The NYSE parent company, ICE, originally planned to launch the Bakkt Bitcoin Futures Exchange in December 2018. Due to various reasons, it was delayed until the July 23 when the global user test of bitcoin daily and monthly futures contracts was finally launched. It finally went online on September 23.
The glamor of Bakkt not only comes from its compliance attempts in physical delivery, but also its traditional financial background and strong investment institutions.
But in fact, Bakkt has not yet obtained a trust license issued by NYDFS. Another US encryption trading platform, ErisX, has spent two years on DCO license.
Since it’s so difficult for the traditional institutions to access to the industry of cryptocurrency, why so many traditional financial institutions are keeping a close eye on the bitcoin futures market?
We will discuss this issue from the aspects of access difficulty, reasons and significance.
What problems to be faced for the access?
In fact, there are some compliant bitcoin futures exchanges on the market, such as the Chicago Mercantile Exchange(CME) and the Chicago Board Options Exchange (CBOE). However, not long ago, due to insufficient trading volume, the CBOE decided to cancel the bitcoin futures contract products. Since it’s not physical delivery, the CME products were often regarded as not the true bitcoin futures.
In addition to the regulatory and compliance issues (such as the most difficult issues like DCM and DCO license), some existing problems in bitcoin futures also need to be solved for the access of traditional finance.
First, the bitcoin futures differ from traditional futures because the bitcoin transactions can be conducted 24 hours a day. During the closing period of traditional futures, bitcoin transaction can still be conducted, so the risk of the counterparty is difficult to be restricted during the process of trading and liquidation. Bakkt has a clearing platform between the buyer and the seller in the form of spot mortgage. The user needs a certain proportion of physical BTC as the mortgage to establish the futures contract. Therefore, during the closing period, if there’s big BTC price fluctuation and the user fails to make timely replenishment during this period, Bakkt can use the BTC in mortgage to make up for the losses. In addition, the ICE Clear US also contributed US$35 million to Bakkt to make up the deficiency beyond collateral liquidation.
The second issue to be solved is the price difference at various trading platforms. The bitcoin prices often differ at various exchanges in the cryptocurrency market. The platform price at the end of the futures contract is often focused on by the users. As for the futures contracts (cash delivery) in current cryptocurrency market, the delivery prices are often based on the price comparison at multiple platforms with the censored average method. The pricing mechanism at Bakkt is relatively innovative. It adopts the method of physical delivery and the settlement price is based on the ICE futures market instead of the physical market, so that the prices in the futures market are stronger with physical anchorage.
For the potential conflicts of interest between exchanges and users, the users are concerned about the problems such as “pinning and drawing line”. Bakkt claimed that the ICE Future US under the ICE is a transparent and neutral exchange without any risks, self-supporting trading and bitcoin balance.
As for the custody, Bakkt announced the acquisition of Digital Asset Custody Company (DACC) at the end of April and revealed a partnership with the BNY Mellon. Bakkt said that after obtaining permission from the relevant authorities, it planned to use it as a qualified custodian of bitcoin to solve security issues and adopt separate governance to ensure the independence.
In addition, Bakkt will adopt the self-owned resources and technology of ICE to solve the issues like transaction custodian fees, platform security and efficiency as well as AML and KYC.
What has attracted ICE?
Since the traditional finance has faced so many difficulties after accessing to the cryptocurrency world, why do traditional finances such as Bakkt, LedgerX and ErisX frequently try to access to the market?
The traditional financial resources, experience, technology and other factors carried by the institutions themselves have provided natural convenient conditions for access; moreover, the temptation of cryptocurrency world may not be underestimated yet.
In terms of business choice, the futures market is different from the spot market. Due to the particularity of bitcoin itself, spot transaction often gets involved in multiple risks such as money laundering, asset security and terrorism. Moreover, the official attitude toward bitcoin is not clear yet and there not explicit access and regulatory regulations, so the futures transactions are more controllable and safer. On the other hand, the market cycle of bitcoin results in higher risk of spot transaction, while the futures can be immune from the influence of bull and bear markets, and the market space is far greater than that of spot market, thus it becomes the optimal channel for traditional finance to access to the encryption world.
Compared to traditional commodity futures, the physical delivery of bitcoin futures is also very simple. It has no costs in inspection, transportation and storage like the traditional commodities. The process is very simple and the delivery is very convenient.
In terms of ICE itself, some institutions and exchanges at the same level as the NYSE, including the NASDAQ, Zurich Exchange and CME, have already carried out blockchain business. The performance of the CME bitcoin futures platform is also satisfactory, which can verify the business model to some extent. Therefore, its access may also result from the factors in the strategic layout of cryptocurrency world to avoid the incident of dislocation.
In addition, the performance of some exchanges such as Okex, Binance and Huobi in the cryptocurrency world also shows the benefits of encrypted assets. It’s very understandable in terms of profitability.
Is access of traditional finance the good news?
Bakkt represents that the traditional financial funds will access to the blockchain industry.
At the market level, Bakkt provides the daily and monthly futures contracts for bitcoin physical delivery. The transactions are based on spot mortgages, so that the unlimited short-selling is completely impossible. It will prevent the scalping and manipulations in the market to a certain extent and attract more funds to access to boost the confidence of investors.
The physical delivery of futures transactions helps the price discovery in the spot market and provides the investors with more effective risk management tools for the sake of healthy development of the bitcoin market.
In terms of the long-term development of bitcoin, Bakkt owns credit endorsements from ICE and many other investment institutions. The spot mortgages may also mean that some traditional financial capitals have recognized the investment value of bitcoin, which will attract more traditional capitals to access to the market, so that the mainstream society will have more positive perception of bitcoin.
With more capitals access to the market and more consensus, the market volume of bitcoin has also been enlarged to promote the coin holding more dispersed, so that the impact of individual factors on the market will be greatly reduced. The less fluctuation price will make bitcoin more secure and bitcoin will be much closer to practical application in real life.
In addition, from the perspective of the industry, the access of large-scale funds and professionals is more conducive to realizing the economic values of high-quality blockchain projects. Meanwhile, it will promote the perfection and implementation of regulatory measures and strategies in the future to make the entire industry develop more orderly.
In short, regardless of the reasons for the access of traditional finance, the access of some large institutions like Bakkt may be a good attempt to find a connecting point between the traditional finance and the crypto world. We’re looking forward to the access of Bakkt as well as more similar attempts in more areas.