NYSE owners' plan for a new crypto ecosystem has one detail that traders have been crying for —and it might reel in Wall Street

The Intercontinental Exchange (ICE) announced the launch of Bakkt, a new digital asset platform, on Friday. The move, which represents one of the biggest moves by a Wall Street firm into crypto, swept financial news.
But many experts think headlines missed a key aspect of the plan, which could help bring the bitcoin market to the next level.
The Bakkt platform, which will facilitate the trading of a physically delivered bitcoin futures contract, offering a regulated way to store bitcoin.
This could lure big institutional traders to the market.

"This is what the market has been crying for."

David Mercer, the founder of UK trading firm LMAX, is typically critical of the futures markets for cryptocurrency. He doesn't think the underlying spot market is mature enough yet for a futures one on top of it.

But he, like many other experts, saw Friday's news that the parent company of the New York Stock Exchange was launching Bakkt, a crypto ecosystem, as a positive step to the market. But it's not the fact that the platform might make it possible for someone to convert their crypto into USD to buy a latte at Starbucks that has Wall Streeters excited. It's something a bit more pedantic to the non-trading wonk.

The first step in the platform will be a crypto futures contract that physically delivers bitcoin. Elsewhere, at rivals CME and Cboe Global Markets, bitcoin futures settle in cash.

What does that mean?

At the end of a futures bet that's cash-settled, a trader receives or pays the difference between the price at which they bought the contract and its settlement price. In contrast, with a physical-settled future, a trader would take their payment in physical bitcoin.

As Business Insider previously reported in February, traders from firms like DRW, DV Trading, and B2C2 were clamoring for physically-delivered bitcoin futures. At the time, however, it wasn't clear whether such a set-up could exist because it require complex systems to store bitcoin.

The fact that traders will be able to trade bitcoin futures that physically deliver would make trading less risky and would better facilitate an arbitrage trade, according to Garrett See of DV Chain, a crypto trading firm.

If bitcoin is trading at a discount in the spot market relative to the futures market, a trader can go long bitcoin and short the future for a profit. This is hard when a future settles in cash because it requires a trader to make another trade.

Max Boonen, the founder of B2C2, a UK-based crypto market-making firm, said that such a settlement infrastructure would be difficult to implement.

"Basically the clearing houses and [brokers] would need a bitcoin infrastructure to transfer crypto," he said in an e-mail to Business Insider.

Physically settled bitcoin futures would also need to get the green light from the Commodity Futures Trading Commission.

But Bakkt plans to get that infrastructure in place. According to the news release on Friday:

"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."

'A very, very big deal'

Aside from the fact that physically-settled bitcoin futures could make lives easier for traders, it could also point to a key development in the market.

The thing stopping large Wall Street institutions from diving into the market right now are the lack of prime services — such as margin finance — and secure, regulated custody.

"Bakkt is going to be a regulated custodian," an investor in Bakkt, who declined to be named, told Business Insider.

The insider said every broker dealer connected to ICE would be able to connect to Bakkt and then trade, knowing their bitcoin will settle in their warehouse.

"That’s massive. A very, very big deal," Patrick Rooney of Trading Technologies said in a message.

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