by Ben Bain and Matthew Leising (Bloomberg)
Intercontinental Exchange Inc. has been facing resistance from federal regulators over a key part of its ambitious plan to bring Bitcoin to the masses.
Now, the owner of the New York Stock Exchange is turning to state watchdogs to get the project over the goal line.
ICE’s plan is to create a highly regulated Bitcoin ecosystem that would encourage pension funds, endowments and other institutions to invest more money in the space, and make it much easier for consumers to buy products with the cryptocurrency. The venture, announced to much fanfare in August, has lined up big-name backers, including Starbucks Inc. and Microsoft Inc.
But the launch date for the project -- known as Bakkt -- has been delayed for months because of skepticism from the Commodity Futures Trading Commission, the U.S. regulator that polices Bitcoin futures. The issue that that has made the CFTC the most concerned is how clients’ tokens will be stored, and thus safeguarded from possible theft and manipulation, according to people familiar with the matter.
To placate the agency, ICE is considering seeking a license from New York financial regulators that would permit Bakkt itself to hold custody of customers’ tokens, said three of the people, who asked not to be named because the discussions aren’t public. Should ICE secure a state license it would still need sign-off from the CFTC on the broader Bakkt project.
Bakkt Chief Executive Officer Kelly Loeffler, who is married to ICE CEO Jeff Sprecher, said last month that the company is in discussions with the CFTC and that the initiative is moving forward.
Spokesmen for ICE and the CFTC declined to comment.
In theory, Bakkt would address two of the main hurdles that have prevented Bitcoin from becoming anything more than a speculative fad: The investors with the deepest pockets have mostly shunned it and consumers rarely use crypoturrencies to buy anything. Those problems have become even more acute over the past 16 months with Bitcoin suffering through a drawn-out slump that has erased more than 70 percent of its value.
Atlanta-based ICE is trying to attract institutional investors by providing Bitcoin futures that differ in a crucial way from derivatives already offered by CME Group Inc. and Cboe Global Markets Inc.: When Bakkt’s one-day contracts expire they would pay out in Bitcoin tokens instead of U.S. dollars.
The reason why that’s important is that institutions have been hesitant to buy Bitcoin on the unregulated platforms where it’s now mostly sold -- the Wild West that dominates the crypto market. So having a futures contract overseen by ICE that delivers Bitcoin would potentially give mutual funds and endowments a more secure way to obtain tokens.
Bakkt would also facilitate retail transactions by providing Starbucks and other businesses a platform to easily convert Bitcoin into dollars. Combined, the features are central to ICE’s plan to enable “consumers and institutions to buy, sell, store and spend digital assets on a seamless global network.”
From the CFTC’s perspective, that objective makes Bakkt far more complicated than the Bitcoin futures that CME and Cboe launched in late 2017.
The regulator’s rules require clearinghouses to deposit customer funds at a bank or trust company, and Bakkt is currently neither of those things. Also, some of the Wall Street partners that ICE needs to operate a derivatives market have been lukewarm about getting involved with a project that involves handling Bitcoin, according to two people familiar with the matter.
The CFTC recognizes state bank and and trust licenses, and could let ICE list futures through a self-certification process if it obtains permission from New York’s Department of Financial Services to hold tokens, said one of the people. The CFTC, which doesn’t police the spot market for Bitcoin, is still likely to require public comment on Bakkt or have an ICE panel that assess risks approve the futures contracts, the person said.
A spokeswoman for the New York regulator, which has granted virtual currency licenses for a number of crypto projects, said the agency doesn’t comment on applications.
ICE initially planned to have Bitcoin futures available last November. In a March 29 post on Medium, Loeffler said that the company was continuing to work with the CFTC and that the derivatives would eventually trade and be cleared on ICE platforms, which are overseen by the regulator.
“While we’re not yet able to provide a launch date, we’re making solid progress in bringing the first physical delivery price discovery contracts for Bitcoin to the U.S., where price formation will occur in federally regulated, transparent markets,” Loeffler said in the Medium post.
