Bakkt CEO: ‘With Our Solution, the Buying and Selling of Bitcoin Is Fully Collateralized or Pre-Funded’

Siamak Masnavi

On Monday (20 August 2018), Bakkt, the new company announced by Intercontinental Exchange (ICE) on 3 August 2018, declared that with its solution, "the buying and selling of bitcoin is fully collateralized or pre-funded."

ICE's press release mentioned that Bakkt would be offering a one-day phsyically-delivered Bitcoin futures product:

"As an initial component of the Bakkt offering, Intercontinental Exchange’s U.S.-based futures exchange and clearing house plan to launch a 1-day physically delivered Bitcoin contract along with physical warehousing in November 2018, subject to CFTC review and approval. These regulated venues will establish new protocols for managing the specific security and settlement requirements of digital currencies."

This is how Bakkt announced today's news on Twitter:

Kelly Loeffler, the CEO of Bakkt, provided more details in a post on Bakkt's Medium blog.

Loeffler started by saying that to achieve a "trusted infrastructure for trading, storing and spending digital currencies", Bakkt would need to provide:

  • "a consistent regulatory construct";
  • "transparent, efficient price discovery"; and
  • "an institutional quality pre- and post-trade infrastructure"

She then moved to the "meat" of Bakkt's announcement:

"A critical element to price discovery is physical delivery. Specifically, with our solution, the buying and selling of Bitcoin is fully collateralized or pre-funded. As such, our new daily Bitcoin contract will not be traded on margin, use leverage, or serve to create a paper claim on a real asset."

She noted that this provided support for market integrity and differentiated them from other exchanges which "allow for margin, leverage and cash settlement." She went on to say that once you take into account the fact that Bakkt also provides "a secure, regulated warehouse solution", it was easy to see how this infrastructure could "help more institutions and consumers participate in the asset class."

For many crypto traders/investors and analysts, what Bakkt announced today sounded great. However, not everyone was equally excited.

Caitlin Long, 22-year Wall Street veteran (including over eight years at U.S. investment bank Morgan Stanley) who has been active in Bitcoin since 2012, expressed her concern about "financialization" (i.e. when an asset class becomes investable by large institutional investors) of cryptocurrencies, and especially her worries about “leverage-based financialization" (which arises "either from the issuance of more assets out of thin air to dilute existing holders, or from the creation of more claims to the asset than there are assets") in an article for Forbes published on 31 July 2018.

Then, on 7 August 2017, a few days after ICE's announcement about Bakkt, she wrote another interesting article for Forbes Titled "Racing to Fix Wall Street: ICE, Cryptocurrencies And Enterprise Blockchain" that explained how ICE's move into the crypto space was "a double-edged sword". More specifically, she warned us about the possibility of seeing "fractionally-reserved bitcoin", i.e. more "paper claims to bitcoin (created off-chain) than there are real bitcoins on-chain" (with the danger being that that these paper claims would "offset bitcoin's natural scarcity to some degree, thereby suppressing bitcoin's price").

Upon hearing Bakkt's announcement earlier today, Long sent out the following tweets to explain that although the confirmation that Bakkt's daily Bitcoin contract would not be traded on margin, use leverage, or serve to create a paper claim on a real asset" was a good thing, she still had a few reservations:

 

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$1.2 Billion Worth of Cryptocurrency Reportedly Lost to Theft, Fraud in Q1 2019

A surge in theft from cryptocurrency exchanges and fraud-related activities has seen around $1.2 billion worth of crypto get stolen in the first quarter of this year. The amount is equivalent to 70% of all crypto funds stolen throughout 2017.

According to a report published by US-based data security firm CipherTrace, the first quarter of this year has seen hackers steal $356 million from cryptocurrency exchanges, and fraud or fund misappropriation take $851 million worth of crypto from users.

Earlier this year, a report published by the same firm revealed that a total of $1.7 billion worth of cryptocurrency were lost to thefts and scams. The figure was already 3.6 times higher than in 2017, and seven times higher than in 2016.

According to Reuters, CipherTrace’s report for Q1 of this year included the QuadrigaCX ordeal, that saw the exchange get locked out of $145 million worth of crypto after his founder, the only person with access to its cold storage wallets, suddenly passed away in December of last year.

CipherTrace’s chief executive officer, Dave Jevans, was quoted as saying:

Crypto crime has gotten worse because regulations are still weakly enforced. Europe broadly has not implemented its regulations yet and the cyber criminal community continues to grow.

Jevans added that he would add that “insider issues such as fraud or theft have grown mostly due to operations outside of the U.S. where regulations are poor.” This, he claims, because of “greed and mismanagement” by teams who are ahead of cryptocurrency companies with millions to manage.

The data security firm’s report notes there’s a major gap in the currency regulatory environment for cryptos when it comes to cross-border payments from US exchanges to offshore exchanges.

Per Reuters an analysis of 164 million BTC transactions showed cross-border payments to offshore exchange grew by 46% over the last two years, contributing to the amount of wealth ‘hidden offshore.’

Notably, as recently covered cryptojacking incidents have seen a significant drop, as a popular mining script provided by CoinHive is no longer active. Nevertheless, malware is still out there trying to get to cryptocurrency users, as French crypto hardware wallet manufacturer Ledger warned against a ‘highly targeted’ malware hitting its users.