Launch of Bakkt cryptocurrency platform for institutional investors

Libra's cryptocurrency project from Facebook has become one of the most important events of 2019, but even the launch of Bakkt, a platform for cryptocurrency-based asset trading for institutional investors, can overshadow it. The first asset of Bakkt will be Bitcoin futures, which the company will begin to test among its users on July 22 .

The main difference of Bakkt from existing sites is that the startup wants to offer a full-fledged infrastructure for the work of institutional investors, which, as stated, will meet the strict standards of the American financial market.

On the eve of the start of testing cryptocurrency derivatives, we will understand what features of Bitcoin futures Bakkt compared to existing counterparts, and also learned what priorities the company has set itself.

The value of bitcoin futures for the cryptocurrency market

Observers believe that institutional investors have become one of the important drivers of the current bull rally in the cryptocurrency market. It is difficult to assess the degree of their presence on cryptobirds , but one of the indicators is interest in derivative financial instruments – derivatives. Unlike cryptocurrencies themselves, derivatives are a regulated asset, and for whales this is a key feature.

If the main word in 2018 was Bitcoin-ETF , then the last couple of months, public interest has been focused on Bitcoin futures . So, in March, the Chicago Stock Options Exchange (CBOE), the first to launch a similar instrument, announced it had stopped accepting Bitcoin futures with new maturities, explaining that it was low in demand.

However, by the end of May, the market situation was exactly the opposite: the volume of futures trading beat all records. On June 17, the Chicago Mercantile Exchange (CME) reported record numbers of one-day open contracts. And according to the Bitwise Trade Volume project from Bitwise, as of July 1, the daily trading volume of Bitcoin futures was about $ 2.6 billion.

Despite the fact that futures are formally a tool of institutional institutions, their trade affects the entire cryptocurrency market. Why?

In March, Bitwise thundered to the entire crypto-industry after submitting a report to the SEC as part of the application for approval of Bitcoin-ETF. Based on its own analysis of the company said that 95% of all trading volumes Bitcoins rigged. Fake trades affect the price of an asset, which means that it is impossible to determine the objective value of a Bitcoin ETF. Bitwise promised to tie its index fund to the remaining 5%; however, the regulator still rejected the company's application.

This, however, has become an important sign that institutional investors are trying on the standards of classical markets in the field of cryptocurrency trading. Data Bitwise investigated the bank JPMorgan. The bank's analysts concluded that if only 5% of the $ 725 billion of crypto-bursa trades announced in May, that is, $ 36 billion, then the influence of institutional players is much more significant than previously thought – the total amount of trading in bitcoin futures on CBOE and CME in the same month reached $ 12 billion.

The difference between Bitcoin futures Bakkt from analogs

The market is looking forward to the opening of the largest springboard for institutional investors on the crypto market — Bakkt. The fact that this is a project of the operator of the New York Stock Exchange, the company Intercontinental exchange (ICE), speaks about the significance of the platform.

The expectation level from Bakkt also reflects the second fact: even before its opening, the startup was valued at $ 740 million, with $ 182.5 million of investments received over several rounds. For a while almost nothing was known about Bakkt, but, unlike the same TON, the project was officially presented in August 2018. At the same time, the Bakkt team said that the first asset traded on the platform would be Bitcoin futures.

However, due to legal difficulties, launching the platform was repeatedly postponed. However, the process did not stand still: in May, the head of Bakkt, Kelly Loffler, stated that thanks to the work with the US Commodity Futures Trading Commission (CFTC), the company approved the details of future contracts. Exactly one month later, Loeffler called the exact date of commencement of trading of testing among the actual users – on 22 July.

Bakkt futures will be fundamentally different from current securities, as they will be deliverable, and not settlement. In settlement futures, the participants pay each other only the difference between the price of the contract and the actual price of the asset at the date of expiry of the contract. In the case of a delivery futures in the performance of the contract, the buyer must purchase from the seller the specified number of bitcoins at the price fixed on the last trading date.

If settlement futures serve as a speculative tool, then the supply contracts allow you to protect the contract holder from future fluctuations in the asset price. This is an important factor in the case of Bitcoin, which, as recent events have shown, can lose 20% of its value in just one day even during a bullish trend.

As for the contract itself, its amount will be 1 Bitcoin, and futures for a period of 1 day and 1 month will be available for listing. The deviation between the amount of the purchase and sale must be at least $ 2.5 for one bitcoin. The term of the listing on the platform of a monthly contract is 12 months, and one day is 70 days. Back in September, the project team noted that futures could be bought for various fiat currencies, including the US dollar, the euro and the British pound.

Custodial storage of crypto assets for institutional investors

In addition to the approval of the regulator and working trading, institutional investors need additional infrastructure, one of the main components of which is the safekeeping of clients' funds – custodial services. Especially given the fact that customers will operate with Bitcoins, and not just fiatnymi currencies.

So, in late April, Bakkt announced the acquisition of the Digital Asset Custody Company (DACC), whose task it will be to develop a custodial vault. The main part of Bakkt clients' funds will be kept in cold wallets, and these funds will be insured for $ 100 million. In addition, together with the BNY Mellon bank, a crypto startup will create a distributed system for the physical storage of users' private keys.

It is likely that Bakkt will apply its development in the field of cryptocurrency storage not only for corporate clients, but will also release a solution for individual users. On June 20, The Block Crypto reported that within a few months Bakkt will launch a cryptocurrency wallet as a mobile application.

As Bakkt’s Operations Director, Adam White, explained in a startup blog, they will also provide their users with other opportunities that financial institutions want, such as trading blocks (exchanging a large set of assets between two participants), commissioning “holidays” at the end of the year to trade incentives; a market maker incentive program to increase liquidity; and integration with independent software vendors and regulated brokers.

In the same blog, White summarized the main advantages of Bakkt compared to retail cryptobirths:

• Fully regulated trading environment . Tradable assets are subject to prior approval of US financial regulators.
• In the event of default on the contract (for example, due to bankruptcy), the site compensates for losses from its own $ 35 million fund.
• Custodial storage of crypto assets , consisting of a system of cold and hot wallets. Cold storage facilities are insured for $ 100 million.
• Transparent pricing of an asset (Bitcoin) within the framework of only one supply futures market.
• All customers of the platform undergo KYC procedures , they are checked for compliance with US federal money laundering laws, similar to institutional markets.
• Market monitoring system : all futures contracts are extensively tested for compliance and are monitored. If you suspect a violation of the rules, the administration of the exchange reports to the federal regulators.
• Low commissions for trading operations (“shares” from commissions on spot cryptocharges).
• And the presence of marginal contracts .

New standards for trading cryptocurrency assets

In order to win the unequivocal trust of whales who are bursting into cryptographs, Bakkt wants to set new standards for cryptocurrency trading. And in this project has a big hand in front of competitors in the form of the parent company – ICE.

However, if the technically announced capabilities look realizable, then the company has problems with compliance with the laws, because it turns out that it has already postponed the launch of the trading platform for more than half a year. However, judging by the last announcement, the regulator is still inferior, but this is a typical problem for a pioneer.

It is curious that the same Bitwise study, aimed at working with institutional audiences, prompted the crypto-community to start a discussion about how conscientiously the cryptobirds work in relation to retail investors. It is possible that intervention on the whale cryptocurrency market will entail a further tightening of trade standards. However, good or bad – time will tell.

Publication date 07/02/2019
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