold and private equity, a popular alternative investment. But the ultimate goal in the future is to achieve an effective, regulated digital currency market, from coffee to air tickets that change the way we pay for everything.

“Fund managers who trade on our exchanges show us that they don’t want to trade in existing unregulated markets, they want to get federal regulation from start to finish on the NYSE’s level to ensure bitcoin The security of the transaction," said Baffet's CEO Loeffler. COO White added: “For example, pension funds are diversifying into alternative investment sectors. Regulated bitcoin futures may be part of their investment direction because of bitcoin and stocks and bonds and other alternative investments such as gold. Have different relevance."

Once hedge funds, family finance institutions, and securities companies such as Charles Schwabs or TD Ameritrades accept bitcoin, the huge volume of transactions in the Bakkt contract will make investors and potential users feel Fear of price volatility has become flat, creating a stable, trustworthy digital currency. If this happens, it's not hard to imagine that Bakkt will develop an app for individual users to buy Bitcoin. Bakkt has not yet disclosed its personal-oriented plan, but acknowledges that its partnership with Starbucks heralds a similar grand plan for the future. Bakkt is also negotiating with other consumer brands that want to pay in digital currency. After all, the high fees charged by credit card companies and banks from merchants are in urgent need of change, and ICE CEO Sprecher is a master in speeding up a series of transactions and reducing transaction costs.


The partnership between Bakkt and Starbucks has led to speculation that the exchange can help speed up the use of Bitcoin in retail.

Sprecher told Fortune magazine that for now, whether asset managers turn their interest in Bitcoin into actual purchases is inconclusive, which makes this futures a suspense.

He said: "This is not a real trading demand. It is only a strong curiosity." He continued: "In a sense, the wealth management agency wants to be the leader of this bitcoin train, not excluded. Everyday news reports on the rise or fall of bitcoin prices, but behind it, we see that some experienced people have an infrastructure and compliance license application that is not directly related to bitcoin prices. As a wealth management agency does not use this infrastructure, unless we can build a track of Bitcoin trains in a legal and legal manner, there will be no real global recognition."

Sprecher pointed out that Bakkt's Wall Street prospects can take weeks or months to determine whether a product is a success or a failure. He said: "It is like the night of the opening ceremony, everyone is very nervous."

Reduce the fear of supervision

The success of Sprecher's “like a moon-like feat” depends on whether the traditional regulation that Bakkt bets on can serve as a bridge to direct money managers to Bitcoin.

It is easy to understand why endowment funds and pension funds view the cryptocurrency world as a dangerous area. In short, the industry lacks a unified, rigorous federal surveillance system similar to protecting US securities and commodity futures markets. A recent study by crypto asset management company Bitwise found that 95% of transactions on digital currency exchanges are fraudulent, meaning they are designed to be imaginatively high in quantity or price, not for customers who want to actually buy and sell bitcoin. Designed for legal transactions between. In fraud, there is a "pretend transaction" behavior, that is, the trader does not intend to purchase, but enters a false command to manipulate the price. 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 the responsible trustee is not Willing to participate."

The US authorities have regarded Bitcoin as a “commodity,” so it is under the jurisdiction of the US Commodity Futures Trading Commission (CFTC) (rather than the Securities and Exchange Commission that oversees securities). However, the CFTC has not yet granted a license to operate the “spot” commodity market. These markets trade oil, soybean or currency futures, and finally settle in cash. As indicated by the CFTC name, CFTC's jurisdiction is commodity futures, which is a derivative contract that ultimately sets out how much the refinery will pay to the crude oil seller in the future for delivery on 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 bitcoin in kind. CME futures are settled in cash instead of bitcoin tokens , the settlement price is based on the comprehensive price index of the bitcoin spot market)

In addition to these futures on the Chicago Mercantile Exchange (CME), cryptocurrencies have also been traded on the spot market, which are not part of the federally regulated "exchange" category. In most cases, cryptocurrency exchanges Hold a currency transfer license issued by the state in which it is registered. Compared with the CFTC's strict and uniform standards for futures trading, investment companies are clearly less comfortable with the decentralized and immature regulation of these trading venues. More than 200 encrypted digital currency platforms dominate the transaction, and each platform has its own price. Therefore, Bitcoin does not have a clear, centralized price.

This is the bitcoin pricing standard that Bakkt wants to offer.

In CFTC-regulated futures markets (such as ICE US Futures), only brokers and futures commission members who are members of the exchange are allowed to trade. The transaction records and capital reserves of these members are carefully reviewed by the exchange and are reviewed by the Commodity Futures Trading Commission (CFTC). These trading member companies are also members of the clearing house (the members of the ICE US Futures are also members of the ICE US Clearing Organization), which pays for settlement between members and protects participants from losses. For any contract traded on the exchange, if the buyer fails to pay, the clearing house enforces an agreement designed to completely waive the seller’s loss. For example, if the manufacturer purchases an oil or soybean contract and the seller defaults, the clearing house will arrange to repay the buyer. The Futures Clearing House is also licensed and supervised by the CFTC.

Bakkt's coup is to create a futures contract that trades like a spot contract. By purchasing a daily futures, the buyer's account will receive the bitcoin in kind on the same day, just like on a spot exchange. The difference is that Bakkt products have the strict trading and clearing ability under CFTC supervision, and have the outstanding advantages of using margin and leverage. This is especially important for investors. Bakkt monthly Bitcoin futures will launch a 12-month bitcoin futures contract.

Bakkt may soon face a lot of competition. LedgerX and TD Ameritrade-backed ErisX, two well-known cryptocurrency trading companies, have been recognized by the CFTC as a “designated contract trading market” for compliance. They plan to launch a physical delivery bitcoin contract that competes with the Bakkt contract.

Hosting is the key

So what is the advantage of Bakkt? Bakkt believes that big customers' trust in ICE will extend to its holding company, and that ICE technology will create a super-safe vault for storing digital assets.

Protecting stocks, bonds, and commodities (such as gold) from theft is called “hosting,” and protection that cannot be broken is especially important for cryptocurrencies. If Bitcoin is sent from the owner's wallet to the wrong digital address, the recipient will get a private key, which means that the recipient owns the bitcoin – the owner has no way to get their digital currency back. Similarly, no one can retrieve Bitcoin from a thief who invades the wallet.

It is important to realize that CFTC has not regulated the custody business in history. Contracts such as oil futures are either settled in cash or shipped to the buyer's warehouse; gold and silver are deposited in banks or large treasury that are often owned by third parties. Many digital trading platforms offer hosting services, but few organizations can meet the stringent requirements of asset management companies to become "qualified custodians." With the exception of a few operators, they receive trust banking licenses from one of four states: New York, South Dakota, Nevada, and Wyoming. Hostings operating under these state licenses must meet stringent capital requirements, as well as anti-money laundering (AML) and customer-aware (KYC) security protocols. Bakkt operates under the New York State Trust Bank license, and its competitors Gemini (operated by Tyler and Cameron Winklevoss) and Coinbase have also established trusteeships as New York Trusts.

ICE does not provide custody of securities or commodities. But it uses powerful fraud detection tools to protect transactions on its exchanges and to secure payments to and from its clearing house. ICE is deployed in a network security called the Bakkt Trust Co. Clearing Center, which is no less than the ICE's New York Stock Exchange. Unless the customer wishes to transfer the token from the Bakkt Trust to the competitor's site for storage, the process of transferring Bitcoin from one customer to another occurs entirely within the Bakkt managed library. If Customer A sells to B100 tokens, the transaction will be conducted on the ICE US Futures System, and the subsequent delivery of Bakkt will simply increase the amount of 100 Bitcoins to Customer B's account through the Central Hosting System, while reducing the A Account by 100 Bitcoin, then Cash is directed to the A cash account via ICE Clear US.

Bitcoin, like a pile of wood, moved from one branch of Home Depot, a home-decorated warehouse chain, to another store, but never left its warehouse system. Since all transactions are settled on an internal centralized account, Bitcoin futures trading avoids running on the blockchain, preventing the possibility of sending to the wrong address. It's like having a cash transfer from one of your own accounts as easily and safely as having another account under one bank.

With the help of ICE, Bakkt also developed a fortified protection for Bitcoin to leave the managed warehouse. Most of the bitcoins in the Bakkt warehouse are stored in so-called "cold banks". To leave the warehouse, Bitcoin must be transferred from the cold storage to the "hot library" and then transferred out via electronic transfer on the Internet. The "hot library" is connected to the internet, so Bitcoin can be sent from Bakkt Trust Bank to another exchange or wallet. The cold storage stores Bitcoin in the safest vault that is disconnected from the network.

In the process, no steps are automatically approved. In order for Bitcoin to be stored from cold storage to hot storage, multiple people in two or more departments of Bakkt or ICE must sign in the prescribed network security process. These security processes have been used to protect all trading products from oil to ETF trading. In addition, approval by several other members of the security team, as well as other proprietary processes such as authentication, are required. . ICE and Bakkt have now set up a joint team to handle these sign-offs, and as the transaction begins, the level and importance of these teams will gradually emerge.

Will the money manager accept bitcoin?

Loeffler said the asset manager told her that if Bitcoin is safe enough, it could be the gospel of a balanced portfolio. Lovler said: "The volatility of Bitcoin is currently a big negative impact on individual traders, but not for institutional investors. Many funds invest in bulk commodities as alternative investments but their prices are highly volatile. Oil and coffee prices are rampant up and down, often violently fluctuating.” She pointed out that Bitcoin is the ultimate maverick, and its price peaks and troughs have nothing to do with stocks, bonds, gold and real estate trends. Despite the volatility of Bitcoin, the total revenue of Bitcoin has surpassed its competitors in the past 10 years. In theory, Bitcoin should have a place in the alternative asset basket, which is a major component of a large, diversified portfolio.

Who is most likely to accept bitcoin? Loeffler expects personal-oriented brokerage firms to take a lot of action to buy bitcoin, in part because millennials and x generations are eager to hold bitcoin and use it as an investment . “Brokers are always looking for advantages to attract new customers,” she said. “Providing bitcoin can be very attractive.” For fund managers, Loeffler believes that the most likely buyers are university endowments and pensions. Fund: “They are usually at the forefront of adopting new investment ideas.”

In the past, hedge funds, which were usually only cryptocurrencies, were the main institutional investors in risk-taking, digital assets. The rise of Bakkt is likely to attract more hedge fund companies. For example, just this week, Elwood Asset Management, a billionaire fund manager and Bakkt shareholder Alan Howard's personal cryptocurrency portfolio, announced plans to invest money in a variety of digital hedge funds for institutions. Investors create a $1 billion portfolio.

What about Bitcoin ETFs or mutual funds (such as Vanguard or Merrill Lynch)? They are unlikely to be realized soon. Since ETFs or mutual funds holding bitcoins are securities, not commodities, they will be regulated by the SEC. The SEC has repeatedly told applicants that the current bitcoin transactions are not adequately regulated. The SEC specifically pointed out that Bitcoin does not have the price set by the central exchange, so it is difficult to set reliable pricing for newly issued securities. On the other hand, if Bakkt gets a huge trading volume, it might end up setting a global benchmark price like ICE is now Brent crude. In this case, the SEC may eventually agree to package the bitcoin purchased by the asset management company on ICE Futures US into etf and mutual funds.

Shopping with cryptocurrency

Bakkt's partnership with Starbucks has led to speculation that its ultimate goal is to bring bitcoin into the retail payment space. This was confirmed by Lovler Loeffler and Sprecher Sprecher, and the high cost paid by merchants is their target of attack. Today, consumers around the world buy a staggering $25 trillion in merchandise on their credit cards. According to reports, the average fee charged to retailers for these payments, especially credit card providers and banking intermediaries, is 2.4% to 2.5%. The credit card company returns some of the "transaction fee" to the consumer in cash, or returns it to the consumer in terms of airline miles, hotel points or other incentives designed to build loyalty.

Merchants want to be able to control these funds and design their own rewards programs instead of offering customers miles or points they might never use, and businesses want to not tie them to the payment agency's brand. Retailers have the ability to never accept bitcoin payments. But millennials and x generations have shown great enthusiasm for bitcoin and other cryptocurrencies. They are digital aborigines, and many of them have never lived on their mobile phones. If possible, they are usually more willing to pay with the app instead of using a credit card.

If Bakkt successfully releases the institutional trading volume of Bitcoin, these tokens may play a new role, becoming a highly liquid alternative currency. People with a Bakkt app on their phone can easily use Bitcoin to buy items from merchants. Bakkt is responsible for converting Bitcoin into US dollars so that merchants will never touch Bitcoin and only see traditional currencies. Experts compared the transaction costs paid by Bitcoin and credit cards and found that the former can reduce the current transaction costs by about 75%. Merchants can use these saved transaction fees to lower prices, or design their own rewards program to expand their fan base in their 20s.

The premise of realizing this vision of "chasing the stars and picking the moon" is that the current "Looking the Moon Plan" has been successfully launched. Wait for the countdown together.

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Author: Sean Tully (Shawn Tully) Translation: Caikai Long Cindy Huang