On Friday, August 3, 2018, Intercontinental Exchange (the parent company of the New York Stock Exchange) announced that it will be forming a new company, Bakkt. According to the statement, Bakkt is being formed to “create an integrated platform that enables consumers and institutions to buy, sell, store and spend digital assets on a seamless global network.” Initially the company will focus on offering a Bitcoin exchange. Based on the statement, Bakkt’s business strategy seems to be aimed at becoming a leading player by providing enhanced security and efficiency, two of the most troubling issues facing cryptocurrencies today. To achieve that goal, Bakkt is scheduled to launch a U.S.-based futures exchange and clearing house for 1-day physically delivered Bitcoin contracts. These futures contracts appear to be a strategy to work around the speed limitations inherent in the processing and validating transactions in a cryptographic environment. To reduce settlement risk, the clearing house plans to create a separate guarantee fund that will be funded by Bakkt. The statement also noted that the company offers 1-day physically delivered Bitcoin but also offers physical warehousing. The statement did not mention any details on additional security measures or guarantees/insurance offered associated with this physical warehouse product other than that leverages Intercontinental Exchange’s market infrastructure. Today most theft targets the exchange and the bitcoin warehouse, hence the breaches of several Bitcoin exchanges such as Coincheck, Mt. Gox, Bitfinex, Coinsecure, Bithumb to name just a few, it will be worth monitoring what actions Bakkt takes to avoid a similar fate.
The futures contracts appear to be an interesting workaround, but other than that the core product seems to be more or less the same as the many other Bitcoin exchanges out there. What is noteworthy in the announcement is the partnerships that Intercontinental has made with other companies to build a platform on top of the core exchange. On the technology side, Bakkt has partnered with Microsoft to use that company’s cloud solutions. While Starbucks has signed on to be the “flagship” retailer and will be offering acceptance of the digital currencies at its stores, note that despite significant confusion in the news, Starbucks will not be accepting the coins directly. Instead it appears that Starbucks will use the Bakkt platform to allow consumers to exchange their cryptocurrency for fiat currency in real time. In this scenario, Starbucks avoids the volatility risk of cryptocurrencies as well as any fees to exchange the cryptocurrency back into fiat currency. It remains to be seen how good the customer experience will be. Will Bakkt be integrated into the Starbucks app as a funding source, or will it require a separate app? Will customers prefer to use their existing exchange, and will Starbucks be willing to accommodate that? There is also the open question of whether Starbucks is interested in Bakkt for its own purposes – either as an investment or to help solve foreign exchange issues in its own supply chain.
Depending on how these questions are answered, Bakkt could be an important step toward making cryptocurrency relevant for everyday purchases and potentially pose a threat to credit and debit cards. That is a long way off, however, and there are many obstacles in the way.
