What is Bakkt and Why is it a Big Deal for Financial Institutions?
Bakkt is a company whose mission is aimed at enabling both people and financial institutions to seamlessly buy, sell, store and spend digital assets through a globally regulated ecosystem. It aims to accomplish its goal by having its services and offerings subject to regulatory review, including bitcoin futures, warehousing and bitcoin to fiat conversions (in multiple currencies including USD, GBP and EUR).
This mission is especially vital in the economic environment in which bitcoin developed out of in the housing crash and recession of 2008. Since this period, many people have formed a distrust of financial institutions and regulated, centralized markets. Bakkt seeks to bring trust back to these institutions while at the same time have them incorporate these new digital assets in their financial policies. Bitcoin to fiat conversion in particular is uncommon on most cryptocurrency exchanges and can position Bakkt as a market leader. Bakkt also has its eye on being able to serve the next generation of millennials, and wants them to be able to buy, sell and store cryptocurrency for their 401k or for cryptocurrency credit cards.
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Regulating the Cryptocurrency Markets
The project will start with the regulation of bitcoin, due to it accounting for over half of crypto trading and its recent declaration by the SEC as a commodity. Like the sound of its name Bakkt, it will offer “bitcoin-backed” contracts. An initial launch of a Bitcoin futures contract and physical bitcoin warehousing for the end of 2018 was postponed to 2019 while it waits for permission for the Commodity Futures Trading Commission. It is thought that the current government shutdown in Washington will force additional delays of regulatory approval for the project.
The projected market for this ecosystem is estimated to be around $270 billion in digital assets.
“Once digital assets have more trust and regulation, people will be more comfortable using digital assets as currency,” said Kelly Loeffler, Chief Executive Officer of Bakkt said to the Wall Street Journal. “It’s great to have cash-settled, but there’s a need for physical delivery” she added, referring to traditional future contracts which are settled in US dollars when the contract ends. Bakkt will aim to provide regulation of bitcoin first, assuring the public that it is free from fraud and manipulation. As Bakkt expands, it will meet the changing demand of the crypto marketplace and consider regulating additional digital assets in the future.
Ushering in an Era of Mainstream Adoption with Big Market Players
Another reason for the recent media attention given to Bakkt is its impressive list of investors and partners – including Microsoft and Starbucks — backing up the projects and its successful raising of its first round of funding Its founding company, the Intercontinental Exchange (ICE), is the parent company of the New York Stock Exchange (NYSE) and is also an investor in Coinbase, a digital currency exchange based in San Francisco that also serves as a wallet to store digital assets.
Bakkt raised a total of $182.5 million in its first round of funding at the end of December. Partners and investors in the first round included: Boston Consulting Group, CMT Digital, Eagle Seven, Galaxy Digital, Goldfinch Partners, Alan Howard, Horizons Ventures, Intercontinental Exchange, Microsoft’s venture capital arm, M12, Pantera Capital, PayU, the fintech arm of Naspers, and Protocol Ventures.
As a consequence of this big-name investment, is it thought that Bakkt will finally encourage mass adoption of cryptocurrencies and a bullish market for bitcoin and other cryptocurrencies, which have remained at their low rate since their crash in January and February of last year. This combined with regaining trust in financial institutions is thought to encourage the market to move forwards. As Jeff Sprecher, CEO of the ICE explained to Fortune Magazine: “Millennials don’t trust traditional financial institutions. To gain their trust, banks, brokerages, and asset managers can use a currency that millennials believe in, like Bitcoin. Using digital currencies brings a lot of sizzle.”
Critics argue that cryptocurrencies are meant to be peer-to-peer networks rather than decentralized markets and the influx of financial institutional investment encourages greater and greater regulation of the market, which is the opposite of what its original founders would have wanted. Others say that it could be a while before most major financial institutions join the cryptocurrency train, even with Bakkt’s backing from the NYSE. Instead, each player may play a “wait-and-see” game, preferring to join others instead of being the first in the new and uncertain marketplace.
How Bakkt Could Spur Greater Institutional Investment
Bakkt is far from the only major financial institution to see cryptocurrency as a worthwhile investment for the future. Goldman Sachs announced investment in cryptocurrency startup BitGo, whose goal it is to help institutional investors store their cryptocurrency securely; Morgan Stanley has announced plans to offer bitcoin derivative trading, and Citigroup is developing a mechanism that enables its clients to trade cryptocurrencies with digital asset receipts, or DARs. Coinbase itself was able to secure a bank account with Barclays in March and announce its partnership with Goldman Sachs and Circle.
However, as a NYSE-backed cryptocurrency exchange, Bakkt is supported by one of the most influential financial institutions in the world and its movement should signal other important players in the financial space. Furthermore, the majority of the crypto trading exchanges do not meet regulations such as Know Your Customer (KYC) requirements for customers. In contrast, KYC checks are mandatory for all regulated banks in the US and Europe.
The entrance of Bakkt to the cryptocurrency exchange market may level the playing field.
What is the Future for Financial Institutions and Cryptocurrency?
At the moment it seems as though the winds of change have moved through the cryptocurrency markets. The new wave of interest of financial institutions has come as the Securities and Exchange Commission (SEC) announced in June that it viewed Bitcoin and Ethereum as commodities rather than securities and the question of exploring government regulation of the cryptocurrency exchanges was openly acknowledged. While the decision of the SEC encouraged the support of projects by these major financial players, it still left many unanswered questions about the regulation of this market. Initial Coin Offerings (ICO’s) for instance, were still considered securities and therefore subject to regulation. So would tokens that run on top of Ethereum.
It remains to be seen whether financial investors can help stabilize the market. Perhaps an influx of more regulated players and exchanges will help gain more of the public’s trust in the cryptotrading market. And as more financial institutions invest in the cryptocurrency space, more projects will lean towards regulation. There is also talk of more regulation, such as the SEC approving ETFs for bitcoin – as soon the coming year.
But many of the big financial institutions will only pull out the big guns and make serious investments once the cryptocurrency markets are regulated. And Bakkt’s vision of a globally regulated ecosystem is offering just that.