It was not a long time ago that Intercontinental Exchange (ICE), which owns the New York Stock Exchange (NYSE), has announced the launch of a new Bitcoin market. This move was met with enthusiasm for a part of the community but some people remained cautious.
Why? According to some long-time investors of Wall Street, the “financialization” of Bitcoin could introduce new elements of the fractional reserve banking system into the crypto market and it is necessarily prepared for that.
5/ …by which @Bakkt creates fractionally-reserved claims on #bitcoin. Plus, Bakkt didn't answer questions abt how will it handle forks–lots of questions posed on that including by @aantonop. I look forward to reading the complete disclosure package when it's available! Thanks!
— Caitlin Long 🔑 (@CaitlinLong_) August 20, 2018
ICE Will Not Offer Leveraged Bitcoin Trading
In a recent blog post, the head of Bakkt (ICE’s Bitcoin market), the CEO Kelly Loeffler, has affirmed that one of the main missions of the company is to promote price discovery in an efficient way, which means that it will not allow its clients to make margin trading.
According to Loeffler, a critical element of price discovery is the physical delivery of a good. Because of this, all Bitcoin bought and sold has a collateral or is pre-funded. This way, the Bitcoin contracts will not have leverage or be traded on margins.
This was made to support the difference between the company and other exchanges at the same time that it offers a secured solution. The one-day futures contract will be paid with Bitcoin instead of fiat currency.
The reason why the exchanges are not simple BTC/USD trades is because they are regulated by the Commodity Futures Trading Commission (CFTC) instead of the Securities and Exchange Commission (SEC).
The guidelines of the CFTC, unlike the SEC’s, state that a warehouse in which the assets are stored should be provided, so that could not be done with Bitcoin, only the futures contracts.
Will ICE Offer Hidden Leverage?
Caitlin Long, a two decade investor in Wall Street and the co-founder of Wyoming Blockchain Coalition, has told the media that she was pleased by what Loeffler’s post made clear because it answered some important questions about the market, like how ICE will handle Bitcoin and about leverage and margin trading.
However, she was worried about what is commonly known as hidden leverage and is made via institutions commingle and rehypothecate different types of collateral like securities, actual BTC, etc. This move allows multiple shares to declare ownership of the same assets on the financial system.
These practices, she affirms, are very common in Wall Street right now, and the post said nothing about them. Her major concern is that they could taint the fixed supply of Bitcoin with elements from the financial system, which uses some things that are absent in Bitcoin in fractional reserve banking.