It’s been a bumpy road so far for Bakkt, ICE’s yet-to-launch crypto future exchange, facing a grueling regulatory climate, government standstills, and even some technological hurdles.
With its updated Q3 launch is now within reach, it seems to be nearing the finish line. But there is still one catch that might impede full adoption, and this time it comes from the client side. [related id=”1″]
Its largest prospective customers say getting approval to trade Bakkt’s much-lauded flagship CFTC-compliant, physically-delivered futures product will be a lengthy process in itself, limited by internal rules and company-politics.
“Bakkt may be getting their own regulation sorted, but there’s still no regulation for their customers. Most hedge funds, endowments, pension funds, brokerages, and banks aren’t going to get approvals to trade physically delivered contracts for at least a year after they launch,” said one senior bank source.
Another source at a major bank also confirmed that it had little regulatory guidance on the matter thus far, and little interest in the product from clients.
To be sure, while the banks may be ready to tip-toe into the digital asset space – as reported last week – this is limited to specific project approval, and doesn’t entail a sweeping endorsement of other initiatives. Specifically, one issue with Bakkt’s product is that the crypto futures contracts are physically delivered, meaning customers receive actual bitcoin at the expiration of a contract, whereas cash-settled futures are paid out in USD. This means Bakkt’s customers will need to be comfortable handling the asset-class itself; a demand synthetic derivatives avoid.
Rather than raucous banging on Bakkt’s door, sources say the exchange could see a disjointed trickle from large banking clients. That could put an initial spanner in the works for Bakkt, which investors and supporters believe will thrive by leveraging its connections on Wall Street.
“The difference with Bakkt is that they have their tentacles so much deeper [into different networks] than any other crypto firm,” Ali Hassan, CEO of asset manager Crypto Crescent told The Block earlier this year. “ICE is a much larger corporation than CME and CBOE. It is trusted globally and as such has a distribution model that will onboard new counterparties that may have never traded crypto futures before.”
The reality however is that even Wall Street top dogs face restrictions and are not ready for Bakkt yet. In short, that means Bakkt should expect fewer clients and lower volumes in its first year of operation than had been projected.
Not a lost cause?
Naturally, that’s not to say Bakkt won’t have any clients initially.
Smaller institutions like crypto asset managers, family offices, and brokers fall under less stringent regulatory scrutiny than major banks, meaning they can start trading without friction on Day One.
There’s also clearly demand for the product from smaller players. In June, current market-leader CME saw record volumes for its cash-settled bitcoin futures products; clients who will all theoretically be able to trade physically delivered contracts, which have the potential added benefit of being less prone to manipulation.
And although LedgerX has now launched the world’s first physically delivered options – beating Bakkt to the mark – this could play into their hands. Indeed, LedgerX’s futures primarily target retail investors, which shouldn’t threaten Bakkt directly. LedgerX’s contracts are also fully collateralized meaning you can’t legally trade them on margin, while Bakkt will have margined one-month and one-day futures which are cleared by ICE Clear U.S – two extra bonuses for institutions. LedgerX can also test-run the product, allowing Bakkt to take notes.
Still, it’s worth remembering that larger institutions have so far steered clear of any bitcoin futures, with only four currently trading the product in reportable size on CME. It’s also worth remembering that Bakkt was pitched as the exchange that can bring in the big banks. So if Bakkt only proves viable for those already in the space, it will have failed in its mandate.
The question now is how quickly can physically-delivered bitcoin products really deliver?
The answer, unfortunately, falls outside of Bakkt’s control.
Author: Isabel Woodford