Kelly Leoffler, the CEO of the ICE/Microsoft crypto-venture, Bakkt, has offered an insight into just how the platform will operate.
Following the recent news of a high-profile project involving, among others, Microsoft and the company behind the New York Stock Exchange, the CEO of Bakkt has taken the opportunity to give a little more detail regarding exactly how it will work.
In a blog titled ‘An evolving market – The need for trusted price formation‘, Loeffler both addresses some of the concerns regarding current crypto investment options – certainly those held by many institutional investors – and exactly how Bakkt hopes to mitigate for them.
“Whether you’re an investment manager seeking federally regulated, institutional trading and security solutions or a consumer looking for more choice in transacting,” the blog states, “we’re working to make the vision for wider application of digital assets a reality.”
As befits the title of the blog, price formation (or price discovery, as it is often referred to) – essentially the mechanism whereby any financial market determines the spot price (not value) of the asset or service it offers – is top of the list. Indeed, it has been one of the topics that has been an issue with the SEC in their investigations of Exchange Traded Funds, and was one of the sticking points to their rejection of the proposed scheme from Gemini, which triggered a sharp fall in the value of bitcoin recently.
The fact that the Winklevoss’ plan would have only used Gemini’s own market to source its price information left it open to the criticism that the price of the asset at the centre of its proposal could be more easily manipulated to the detriment of investors.
As part of a recent tweetstorm on Bitcoin Exchange Traded Funds, securities lawyer Jake Chervinski – a noted commenter on such matters – went through some of the problems the SEC has had with Bitcoin investment schemes, which it began to outline in letters at the start of the year, and have expanded on in their rulings against Gemini. Here’s one observation…
9/ ProShares also fixes some problems that the SEC had with Winklevoss.
For example, Winklevoss would have used only the Gemini exchange to buy & price bitcoin, while ProShares would use the well-established & regulated CME & CBOE futures exchanges.
— Jake Chervinsky (@jchervinsky) August 17, 2018
In Loeffler’s words, “trusted price formation is a fundamental part of advancing the promise of digital currencies”, and as such the Bitcoin contracts sold by Bakkt will be “fully collateralized or pre-funded.”
“As such,” she continues, “our new daily Bitcoin contract will not be traded on margin, use leverage, or serve to create a paper claim on a real asset.”
So, those who invest via Bakkt will be buying Bakkt, not ‘Bitcoin’ as such – Bakkt will own the Bitcoin, or at least promise to own the Bitcoin at some point, and oversee the mechanism deciding what it is worth. In exchange for this centralised power, it will offer those investors the reassurance of its systems, liquidity, oversight and good name.
However, an important point to make about the Bakkt system outlined by Loeffler is that, unlike some trading platforms that have been making headlines recently, its system will not allow for “margin, leverage and cash settlement” – essentially the mechanisms for borrowing of money to fund investments, which have lately been the focus of concern regarding the effect that such trading is having on an already volatile evolving market.
“Coupled with a secure, regulated warehouse solution,” the CEO concludes, “you can begin to see how this market infrastructure can help more institutions and consumers participate in the asset class.”
Some purists in the crypto industry will, no doubt, see Bakkt’s plan as another distortion of what digital currency was meant to be. Cryptocurrencies, to many, are a genuine asset – in the same way that land, commodities and personal assets are – Bitcoin is not referred to as ‘digital gold’ (by some) for no reason. What’s more, they were meant to be peer-to-peer assets that don’t need the intervention of a third party.
So, while Loeffler thinks the Bakkt model “supports market integrity”, others will see it as indicative of the so-called ‘financialisation’ of the cryptocurrency space, rendering investment in Bitcoin via Bakkt’s contracts as little more than an IOU – similar to shares, centralised bank accounts and fiat money. However, to others, it takes away many of the doubts – regarding market manipulation, safety and storage.
Some, after all, invest in gold – while others keep gold bars in a safe in their house.
While Bakkt will not be Cryptocurrency investment to please the purists, neither is trading as we have begun to see it in some of the highly leveraged trading platforms that have sprung up in the last year, where speculators can go long or short on Bitcoin or other crypto with borrowed money, trading on the price action. As existing platforms begin to coalesce together in order to self-regulate on both sides of the Atlantic, it seems that Bakkt – backed as it is by the company behind the New York Stock Exchange – has decided on a safety first model that will appeal to the existing investor class, and assimilate digital assets into a system that it trusts and understands, and that encourages them to hodl Bitcoin as its value grows, rather than trying to convince them to leap into a brave new world.