For the past 15 months, some of Wall Street’s best coders have turned themselves into hermits to work on a top secret bitcoin project. It’s one of the biggest, most ambitious cryptocurrency projects Wall Street has attempted.
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Here’s what we know. Last month, Intercontinental Exchange (ICE) — the company that runs the New York Stock Exchange (NYSE) – announced it’s launching a bitcoin exchange called Bakkt. (It’s no accident that the name Bakkt sounds like the English word “backed” which means “supported”). To do it, they partnered with tech titan Microsoft, coffee chain Starbucks and Boston Consulting Group, a major international consulting firm.
If all goes to plan, when Bakkt launches in November, individuals and institutions will be able to buy bitcoin on a platform that’s fully regulated by the U.S. government. This isn’t just another bitcoin exchange, though. It’s a masterplan for taking bitcoin from the financial fringes, to the very heart of the financial system. It could give bitcoin legitimacy as an investment vehicle – and it could also change the way consumers pay for everything from lattes to televisions.
How Bakkt’s exchange could change the world
The exchange itself is straightforward. Bakkt will offer one-day bitcoin futures contracts – agreements that assure buyers will receive the bitcoin they purchase at a set price one day later. They’ll then have the option of withdrawing their bitcoin to their own wallets or leaving it “warehoused” (or stored) with Bakkt.
That warehousing might not sound like much, but it’s transformational. Bakkt would take over management of each bitcoin wallet’s private keys. Those keys, which are vulnerable to hacking and theft, give whoever holds them the ability to access and spend the underlying bitcoin. Bakkt plans to store them “offline” in digital vaults. What this means is that suddenly, institutional investment firms – that is, major mutual funds, pension funds, hedge funds and others with billions of dollars under management – will have a place to buy bitcoin that’s as reputable as the NYSE… and they won’t have to worry about their private keys.
The same warehouse will likely pave the way for a long-awaited bitcoin exchange-traded fund (ETF) – an investment vehicle that would give investors the ability to buy bitcoin just like they buy shares of stock.
Up to now, the U.S. Securities and Exchange Commission (SEC) hasn’t been convinced anyone can store bitcoin securely. That’s one of the main reasons they keep rejecting bitcoin ETF applications. If ICE’s Bakkt can’t convince the agency that they can store cryptocurrency securely, no one can. The NYSE, after all, processes nearly a quarter of all equity transactions that happen in the world.
Once an ETF is approved – and I believe Bakkt will be the catalyst for an approval – everyone who can buy shares on a U.S. exchange (including people with Individual Retirement Accounts (IRA) or 401(k) retirement accounts), will suddenly have the ability to invest in bitcoin with a few clicks of a button. And that’s just the beginning of Bakkt’s master plan.
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The idea for Bakkt has been germinating for five years. When Jeff Sprecher, the founder, chairman, and CEO of ICE, and his wife Kelly Loeffler – a former ICE executive who became the CEO of Bakkt – finally hit on the plan, it was something much more than a bitcoin exchange.
Phase 2 of their vision includes a global merchant platform that gives retailers an easy way to let customers buy goods with bitcoin (and presumably other cryptocurrencies in the future) with the swipe of a phone. Bakkt’s flagship retailer will be Starbucks, the biggest coffee house chain in the world.
How Bakkt will revolutionize payments
Critics are quick to point out bitcoin’s slow transaction times. With the ability to process just seven transactions per second, it’s hard to imagine the cryptocurrency competing with something like the Visa network. Visa regularly process around 2,000 transactions per second and can handle tens of thousands of transactions when needed.
Bakkt believes it has a workaround here, too. It will build its own bitcoin ecosystem. Since Bakkt could conceivably warehouse millions, if not billions, of dollars of bitcoin, it could track and process how those particular bitcoin are spent. So long as they’re bought and sold through retailers like Starbucks, which already have a relationship with Bakkt, Bakkt wouldn’t have to push every single transaction out on the bitcoin blockchain (which is the public ledger where bitcoin transactions are published and verified).
Instead, Bakkt could keep tabs on its own bitcoin, only publishing transactions to the blockchain when bitcoin exits Bakkt’s digital warehouse.
That plan sounds a lot like the monetary centralisation that bitcoin was designed to circumvent. But it’s actually very similar to the much-touted bitcoin “lightning network.” The bitcoin lightning network, which is already up and running, gives private parties a way to create their own payment channel where they can send payments back and forth without publishing every transaction on the blockchain. Bakkt would do the same thing on a massive scale.
Think of it as bitcoin’s version of Mastercard or Visa. I’d probably bet against it if people like Sprecher and Loeffler weren’t at the helm. Sprecher’s track record is sterling. In the past he’s purchased old-world exchanges (places where commodities were traded by phone or in person) and completely digitised them.
He did it with electricity exchanges. He did it with the International Petroleum Exchange. He did it with the bond market and credit default swaps (complicated insurance products that protect debt buyers from defaults).
Investors believe Bakkt can do it with bitcoin, too. They lined up to contribute capital. Susquehanna International Group, Fortress Investment Group and Pantera Capital, three firms that manage around a combined US$330 billion, are just a few of the backers.
There’s no assurance that Bakkt will be successful. But I believe it’s the first true glimmer of a different world: one where bitcoin and other cryptocurrencies are as legitimate and omni-present as the dollar, the yuan and the rupee.
Bakkt has the right players with the right experience to give bitcoin what’s its lacked over the past decade: a stamp of approval from Wall Street’s elite. And that stamp is just a few weeks away. When it comes, it could finally reignite a bull market not just in bitcoin but the entire cryptocurrency space.
Editor, Stansberry Churchouse Research
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