Why ICE’s Bakkt platform is such a big deal for cryptocurrency
The world's largest traditional exchange operator is planning to tokenise the world on the blockchain.
On 3 August, Intercontinental Exchange (ICE) announced the launch of a new digital asset and cryptocurrency platform called Bakkt (official site), working with companies including BCG, Microsoft and Starbucks to create an open ecosystem for digital assets and offer physically settled one-day bitcoin futures contracts.
So far coverage around this launch has mostly been oversimplified to the point of inaccuracy, and crudely minced into reports like "now you can buy a Frappuccino with bitcoin," and "no, you cannot buy a Frappuccino with bitcoin."
And that's a real shame because either way, it's the narrowest and least-interesting way of looking at Bakkt.
The real impact might be best summarised as one of the world's largest regulated exchanges creating their own institution-focused cryptocurrency exchange, complete with derivatives, custody solutions and asset-tokenisation systems, with initial customers including Starbucks and Microsoft. It's kind of a big deal.
Who is ICE and what it Bakkt?
Bakkt might be best thought of as a giant digital asset exchange, created by one of the world's largest exchange operators and partnered with some of the world's largest companies, including Microsoft and Starbucks, and launched with a range of very interesting features.
- What is ICE? It's the world's largest owner of exchanges, commodity markets and clearing houses by just about any measure. It operates 23 regulated exchanges including playing a sizable role in the New York Stock Exchange and 6 clearing houses, on which thousands of different assets and derivatives are traded.
- What is Bakkt? Bakkt is its newly created digital asset platform for assets like bitcoin and cryptocurrencies. It's designed to let ICE customers, such as Microsoft and Starbucks, more easily access and utilise the growing market for digital assets such as bitcoin.
The features of Bakkt, such as one-day physically settled bitcoin futures contracts and bitcoin warehousing – both due for release in November pending regulatory approval – are designed to de-risk bitcoin for ICE customers like Starbucks.
The one-day physically settled bitcoin futures allow for hedging against and profiting from bitcoin's volatility, while the warehousing solution overcomes the longstanding pain point of actually needing to safely store cryptocurrency. This reduces the risks involved in using cryptocurrency and digital assets, which allows for a lot more possibilities.
The point of the platform
As far as coffee is concerned, the goal isn't for customers to give bitcoin to Starbucks. Instead, the goal is for Starbucks to be able to convert bitcoin to fiat or other digital assets as needed, so if it wants to accept bitcoin in the future, it will be able to do so much more easily. And as far as bitcoin is concerned, Bakkt is simply doing it first because bitcoin has relatively wide acceptance and deep liquidity relative to other digital assets.
"[Bakkt's] first use cases will be for trading and conversion of Bitcoin versus fiat currencies, as Bitcoin is today the most liquid digital currency," the announcement reads.
The point of Bakkt is for businesses of all kinds to be able to unlock the potential of digital assets through regulated existing infrastructure. By laying down viable digital infrastructure, businesses can start innovating much faster.
In the case of Starbucks, the point might be digital rewards points which can start accruing value themselves.
"As the flagship retailer, Starbucks will play a pivotal role in developing practical, trusted and regulated applications for consumers to convert their digital assets into US dollars for use at Starbucks," said Maria Smith, vice president of partnerships and payments at Starbucks. "As a leader in Mobile Pay to our more than 15 million Starbucks Rewards members, Starbucks is committed to innovation for expanding payment options for our customers."
In the bigger and much grander scheme of things, Starbucks accepting bitcoin is just one simple example of how a business might make use of digital assets in the future. Rewards points that can be redeemed for coffee aren't that different to buying coffee with bitcoin or US dollars.
The same digital ecosystem can support and expand the possibilities of all of them.
The big picture
Starbucks would rather have US dollars than bitcoin because it can be more easily and reliably stored and can be widely and easily used to pay its US-based employees, and invested in various ways. Bitcoin is a superior currency relative to most other digital assets thanks to its wide acceptance and liquidity, and the US dollar is a superior currency relative to bitcoin for the same reasons.
But US dollars can't be earned everywhere. There are 180 official currencies in circulation today and some of them are functionally a bit rubbish. There are also some valid reasons for accepting cryptocurrency when shipping goods internationally, such as concerns around credit card fraud and high fees, when operating in countries with ongoing high inflation rates or for avoiding gouging on both ends when paying overseas freelancers.
Economists make a big deal about cryptocurrency's lack of functionality next to the US dollar, but it's far from useless and there are plenty of solid business reasons why a large company would want to have access to the option of accepting and using bitcoin where beneficial.
But bitcoin is just one digital asset among many in the global marketplace. Bakkt aims to break open the functionality of the cryptocurrency ecosystem for a wide range of digital assets beyond just bitcoin and with an emphasis on asset tokenisation.
It's all in the name. Bakkt, pronounced "backed," is for digital assets and derivatives thereof to be seamlessly traded and converted as needed, with the name suggesting an emphasis on tokenisation – or cryptocurrencies "backed" by exiting tangibles. This opens up a slew of previously impossible applications.
These can be almost anything. Bakkt uses art as an example of the kinds of digital assets to be traded in this ecosystem.
For example, a hotel might sponsor an artist to produce exclusive seasonal works to be reproduced across its venues as needed to simultaneously get a valuable service as well as the rights to the art in question, which may appreciate over time or may be rented out later as a profitable sideline.
Other digital assets might be valuable data, computer processing power, bandwidth on a decentralised network and just about anything else, all tradeable through one of the world's largest and broadest regulated exchanges.
"Bakkt is designed to serve as a scalable on-ramp for institutional, merchant and consumer participation in digital assets by promoting greater efficiency, security and utility," said Bakkt CEO Kelly Loeffler. "We are collaborating to build an open platform that helps unlock the transformative potential of digital assets across global markets and commerce."
"The Bakkt platform will enable firms across industries to accelerate a range of innovation," agreed Sean Collins, senior partner at BCG.
It's not about bitcoin or Starbucks, so much as a sprawling digital marketplace where almost anything might be valued and traded. Bitcoin and Frappuccinos are just two assets that might be traded against each other in this ecosystem. ICE is profitably positioning itself as one of the primary gatekeepers of this future system.
It might not be decentralised, but it could go a long way towards unlocking the economic potential of cryptocurrencies and showing what the technology can do, starting with a bitcoin test run.
Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, VET, XLM, BTC and ADA.
- BIS survey suggests Libra blindsided central banks, stablecoin use in EMEs
- Chamber of Digital Commerce sides with Telegram in SEC lawsuit
- Reserve Bank of India vs cryptocurrency: RBI cites Libra as point against crypto
- Digital Dollar Foundation: Why the former CFTC head is pushing for digital USD
- Understanding Australia’s proposed digital wallet regulations