On Thursday (9 August 2018), Thomas Lee, the Head of Research at independent research boutique Fundstrat Global Advisors, explained on Twitter why he believes that institutional investors will find buying Bitcoin via ICE/Bakkt much more attractive than via existing crypto exchanges such as Coinbase and Binance.
Before we examine Lee's argument, it is worth recalling that on 3 August 2018, the parent company of the New York Stock Exchange (NYSE), Intercontinental Exchange (ICE), announced that it was launching a new company called Bakkt that would be "building an open, seamless global network to enable you to buy, sell, store and spend digital assets simply, safely and efficiently." The ICE press release said that one of Bakkt's first products would be a fully-regulated 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. In addition, the clearing house plans to create a separate guarantee fund that will be funded by Bakkt."
The Bakkt website provides a little more information on this product:
"In November, ICE Futures U.S. and ICE Clear U.S. plans to launch its first physically delivered bitcoin futures and warehouse in coordination with Bakkt, subject to regulatory review and approval. This will enable access for institutional investors via regulated market infrastructure."
But to get a full description, we need to take a look at the relevant products page on the ICE website:
"ICE Futures U.S. offers physically delivered daily futures contracts on Bitcoin traded in BTC/USD (subject to regulatory approval). These contracts will be traded on ICE’s electronic trading platform, which offers industry-leading speed and reliability, regulated by the CFTC. All trades are cleared and guaranteed by ICE Clearing US, the central counterparty for all ICE cleared forex futures trades. Trades will result in physically delivered Bitcoin in ICE’s regulated Digital Asset Warehouse. Market participants are eligible to transact with any other market participants. ICE physically delivered bitcoin futures offer trading and hedging opportunities."
And here are the full specifications:
Market Specifications Trading Screen Product Name BTC/USD Futures Trading Screen Hub Name ICUS Contract Series Daily Futures Trading Hours 8:00 pm to 5:00 pm EPT Commodity Code BTC Contract Size 1 Bitcoin Price Quotation U.S. dollars per Bitcoin to 2 decimal places Minimum Price Fluctuation .01 ($0.01) Daily Price Limit None Last Trading Day 5:00 p.m. Eastern Prevailing Time (EPT) on the Business Day of the Daily Contract Date Final Settlement Last Trading Day MIC Code IFUS Clearing Venues ICUS
Note that the contract size is "1 Bitcoin".
Now, let's look at the two reasons why Lee thinks that it is better for institutionals to buy 1-day bitcoin futures contracts through ICE/Bakkt than via spot exchanges such as Binance:
3/ ICE already has existing and approved trading relationships with banks like @jpmorgan and brokers @Fidelity @CharlesSchwab etc and means that this is a natural pathway for traditional retail investors to access Bitcoin via their brokers. ICE is owner of @NYSE— Thomas Lee (@fundstrat) August 9, 2018
4/ ICE is the counterparty to the trade (just as @coinbase and @binance are counterparties if u use them). ICE has tremendous financial resources with revs $6 billion (financials https://t.co/uUlViK2W2E) and $85 billion in assets. As a custodian/counterparty, money good.— Thomas Lee (@fundstrat) August 9, 2018
5/ Bakkt is doing 1-day settled futures and not spot, because this entity is under the purview of the @CFTC (and #cryptodad @giancarloCFTC) and if it was spot, it would be @NewYork_SEC (not positive but I believe this is the case).— Thomas Lee (@fundstrat) August 9, 2018
The reason why it matters which regulatory body needs to approve this product is that the CFTC's approval process for a new futures product is much simpler/quicker than the SEC's approval process for a new ETF/ETP since in the case of the former, there is a "self-certification process" that futures exchanges use to "bring the vast majority of new products to market." This is the same process that was used by CBoe and CME in order to launch their Bitcoin futures products in December 2017. Here is how the CFTC explained in its "CFTC Backgrounder on Self-Certified Contracts for Bitcoin Products" fact sheet back then why exchanges such as CME could do this:
"Prior to listing new contracts, the Commodity Exchange Act (CEA) provides designated contract markets (DCMs) with the option to either submit a written self-certification to the CFTC that the contract complies with the CEA and CFTC regulations, or voluntarily submit the contract for Commission approval."
Since ICE Futures U.S. is a DCM, it can use the self-certification process for its upcoming 1-day physically-settled Bitcoin futures product, and therefore, it is highly likely that ICE will be able to launch this product in November 2018 as planned.
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