Intercontinental Exchange, who owns the Big Board, can't seem to get enough of Cryptocurrencies after seeing its NYSE's investment in Coinbase soar. The institutional exchange operator has now set its eyes on Bitcoin Futures that will be physically-settled, as opposed to CME and CBOE cash-settled futures. And news coming out of New York also highlights the opportunity to enter the mutual funds market, as it sees Grayscale making its mark and gaining institutional investors through the Bitcoin Investment Trust.

Following rumors in May, Intercontinental Exchange (ICE), operator of 23 regulated exchanges and marketplaces including the largest stock market NYSE, officially announced on Friday that it is starting a new company called Bakkt (pronounced “backed”). ICE is partnering with Microsoft, Starbucks and Boston Consulting Group to facilitate the new venture.

Bakkt aims to create an open and federally regulated platform for both the consumers and institutions to trade, store and spend digital assets. Jeffrey Sprecher, founder and CEO of ICE, said that the goal is to build confidence in the digital asset class on a global scale by leveraging ICE’s track record of bringing transparency and trust to previously unregulated markets.

|| HOLD YOUR HORSES...APPROVAL NEEDED

If approved by the CFTC, starting in November, Bakkt’s first offering will be one-day physically delivered Bitcoin futures traded on ICE Futures exchange. Bitcoins will be physically delivered to ICE’s regulated Digital Asset Warehouse, an offline custody service storing both the public and private keys. All the online trading will happen off-blockchain on the ICE Futures exchange while the bitcoins will be securely stored offline until a withdrawal request by the client. In order to initiate the withdrawal process, the identity of the client must be thoroughly confirmed and only then, the bitcoins are released. Any transfers between Bakkt clients will be processed internally offline and off-blockchain. Bakkt will also fund a separate guarantee fund to back all the transactions.

While cash-settled Bitcoin futures have been traded on CME and Cboe since December, Bakkt would provide the first physically delivered Bitcoin futures in the U.S. Physically delivered futures eliminate the cash price settlement risk and the contracts can be used as an instrument by institutional investors to hedge exposure. In 2017, CME filed a patent for physically settled Bitcoin derivatives clearing system. Coinfloor, a cryptocurrency exchange operator based in the British Virgin Islands, launched the first trading platform with physically delivered Bitcoin futures in April.

Microsoft backed Bakkt financially and the platform will be run on Microsoft’s cloud solutions. Despite some confusion, Starbucks clarified that we it will not start accepting digital assets but rather Bakkt will convert digital assets into USD, which can then be used at Starbucks. Starbucks’ role will be to consult and develop applications for Bakkt.

If Bakkt is successful in making the trading and storage more transparent, regulated and secure, it can be expected that it may increase institutional demand, increase liquidity and in turn decrease volatility - which has been seemingly the biggest barrier for institutional investors. Bakkt will compete against other companies offering institutional investment products such as Coinbase, Grayscale, Ledger, Gemini and BitGo but Bakkt will be the first CFTC-regulated company to combine physical storage and futures trading (see table).



|| DOUBLE-EDGED SWORD FOR GRAYSCALE?

While many continue to rejoice on the institutional drive that the venture could bring into the space, in reality, institutional investors have had the opportunity already through multiple avenues. Grayscale's Bitcoin Investment Trust has picked-up speed despite the market downturn. In their 1H18 report, Grayscale disclosed that the company's Bitcoin Investment Trust has seen an average weekly inflow to the tune of $6Mn - over half coming from institutional investors. And while seemingly celebratory, Digital Currency Group's Barry Silbert, who owns Grayscale, still took the opportunity to say "Game on."