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NYSE Owner’s Bitcoin Market May Have ‘Hidden Leverage,’ Wall Street Vet Warns

Last Updated March 4, 2021 3:56 PM
Josiah Wilmoth
Last Updated March 4, 2021 3:56 PM

When Intercontinental Exchange (ICE), the owner of the New York Stock Exchange (NYSE), announced that it was launching a bitcoin market, the move was met with enthusiasm by many within the cryptocurrency industry as a vindication of the legitimacy of the asset class. However, others, including some Wall Street veterans, warned that the “financialization” of bitcoin could introduce elements of the fractional reserve banking system into the cryptocurrency market.

Bakkt Says It Won’t Offer Leveraged Bitcoin Trading

Now, the head of Bakkt — ICE’s bitcoin market — is seeking to assuage some of those concerns. Writing in a blog post, Bakkt CEO Kelly Loeffler said that one of the platform’s key missions is to promote “efficient price discovery,” which means that the firm does not intend to allow clients to trade on margin or otherwise put a “paper claim on a real asset.”

She wrote :

“A critical element to price discovery is physical delivery. Specifically, with our solution, the buying and selling of Bitcoin is fully collateralized or pre-funded. As such, our new daily Bitcoin contract will not be traded on margin, use leverage, or serve to create a paper claim on a real asset. This supports market integrity and differentiates our effort from existing futures and crypto exchanges which allow for margin, leverage and cash settlement. Coupled with a secure, regulated warehouse solution, you can begin to see how this market infrastructure can help more institutions and consumers participate in the asset class.”

That bitcoin contract, as CCN.com reported, will be a one-day futures contract that is settled in BTC rather than cash. The reason it is structured as a one-day futures contract rather than a conventional BTC/USD trading pair is that futures contracts are regulated by the Commodity Futures Trading Commission (CFTC) rather than the Securities and Exchange Commission (SEC). Per CFTC guidelines, Bakkt must provide a “warehouse” where the physical assets undergirding the products are stored.

Will ICE Secretly Offer ‘Hidden Leverage?’

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Caitlin Long, who spent more than two decades on Wall Street and co-founded the Wyoming Blockchain Coalition, said that she was partially-pleased by Loeffler’s post, which answered some questions that she and others had been asking about ICE’s handling of bitcoin, specifically about explicit leverage and margin trading.

However, she noted  that the post was silent on what she calls “hidden leverage ,” through which institutions commingle and rehypothecate  different types of collateral (bitcoins, physical USD, securities, etc.), which involves substituting them for one another on their balance sheet as well as allow multiple parties to declare ownership of the same asset on their financial statements.

These practices, Long says, are standard on Wall Street and could serve to taint bitcoin’s fixed currency supply with elements of the wider financial system, which relies on fractional-reserve banking.

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