A Detailed Look at Bakkt and Its Impact
Intercontinental Exchange (ICE) is launching a startup called Bakkt to make the cryptocurrency safe. Bakkt, which is expected to launch in November, will offer a federally regulated market for Bitcoin. With the creation of Bakkt, ICE aims to transform Bitcoin into a trusted global currency with broad usage.
To achieve that vision, ICE is partnering with heavyweights from the world of technology, consulting, and retail: Microsoft, Boston Consulting Group, and Starbucks. ICE did not immediately disclose the total investment of the investment partners, a group which also includes Fortress Investment Group, Eagle Seven, and Susquehanna International Group—or the ownership stakes.
ICE’s founder, Jeffrey Sprecher, was the heart and brain behind this venture. His wife, Kelly Loeffler who is currently the chief communications and marketing officer of ICE, will be the CEO of Bakkt. Sprecher says:
“Bitcoin can’t survive as a rogue idea”
“To evolve, the cryptocurrencies need to run on established infrastructure. They need the trust and rules that have been built into our financial system for many years. They need the kind of trust that the Big Board represents.”
ICE and its partners have been “building the factory” that will power Bakkt in the strictest secrecy for the past 14 months. The name of the company was only decided just last month. Loeffler explains that “Bakkt” is a play on “backed,” as in “asset-backed securities,” and it’s meant to evoke a highly-trusted investment.
If the Bakkt blueprint works as planned, a surge of new Bitcoin funds would tap the demand for the cryptocurrency, making it a safe and easy choice for everyday investors—notably millennial's getting their first 401(k)s. Wall Street could then tap Bitcoin’s popularity as an alternative to stocks and bonds to generate giant trading volumes. And that flood of institutional buying and selling, in turn, would take the terror out of Bitcoin by smoothing its wild swings in price.
How Did ICE Take Decisions on Digital Currencies?
To study how digital currencies work, ICE in early 2015 took a minority stake in the largest U.S.-based marketplace for digital currencies, Coinbase. “Coinbase has twice as many customers as Charles Schwab,” says Loeffler.
“Many of the people who have opened accounts on Coinbase are millennials who use it to make small investments in crypto-currencies.”
“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.”
Currently, cryptocurrencies have gained little traction with asset managers like Fidelity and Vanguard. The reason, says Sprecher, is that “Bitcoin does not have a good market structure.” For consumers, it’s expensive to exchange dollars for Bitcoin, in part because trading is spread thinly across too many venues that individually do too little trading. He notes that more than 200 marketplaces trade over a dozen major digital currencies, from ether to Ripple to Litecoin. “Even for Bitcoin, different markets are posting lots of different prices,” says Sprecher.
“And you can pay an up to 6% spread to exchange dollars for Bitcoin, meaning Bitcoin needs to rise by as much 6% before you break even.”
Can Bitcoin Replace Credit Cards?
“Bakkt is designed to serve as a scalable on-ramp for institutional, merchant, and consumer participation in digital assets by promoting greater efficiency, security, and utility,” said Kelly Loeffler, ICE’s head of digital assets, who will serve as CEO of Bakkt.
“We are collaborating to build an open platform that helps unlock the transformative potential of digital assets across global markets and commerce.”
Why haven’t other institutional investors hopped onto Bitcoin bandwagon?
For Sprecher and Loeffler, the reason is fundamental—and fixable. “Two things are missing,” says Sprecher.
“Trading on an official exchange, and safe storage for digital currencies on an institutional scale.”
Put simply, Sprecher says, the big money managers won’t create digital currency funds unless they can first buy the tokens on a federally regulated exchange, and, second, store the tokens for their investors in accounts rendered super-secure by the safeguards provided by those exchanges.
The Biggest Impact of Bitcoin
The retail industry, according to Sprecher will undergo the biggest disruption. Today, Americans charge $7 trillion in goods and services every year—around 60% of GDP—on credit and debit cards, and through digital portals such as PayPal. The stores and restaurants that accept those cards typically pay 2% to 3% to around six intermediaries, including “merchant acquirers” who sign up the merchants, credit card giants such as Visa and MasterCard, and the banks that issue the cards.
It’s hard to overstate how drastically a shift to Bitcoin could crunch those lofty fees. Consumers could pay for groceries or detergent directly from the Bitcoin wallets on their iPhones or PCs, right from a scanner at Walmart or Starbucks, with no banks taking fees in the middle. If Bitcoin became the chief currency for retail, it’s likely that credit cards would disappear.