How Bakkt aims to build digital asset ecosystem and consumer app

November 26, 2019 11:46
Bakkt COO Adam White (R) and ICE Asia Pacific VP Jennifer Ilkiw (L) believe Bakkt has a great future as it builds out its digital asset ecosystem with Bitcoin futures contracts. Photos: Bakkt, ICE, Bloomberg

Bakkt, a digital asset-focused startup affiliated with the Intercontinental Exchange (ICE), the parent company of the New York Stock Exchange (NYSE), listed its much-awaited Bitcoin Futures contracts in September. With an aim to draw more traditional institutions into the cryptocurrencies space, Bakkt has partnered with ICE’s clearinghouse and futures exchange to bring new products to the market.

The firm has also linked partnerships with Microsoft and Starbucks to develop retail applications for consumers to convert their digital assets into US dollars for use at Starbucks' coffee outlets, a use case that the market is excited about.

One of the most well-funded crypto startups, Bakkt raised US$182.5 million since its founding in 2018. Heavyweight investors include ICE, Boston Consulting Group, Microsoft’s venture capital arm M12, Naspers’ fintech company PayU, and Hong Kong tycoon Li Ka-shing’s Horizons Ventures.

Adam White, chief operating officer of Bakkt, and Jennifer Ilkiw, vice president, Asia Pacific at Intercontinental Exchange, recently sat down with EJ Insight to outline Bakkt’s plan to build a platform that enables consumers and institutions to buy, sell, store and spend digital assets.

Excerpts from the interview:

EJ Insight: What exactly is the physically-settled Bitcoin futures product that Bakkt is providing?

Ilkiw: The futures contract, for example, a one-day futures contract, means that if you go “long”, and you keep your position open, then at the end of that day, you're going to buy that amount of Bitcoin. Investors are interested in trading the daily [futures contract] because it is similar to swap contracts in the OTC (over-the-counter) markets, to hedge their position.

White: Just like trading a futures contract for cotton, or oil, or other commodities, if that contract is taken to delivery, one party has to deliver that asset, and the other party takes the receipt of it. Bakkt is a custodian providing that warehouse service, while ICE is providing the trading service. Rather than being cash-settled like the CME futures, what's special is that we provide physically-settled, deliverable futures.

Ilkiw: To do that, the exchange set up a separate depository, the Bakkt Warehouse, which helps quality institutional names who have concerns about regulatory compliance and counterparty risk. When clients are looking at trading on other unregulated [crypto] exchanges in Hong Kong or overseas, they don't have a clearinghouse in the same way ICE does. We have a specifically defined clearinghouse that helps protect all counterparties.

White: What makes our products different from others is it's fully regulated; regulated custody, regulated exchange and trading, and regulated clearing. No other contract out there offers that end-to-end regulatory marketplace, which is why we believe we have created the benchmark price of Bitcoin.

There have been startups that have built Bitcoin custody solutions, but they are not able to build something in the way ICE can, as ICE is a US$50 billion, publicly-traded company, with 5,000 plus employees and offices around the world. As for Bakkt, we are able to leverage the same infrastructure in technology and protection that defend the New York Stock Exchange, and it was built for institutional custody from day one. We introduced Bitcoin into the existing ICE Futures Exchange, so it is traded alongside all the other assets that are listed there.

We believe that, by bringing institutional-grade infrastructure to this emerging market, we should see more participation and additional capital enter this space.

Q: On the retail side, Bakkt has partnered with Starbucks in developing a consumer app to introduce cryptocurrencies into payments. What is Bakkt’s next plan on the retail front?

White: I cannot talk too much about that business because it is not yet launched, but what I can say is that Bakkt is not just strictly building products for trading and speculation. The first product we offered... enabled physically delivered futures to trade, and that allows price discovery and hedging for risk management and speculation to occur. But we believe that if that is all Bitcoin is used for, it is not going to be that successful. People actually have to use digital assets like Bitcoins to solve real problems; that’s what we call: the adoption and utility.

So there is another side of Bakkt’s business, which is building products and services that drive the adoption and utility of digital assets. That is about all I can say. We have a partnership with Starbucks and we will be launching our mass consumer-facing product next year. Starbucks is one of the merchants that we are working with, to reduce payments and allow consumers to more easily spend digital assets. What we are doing is to make payments faster, cheaper, and more global.

Q: The user experience on crypto applications is not conducive to getting new users actively involved. How is Bakkt going to address this issue?

White: It is important that we build products that are easy and intuitive to use for retail users. Just like e-mail, which has an underlying protocol called SMTP. No retail user understands how SMTP protocol works, nor do they need to, but the protocols are presented with an easy-to-use user interface to send an email. I think we look at our consumer product in that same way. We are saying users do not have to understand the technical components of Bitcoin or other digital assets, and that the technology should be used in a way that solves a problem for them.

Bakkt is there to abstract away all the complexity with the crypto and just allow customers to solve problems. So one thing that's important to notice, I think a lot of people in the space conflate the two things; for trading and speculation, you have to understand the technology and the crypto token, because you are betting, you are effectively taking up a position on the price event. But when it comes to retail use and adoption, those users should not even know how Bitcoin protocols operate. So you'll see on one side, many of our customers on the trading and market side have to very deeply understand digital assets, and on the consumer use side, they might never have to.

Q: Tackling cryptocurrencies' volatility problem, "stablecoins", a class of cryptocurrencies that seek to maintain price by pegging its value to fiat money, or other assets, have been one of the most widely discussed and developed sphere of the crypto-asset industry. What's your take on this unfolding theme?

White: Many stablecoins that exist right now exist on public blockchains, like Tether, USDC, Paxos Standard, and so on. And now we're seeing more permissioned or private blockchain-enabled stablecoins emerging. One example of a private stablecoin would be a “central bank digital currency”, and an example of a permission stablecoin might be like Facebook’s Libra token.

Regardless of what dimension it is happening in, we are excited to see the development and interest. We don't have a perspective per se on any specific stablecoin. Because we are building a custodian solution, in many ways, we may offer custody of those different types of stablecoins over the coming years possibly.

Q: Speaking of Facebook’s cryptocurrency initiative, there has been talk that Libra could become systemically important for the global financial system overnight. But with the increasingly mounting regulatory pressures from governments around the world, do you think Libra will be allowed to launch?

White: I think certainly that Libra is... running into some challenges on the regulatory side, because in many ways, they're innovating and pushing boundaries that haven't been pushed before. What's important to me is when you look at a project like Libra, it was not launching in one country, but launching throughout the world, backed by a ‘supranational’ basket of fiat currencies. So if one country is not supportive as another one, that doesn't mean the project is dead or not going to move forward.

We have seen some countries like France and Germany saying they are going to pass laws to prevent Libra from operating in their nations, we have seen other countries taking a more wait-and-see approach, and others welcoming and embracing projects like Libra. I tend not to focus on any one individual country. What’s important is the trend that these projects are being created and attempting to move forward. It is not going to be without real challenges, but there is an aspect to this technology that can help prevent bad things from happening that other things like cash cannot.

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EJ Insight writer