ICE Bakkt Explained

“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.”-Kelly Loeffler

OK, maybe Loeffler is being cautious, but this is about as vague as you can get. Sprecher, the CEO of ICE, who is backing all of this is a smart cookie.  So here’s my guess as to what he and Loeffler are up to:

Custody Slash Warehousing Slash Lite

Do you think history repeats itself?  Remember Mt. Gox? Yea, well that all happened in the past. Back in the olden days if you were buying equities, you’d get these paper stock certificates. When you sold your shares you would send em into your broker.   That proved to be really inefficient for trading. So as an alternative you could keep your shares with your broker (and even in your broker’s name). But wait! As it turned out, some of those brokers turned out to be hucksters and up and went bankrupt.  Shocker! Shares are missing! Therefore, it wasn’t long until someone came up with the bright idea of custody. A large trusted fiduciary holds your shares. Simple.

So let me ask you:  Do you keep your crypto currency on Coinbase?  Have you ever seen Coinbase’s balance sheet? Listen, I don’t know anyone who has seen Coinbase’s balance sheet.  Might be great. But is it BNY Mellon great? No way.

ICE figures the “adult table” is not going to trade significantly until there is a safe home.  And they’re not stupid enough to do it themselves. So they will look for a custodian-like entity.  And let’s be frank, somewhere that has a hell of a balance sheet and great technology. Coinbase and others might have big dreams on this end but ICE has a $78 Billion dollar balance sheet and very formidable technology capabilities.  It’s a layup.

“Upstairs Market”

Like a Dark Pool?  Maybe. But more likely it’s a place for institutions to trade with one another.  Let me put it another way. It is an upstairs market away from the “pikers.” If you are a large institution do you want to trade with the “hodl bros” or would you prefer to know everyone on the other side of the screen is an ISDA signatory and/or has someone clearing their trades?  ICE is one of the very few organizations able to serve up strong counterparties, technical security, custody Lite and probable liquidity.

ICE Technology

If Bakkt is leveraging ICE’s technology that’s a huge win.  ICE does an excellent job of internal development. The biggest win is if Bakkt is behind ICE’s firewall.  ICE, as a powerhouse global exchange, spends insane money on it’s NOC (Network Operations Center). Nothing is bulletproof but ICE has the smart people and technology to be a formidable barrier.  Hence providing another layer of custody like protections for ICE customers.

What About Fidelity’s Product?  

Well, Fidelity just came right out and called it “custody.”  I think it’s a little risky actually calling it “custody”, because in equities that’s a deeply loaded term.  But at the end of the day, Fidelity is throwing its hat into the ring. Out of the box I would say ICE is in a much better position offering an “Upstairs Market.” They know the players and understand what it takes in terms of surveillance and control.   This should not be underestimated. Those in the know, know there is a whole slew of surveillance and compliance challenges evolving in the crypto currency markets. For the uninitiated, this is going to be a real “gotcha.” But for ICE? Just another day in the life.

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