Bakkt Starting User Acceptance Testing for Bitcoin Futures and Custody in July

Siamak Masnavi

On Monday (May 13), Kelly Loeffler, the CEO of Bakkt (which is owned by Intercontinental Exchange, the parent company of the New York Stock Exchange), announced some important news regarding the upcoming launch of its Bitcoin futures products.

As most of you probably know already, on 3 August 2018, Intercontinental Exchange (ICE), "a leading operator of global exchanges, clearing houses, data and listings services," announced that it was starting a new company called Bakkt that would be "working with a marquee group of organizations including BCG, Microsoft, Starbucks, and others, to create an integrated platform that enables consumers and institutions to buy, sell, store and spend digital assets on a seamless global network."

ICE also said that as "an initial component of the Bakkt offering," its "U.S.-based futures exchange and clearing house" planned to "launch a 1-day physically delivered Bitcoin contract along with physical warehousing in November 2018, subject to CFTC review and approval." That launch has been delayed since Bakkt is still waiting the U.S. Commodity Futures Trading Commission's approval.

In a blog post published earlier today, Loeffler provided some important updates regarding the Bitcoin futures contracts that will be launched later this year on the Bakkt platform:

  • Bakkt's customers (many of whom "still waiting to get in") have helped with "the initial product offering."
  • Bitcoin futures will be listed "on a federally regulated futures exchange in the coming months."
  • Bakkt is working with its customers "over the next several weeks to prepare for user acceptance testing (UAT) for futures and custody," which are expected to start in July.

There will be two Bitcoin futures contracts:

  • "A daily settlement bitcoin future, which will enable customers to transact in a same-day market."
  • "A monthly bitcoin futures contract will enable trading in the front month and across the forward pricing curve."

The Bakkt CEO also mentioned that:

  • "Price formation in these benchmark contracts will be supported by proven tools to detect abusive or disruptive trading practices, including wash trades. That means that the settlement prices on ICE Futures U.S. will be based on prices discovered in our physical delivery contracts without relying on unregulated cash markets."
  • "The futures contracts will be margined by ICE Clear US, including the collection of initial margin collateral and variation margin to manage risk. This approach is consistent with capital-efficient risk management practices in global futures markets, ranging from oil and gold to interest rates and equity index futures."
  • "Bakkt will contribute $35 million into the clearinghouse risk waterfall."
  • "For physical delivery and secure storage of bitcoin, an integrated custody service will be fulfilled by Bakkt’s qualified custodian, subject to regulatory approval. Safekeeping will be supported by insurance, cybersecurity, and comprehensive compliance, including an anti-money-laundering program and blockchain analytics."

This announcement by Bakkt has helped the Bitcoin price surge to even higher levels than seen during the past weekend. According to CryptoCompare, BTC is currently (15:20 UTC on May 13) trading at $7,827, up 12% in the past 24-hour period:

BTC - 24 Hour CC Chart - 13 May 2019.png

Featured Image Courtesy of Bakkt

CME Looks to Double Bitcoin Futures Limit, but Is This Wise?

The Chicago Mercantile Exchange (CME) has a new request for its regulator, as it looks to double open position limits on bitcoin futures contracts in the face of significant interest.

Nasdaq reports that the CME has already petitioned its regulatory body, the Commodity Futures Trading Commission (CTFC), asking for an increase from 1000 contracts per spot month to 2000 per investor. Each contract represents five BTC, so essentially, at its peak,  a single investor's total position may edge towards a monumental 10,000 BTC.

This is in direct response to the contract's recent growth which is currently depicting record levels of activity, citing $370 million being traded per day. A spokesperson for the CME noted that the idea to increase limits was proposed on the continued maturity of the market:

Based on the significant growth and acceptance of our financially-settled CME Bitcoin futures markets, as well as our analysis of the underlying bitcoin market.

However, as Nasdaq writes the increase in the upper limit of positions is somewhat superfluous. As of July, the number of open interest contracts reached an all-time high of just 6100; given this, it seems the CME may be future-proofing.

Open to Manipulation?

However, concerns remain about the limit increase, as without them, the potential for manipulation rises; often to the detriment to the underlying asset. Although, as per the CTFC website, the threat of manipulation from bitcoin futures contracts is "low":

In general, position limits are not needed for markets where the threat of market manipulation is non-existent or very low.

Instead, Nasdaq posited that this might point to a lessening on the CTFC's strict rule of bitcoin; as well as a maturing of the market in general.

Nevertheless, some believe the CME's bitcoin futures contracts do pose a significant threat to the price of BTC; with some suggesting that blatant manipulation continues unchecked within the market.

As reported, there seems to be a correlation between the expiry dates of CME bitcoin futures contracts and a lull in the price point of BTC. In several instances, a significant drop in bitcoin's price has coincided with a closure from the CME. The most recent example of this occurred on Labor Day, September 2, when bitcoin rose an extraordinary 8% shortly after the CME shut.

Crypto analyst, Alex Kruger, highlighted this, noting the large gaps which formed on the CME chart, from the price discrepancy before and after closing.

This has become a pretty accepted practice within the market. Kruger has even gone to the lengths of compiling statistics each time this phenomenon transpired:

On these occasions, bitcoin cited an average 4.6% price discrepancy following the close of the CME.

Whether this is a coincidence or the market is indeed being actively manipulated is as yet unclear. Either way, with the increase of these limits it might be only a matter of time until we know for sure.

Featured Image Credit: Photo via Pixabay.com