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The company has announced that it will launch Bitcoin futures on September 23, bringing to end months of delays, per The Block Crypto. Bakkt, which is owned by Intercontinental Exchange (ICE), which also operates the New York Stock Exchange (NYSE), had originally planned to launch its physical Bitcoin futures as well as Bakkt Warehouse, its in-house custody solution to store Bitcoins for investors, at the end of 2018.
However, that launch was delayed, as was another one mooted in January 2019, as the company failed to secure the necessary regulatory approval. Bakkt, which raised $182.5 million from backers including Microsoft earlier this year, has now received authorization from the Commodity Futures Trading Commission (CFTC) for the futures contracts, as well as approval from the New York State Department of Financial Services (NYDFS) to act as a trusted custodian of physical Bitcoins.
Here’s what it means: Bakkt’s authorization could open the door for a flurry of institutional investments in cryptos.
Bakkt’s authorization will see it become the first to offer physical Bitcoin futures to institutional investors. The company’s Bitcoin futures, a daily one and a monthly one, will enable investors to speculate on the price of the crypto. However, in contrast to existing contracts, which track Bitcoin price indices, Bakkt’s Bitcoin futures will be based on actual Bitcoins, per the Financial Times. This is where Bakkt’s trust charter from the NYDFS comes in: The company will be able to store those physical Bitcoins the futures contracts are based on.
The Bakkt Warehouse was likely key for the firm to secure approval for its Bitcoin futures product and could have similarly significant impacts on institutional uptake.
- Firms that sought to gain approval for crypto-related derivative products have struggled to allay US regulators’ fears that crypto prices are subject to market manipulation. For instance, the US’ Securities and Exchange Commission (SEC) has rejected a number of applications for Bitcoin-based exchange-traded funds (ETF) on the basis that applicant firms can’t guarantee the prevention of manipulative and fraudulent practices that would expose investors. Bakkt’s custody solution will enable it to use its own index for pricing, allowing it to overcome the price manipulation issues outlined by regulators.
- For institutional investors, the firm’s crypto storage, which will be protected by $125 million in insurance, will also be key. Securely storing cryptos remains a major concern, especially given the continued hacks and outages at crypto exchanges. In part, this is because existing crypto infrastructure has largely been developed around retail investors. And while the likes of Coinbase have launched their own custody solutions for institutional investors, ICE’s legacy as a world-renowned exchange operator is likely to engender more trust among this group of investors.
The bigger picture: Bakkt isn’t the only one betting on institutional interest in the crypto space — and how its launch fares could have substantial ramifications for the long-term fate of the space.
While Facebook’s retail consumer-focused crypto has stolen attention in recent months, a slew of players have been courting institutional investors — and if they’re successful, we could see crypto investment propelled into the mainstream. US investment behemoth Fidelity was reportedly closing in on launching a trading service for this group in May, for instance.
And the incumbent financial institution (FI) is also working on its own dedicated custody solution, per the FT. Meanwhile, Coinbase acquired the institutional business of crypto wallet Xapo for $55 million at the end of last week, making Coinbase Custody the biggest crypto custodian in the world, with the total value of the assets it safeguards standing at $7 billion, per Finextra.
And this infrastructure will be key in attracting sophisticated investors into the market: 76% of institutions interested in investing in cryptos place security and safety as their primary considerations, per a Greenwich Associates study conducted on behalf of Fidelity.
Should these efforts by the likes of Bakkt pay dividends and convince investors that the necessary infrastructure to keep their assets safe exists, we could see cryptos become an increasingly mainstream investment asset class sooner rather than later.
Here’s an industry opinion, as told to Business Insider Intelligence:
"The addition of physically settled Bitcoin futures solves two key problems for institutional investors. First, it offers exposure to Bitcoin on a reputable exchange with few custody concerns. More importantly, it provides true price transparency, which is critical not only for investors’ internal controls, but also for regulators that have held up approval of other products over pricing concerns. Whether Bakkt will open the floodgates for institutional investment in crypto remains to be seen, but it certainly is a significant step in that direction." — Joshua Gnaizda, founder at Crypto Fund Research
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