Bakkt, an Atlanta-headquartered subsidiary of the Intercontinental Exchange (ICE) (an American company that owns the New York Stock Exchange), is currently developing an open, seamless, and globally accessible platform for trading digital assets. While at the time of writing Bakkt is yet to launch, it is perhaps one of the most highly anticipated platforms in the crypto industry - as many hope that it will usher in a new era of institutional influx into cryptoasset markets.
While Bitcoin (BTC) and other major cryptocurrencies may now be considered a legitimate asset class, their highly technical nature makes it challenging for many users to adopt them and use them for day-to-day transactions.
Trading Cryptoassets in a “Safe, Simple, Efficient” Manner
In order to help businesses and various other organizations use cryptoassets, Bakkt’s developers are building a platform that will allow users to “buy, sell, store and spend” blockchain-based currencies. Bakkt’s platform will have an intuitive user interface - which will let users trade digital assets in a “simple, safe, and efficient” manner, the company’s management states.
According to its Crunchbase profile, Bakkt aims to leverage ICE’s established financial market infrastructure and trading technology. The management at Bakkt also plans to build a highly secure and global platform that will allow consumers, merchants, and investors to conduct cryptocurrency transactions through its network.
Offering Physically Settled Futures Contracts
One of Bakkt’s most notable financial products are crypto-based physical delivery futures contracts, which will be accessible to investors in more than 30 different countries. Bitcoin futures - offered by the CME, and cboe - have thus far (at the time of writing) been cash settled, with LedgerX set to offer physically settled futures. What’s significant about physically settled futures, is that far more bitcoin will enter the existing institutional framework - something that has investors excited.
Developed through a partnership with a futures exchange owned by ICE, Bakkt’s physically-settled futures contracts may only be acquired after investors submit relevant compliance documents.
These include applicable AML/KYC checks, which are part of standard regulatory checks that are consistent with the Commodity Futures Trading Commission’s (CFTC) requirements. At present, Bakkt is waiting for regulatory approval from the CFTC before introducing its financial products.
Monthly and Daily Settled Bitcoin Futures Contracts
As explained on Bakkt’s website, the company offers bitcoin futures contracts that have been developed after extensive discussions with stakeholders. The crypto-based futures products provide a unique trading opportunity while ensuring a high level of security and robust risk management features, Bakkt’s management states.
The firm will list two futures contracts - including a “daily settlement bitcoin future” (to allow users to conduct transactions in “a same-day market”) and a “monthly bitcoin futures contract” (to facilitate trading in the “front month and across the forward pricing curve”).
Making It Easier, Faster, and Cheaper to Conduct Crypto Transactions
The developers of Bakkt intend to make it “easier, faster and more cost-effective” to acquire, trade and use digital assets in business-related transactions. As an open-source and “neutral” trading platform, Bakkt will adhere to the appropriate regulatory guidelines, while supporting innovative initiatives involving cryptoassets and their underlying blockchain technology.
Notably, Bakkt’s platform will integrate the advanced cybersecurity tools and software that are used by the Manhattan-based NYSE, which currently has a market capitalization of over $30 trillion. Bakkt emphasizes that its platform is being designed to provide a high standard in digital asset custody solutions.
User Funds Will Be Insured, Held in Frozen Wallets
The cryptoassets trading platform will implement the best-in-class physical and cyber security measures, in order to provide secure storage for user funds. Users’ digital assets will also be “backed by insurance” and held in frozen (cold storage) wallets, Bakkt’s developers noted.
In order to further improve security while ensuring investor protection and compliance, Bakkt’s management will require that users submit know-your-customer (KYC) / anti-money laundering (AML) documents. Additionally, Bakkt’s platform will regularly be subjected to regulatory compliance checks and security and financial audits.
All transactions conducted on Bakkt’s digital assets platform will be closely monitored. This will be carried out by the exchange’s development team, which will use sophisticated on-chain analytics and surveillance tools to carefully check deposits and withdrawals made via the platform.
Evolving Beyond Speculative Assets
There are currently over 2,000 cryptocurrencies, however most investors and financial analysts do not consider them to be an effective medium-of-exchange (MoE). The main reason why cryptos can’t yet function as a reliable MoE is that their prices are highly volatile.
According to Bakkt’s founders, cryptocurrencies could potentially “evolve beyond” a speculative asset class and a store of value (SoV). Currently, Bakkt is working on various initiatives with established merchants who believe cryptoassets have the potential to drastically improve the global economy.
Using Established Risk Management Practices
Margined by ICE Clear US (a counterparty risk management services provider), Bakkt’s futures contracts will include post-trade services and a “collection of initial margin collateral and variation margin” for managing risk.
Bakkt’s developers claim that their approach to providing compliant futures contracts adheres to the standard “capital-efficient risk management practices” - which are widely-used in futures markets throughout the world. For example, markets for oil, interest rates, equity index futures, and the gold bullion use similar risk management methods.
After postponing its launch last year due to the extended crypto bear market, ICE CEO
Jeffrey C. Sprecher confirmed in February 2019 that Bakkt’s services would go live at some later point “this year.” Towards the end of March 2019, former Head of Investor Relations at ICE Kelly Loeffler, who’s currently the CEO at Bakkt, said that although the firm could not commit to an exact launch date, “steady progress” was being made.
Developing Platform Using Microsoft Cloud Solutions
As outlined in a press release published by ICE in August 2018, Bakkt’s platform will leverage Microsoft Cloud Solutions to develop an open, regulated, and globally accessible ecosystem for cryptoassets.
Giant multinational firms including Microsoft, the Boston Consulting Group (BSG), and Starbucks are reportedly involved in Bakkt’s ongoing development. According to the release, Bakkt’s crypto platform will serve as a “scalable on-ramp” for institutional clients and consumers.
Bakkt Is “A Bit of a Moonshot Bet”
Bakkt’s users will have access to “federally regulated markets”, warehousing services, and customized applications designed to improve user experience.
Notably, ICE’s CEO has referred to the Bakkt project as “a bit of a moonshot bet”, as it is being developed in a manner that’s quite different than how ICE typically conducts business operations.
Creating a “New Standard” for Securely Managing Cryptos
On April 29, 2019, Adam White, the COO at Bakkt, shared more details regarding how the new cryptoasset platform will protect customers’ funds. White also announced (at that time) that Bakkt had acquired Digital Asset Custody Company (DACC), which helps clients securely hold and manage their cryptoassets.
In a blog post, published (on April 29, 2019) by White, a former Coinbase executive, Bakkt is planning to create “a new standard” for safely and securely storing cryptoassets. In order to provide a high level of security, Bakkt will take responsibility for storing its clients’ bitcoins which will be “delivered upon contract settlement.”
Additionally, Bakkt’s regulated custody services will aim to comply with the New York Department of Financial Services’ (NYDFS) requirements. The firm has filed an application with NYDFS that seeks approval to operate as a trust company and also serve a Qualified Custodian for cryptoassets.
Using Off-Chain and On-Chain Security Measures to Protect User Funds
According to ICE’s management, it took approximately two years to develop Bakkt’s custody solutions which include a secure warm (online) and cold (offline) digital asset wallet architecture.
Both cold and hot wallets use various off-chain and on-chain security measures to protect users’ cryptographic keys.
A set of automated controls such as multi-factor authentication, role-based permissions, and “destination address whitelisting” are used by Bakkt to ensure the safety of user funds. In order to integrate an additional layer of security to its online wallets, Bakkt reportedly uses FIPS-140-2 level 3 “or higher” hardware security modules (HSM) to safely hold users’ cryptographic keys.
Moreover, Bakkt’s management explained that the cryptographic keys associated with customers’ cold wallets are fully encrypted, sharded, and also “geographically distributed in an m-of-n architecture."
Implementing Physical and Cyber Security Measures to Protect Funds
Notably, Bakkt’s platform never transfers users’ private keys through unencrypted communication channels and all its systems reside in “bank-grade” vaults. Bakkt’s datacenters are also highly secure as they are monitored with 24-hour “physical security.”
On June 13, 2019, White revealed in a blog post that Bakkt will begin user acceptance testing on July 22, 2019 for its bitcoin futures contracts - which will be listed and tradable through ICE Futures U.S.. The contracts will be cleared at ICE Clear US.
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