NYSE launches Digital Currency Exchange

NYSE launches Digital Currency Exchange

Intercontinental Exchange (ICE), Owner of NYSE to launch Bakkt the Federally Regulated Global Platform and Ecosystem for Digital Assets

The ICE founder, Chairman and CEO – Jeffrey C. Sprecher of the trading colossus of 23 regulated exchanges, global marketplaces, operator of 6 central clearinghouses and listing services, announced the formation of the new start-up entity called “Bakkt.” Kelly Loeffler, ICE’s head of Digital Assets and the CEO of Bakkt explains that “Bakkt” is a play on the word “backed,” which means “Asset-backed Securities,” and is intended to be a highly-trusted investment platform. Jeff believes that Bitcoin could be the ‘First WorldWide’ currency and that Wall Street could warm up to trading Virtual Currency— and has the potential of greatly simplifying the movement of global money.

The venture is expected to launch in 2019 and will offer a federally regulated market for Bitcoin. With the formation of Bakkt, ICE envisions to transform Bitcoin into a ‘Trusted Global Currency’ with broad usage. To make the vision a reality, ICE partnered with the IT giants from the worlds of technology, retail, and consulting— Microsoft, Starbucks, and Boston Consulting. More partners include Eagle Seven, Susquehanna International Group, and Fortress Investment Group, whose investments have not been disclosed yet. This global ecosystem will allow merchants, institutional clients, and consumers to buy, sell, store, spend various digital assets beginning with Bitcoin.

According to Kelly Loeffler, “Bakkt has been designed to serve as a scalable on-ramp for institutional, merchant, and consumer participation in the digital assets for promoting security, utility, and greater efficiency.” Bakkt is collaborating to build an open platform which helps unlock the transformational potential of digital assets across global markets and commerce.

Apart from that, If the blueprint of Bakkt works as planned, a panoply of new Bitcoin funds could tap the pent-up demand for cryptocurrencies, making it secured as an easy choice for investors, especially the millennials getting their first 401(k)s. Wall Street can then tap into Bitcoin’s popularity as an alternative to bonds and stocks for generating trading volumes, which in turn would take the fear out of bitcoin by smoothing its wild price swings due to the flood of institutional buying and selling.

The volatility of cryptocurrency has attracted individual speculators and terrorised off institutional money. In Q3 2017, the price of bitcoin spiked from $6400 to 20000 and since then has fallen back to $7400. However, Bakkt is determined to crack the 401(k) and IRA market for cryptocurrency which would be a significant win. However, the startup has an even more ambitious goal of using Bitcoin to streamline and disrupt the face of retail payments by shifting consumers from swiping credit cards to scanning their Bitcoin apps. The market opportunity is vast, as consumers globally are paying lofty credit card or online shopping fees in annual purchases on $25 Trillion a year.

Bakkt strongly believes with the presence of Microsoft and Starbucks it will strive to revolutionize the way in which consumers pay today, online, and at the mall. The coffee giant is a leading player in encouraging customers to spend with their smartphone instead of credit cards. Microsoft, through its Azure Cloud business, serves a massive base of retailers handling back-office tasks— from processing invoice to e-commerce. According to Maria Smith, the VP of Partnerships and Payments for Starbucks, “The flagship retailer, Starbucks will play a pivotal role in developing trusted, practical, and regulated applications for consumers to convert their digital assets into USD for use at Starbucks.”

ICE is the world’s second largest owner of financial exchanges in revenue behind by CME Group and one of the biggest purveyors of market data. In 2017, ICE’s revenue was $4.6 billion, which to the delight of the shareholders, Jeff delivered profitability and growth. ICE delivered total annual returns of 24.1% since going public in 2006. It has been ranked fourth in the S&P for towering 54% margin in net profits in 2017. ICE has established an enormous footprint in the galaxy of heavily fragmented stock and bond trading. The NYSE is the largest stock market in the world trading 1.5 billion shares a day. ICE is the global leader in all the categories of futures for soft agricultural commodities such as cotton, coffee, and sugar mainly through its acquisition of the New York Board of Trade in 2007, while ICE Futures Europe is the dominant global marketplace for the global oil price and the Brent crude benchmark.

If Sprecher and Kelly succeed with Bakkt, it would be the most significant development in churning the hazardous frontier of cryptocurrencies since its mysterious programmer under the pseudonym ‘Satoshi Nakamoto’ unveiled Bitcoin in 2009. According to the cryptocurrency analyst, Abhishek Punia, “A regulated exchange with a custodian in the middle contradicts the basic idea of Bitcoin.” Bitcoin has been designed in eliminating the intermediaries who take fees, to be decentralized and a peer-to-peer network.

However, Sprecher disagrees with the above statement and believes that a robust central infrastructure is what is needed, and ICE and its partners will supply it. The challenge would be in getting the banks, endowments, and asset managers to embrace bitcoin. Sprecher and Kelly reckoned that bitcoin would thrive as a mainstream investment as the money managers recognize that millions of their future and current investors want to own it. In 2015, ICE, to understand how digital currencies work took a minor stake in the largest US-based marketplace ‘Coinbase’ for digital currencies. Most of the customers who have opened accounts in Coinbase are millennials who like to make small investments in cryptocurrencies.

Sprecher and Kelly concluded that fragmented marketplaces weren’t the real reasons for the institutions to avoid Bitcoin. A broad universe of consumers wanted to invest in digital assets or Bitcoin but couldn’t find the right products. The solution which ICE will provide is a new ecosystem which could provide Bitcoin with the same protections offered for the bonds, stocks, and commodities futures that are traded on ICE’s exchanges.

The reason behind why the two Federal watchdogs don’t govern the trading platforms, the CFTC (Commodities Futures Trading Commission) and the SEC (Securities and Exchange Commission) has said that the top two cryptocurrencies, Bitcoin and Ethereum are not securities. The SEC is waiting to see the approach which others will take as none of the marketplaces has obtained SEC’s imprimatur as regulated securities exchanges for digital tokens.

Bakkt’s exchange for trading Bitcoin cryptocurrency if approved, would trade bitcoin using what is called as “one-day futures,” contracts which take the same time to settle as the trades in the current cash market in a single day. The broker or dealer will click on a price posted at any time during the day of trading on behalf of client money manager. By the close of market, the ICE clearinghouse would have arranged for the cash to be routed from the buyer’s to the seller’s bank account and the bitcoin tokens would be en route to the Bakkt digital warehouse.

The clients entrusting their Bitcoin tokens to Bakkt would either be companies making cross-border payments or institutions managing bitcoin mutual funds in bitcoin. The clients spend their bitcoin by the control of “private keys.” The keys are randomly generated string of letters and numbers that resemble digital signatures. Most of the Bitcoin owners store their keys on servers, PCs, or in accounts at unregulated marketplaces. However, the private keys on those devices are vulnerable to security threats or hacking. It the hacker succeeds in stealing the key, the hacker keeps the pilfered Bitcoin. According to an Autonomous Research, since 2011 to-date there has been more than $1.6 billion theft of cryptocurrencies by hacking investor accounts.

Bakkt believes it would solve the above problem by storing the private keys “offline” in its highly secured digital warehouse. When a company or fund manager wants to take the bitcoin out of the warehouse, Bakkt would confirm the customer’s identity and release the Bitcoin using the private key. The warehouse will be holding a second key, knowns as the public key which opens the recipient’s account to receive the bitcoin. The dual-key security is similar to how a bank representative and the customer both with their own keys open a safety deposit wallet.

To make Bitcoin the mainstream, Bakkt has to overcome the main drawback of the cryptocurrency— which is its extremely slow speed. Bitcoin runs on a platform called ‘Blockchain,’ operated by a network of millions of individuals who compete to verify and package transactions. Every time a bitcoin owner on the network buys something using their digital wallet, the copy of the transaction is shared with all the ‘nodes’ or computers within that network. The nodes fight to verify the legitimacy of the transaction and a free bitcoin is awarded to the first miner. As a result, the existing platform can handle only seven transactions per second which is very slow for working on an institutional scale.

Bakkt is enabled to transform the Bitcoin’s architecture to run on high speed. Assume millions of transactions take place every day within the Bakkt ecosystem. Bakkt will keep a ledger of all the offsetting Bitcoin debits and credits. The individual buying and selling need not be shared with all the nodes within the blockchain network, but the information regarding the payments coming in or exiting Bakkt’s warehouse.

To summarise, Bakkt will disrupt and revolutionize the world of Financial Markets once it is successful in launching the Digital Exchange Platform for Cryptocurrencies and Bitcoin, and will help Bitcoin be the biggest cryptocurrency to replace or eliminate the use of current financial instruments including the credit cards, cash, share, etc.

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