Blockchain Infrastructure Grows

Last week, the owner of the New York Stock Exchange, a company called Intercontinental Exchange Inc (ICE) announced it is creating a new trading platform for cryptocurrency and other digital assets. It is also including a feature to “physically” deliver Bitcoin via a futures contract. This is an important step in the development of custodial solutions, which are necessary to open up access to institutional capital.

ICE has put together major players to create this exchange: Microsoft will be building the infrastructure, and Starbucks will support payments. Boston Consulting Group is also involved. This may be the most mainstream startup yet. The new company is called Bakkt, and their mission is to allow customers to trade, spend, and store cryptocurrency and digital assets.

Why Custody Matters

As we’ve written about in previous articles, one of the major roadblocks to opening up digital assets is institutional grade custody solutions. Buying cryptocurrency is not like investing in a growth stock; the technical details necessary to do it right can be daunting for fund managers with a fiduciary responsibility.

In a sense, storing cryptocurrency is like storing gold. Both are compact and valuable. Private keys, which give users direct control over their cryptocurrency, can be held on a USB sized device, which could hold millions (or even billions) of dollars worth of digital assets. So long as one holds their Bitcoins without a desire to spend or trade them, the private keys do not need to be accessed. Furthermore, Bitcoins and other digital assets can be deposited to an account without access to the private keys.

In other words, an investor could hold their Bitcoins for decades without ever touching their private key, adding to their stash over time, and end up with a nice retirement.

Private keys are also much less expensive to store than gold, opening up the opportunity for custodial services to startups as well as major Wall Street banks.

Cryptocurrencies are for Spending

While many speculators are interested in holding their cryptocurrency over a long period of time, with stories of people regretting their early sales, there is a strong case for cryptocurrencies to act as money. This is what Bakkt is working on with Starbucks: the ability to safely store and spend cryptocurrencies at major retailers.

But isn’t Bitcoin volatile? How does one expect to use a currency that rises and falls by hundreds of dollars in under an hour?

While there are many who believe Bitcoin will grow to be more stable as adoption increases, others are creating new digital currencies focused on maintaining a peg against the US dollar or a basket of (fiat) currencies. One such token, DAI, can be created and used on the Ethereum platform. There are currently 55 million DAI outstanding, all backed by ETH tokens deposited by individuals into smart contracts called a CDP (collateralized debt position).

DAI can be spent just as any digital currency, without feeling that nagging regret that one is selling a token that could rise 10x in value within a few months.

Big Players, Focused Players

While Bakkt is building a broad service, more focused startups-like Hedge-are creating solutions for fund managers today.

What Hedge Offers

Security:

Hedge leads the industry in providing secure wallets with proprietary best in class distributed cold storage practices. The keys to your funds never touch the internet and cannot be stolen by hackers. There is no single point of failure that can jeopardize your fiduciary.

Applications:

Hedge offers application interface solutions to make your apps work with our apps. Small regional bank looking to compete? Incorporate Hedge’s APIs into your app and give your customers the ability to buy and sell bitcoin through your institution.

Access:

Hedge is the only firm in the industry that gives you 24/7 access to your funds. We net settle transactions in a proprietary process that maintains the safety of keys in cold storage, but with near real time trading.

Let Hedge manage blockchains; you manage your clients.