This is the third in a series of articles sharing my thoughts about the entry of traditional finance into cryptocurrency markets. Follow me on Medium to catch each new post.
Rumors are swirling that Bakkt will pause its pursuit of U.S. government approval while it applies for a state-level cryptocurrency license.
Some say this means Bakkt is dead. I doubt it, but it doesn’t matter. As I said before, Bakkt Will Not Save Cryptocurrency (And You Wouldn’t Want it to). Cryptocurrency is developing slowly, naturally, and organically without Bakkt.
Bakkt won’t save cryptocurrency. It will save Wall Street.
How will Bakkt save Wall Street?
Bakkt is interesting because it allows financial professionals to buy, sell, and trade cryptocurrency using an enterprise-grade trading infrastructure tailored for the unique demands of crypto traders. It plans to be like Coinbase on steroids, with derivatives, investment services, and the sophisticated tools large investors need to properly manage funds. Most importantly, Bakkt will assume all the regulatory and operational risk of buying and selling cryptocurrencies, including custody, security, insurance, and clearing for all transactions.
Basically, Bakkt enables institutions and large investors to “safely” transact with clear rules, regulations, and expectations. At some point, it will offer merchant solutions like credit cards and payment processing. Bakkt is building its entire marketplace from the ground up with one goal: dominate the cryptocurrency markets, just like its sister company the New York Stock Exchange dominates the equity markets.
If you’ve used cryptocurrency, you’ll realize Bakkt is completely unnecessary and redundant. You need Wall Street when you buy a stock, clear a trade, purchase a CDO, or deal in derivatives and other financial products. You need a brokerage. You need a dealer. You need an investment company. You need somebody on the inside.
Downloading a bitcoin wallet? Anybody can do that. Signing up for Coinbase or Gemini? Easy. If you can learn how to use a checkbook, you can learn how to use a bitcoin wallet. If you can learn how to order food online, you can learn how to register for a cryptocurrency exchange. You don’t need Wall Street.
That’s the whole point of cryptocurrency: anybody can use it.
Is Wall Street important? Yes, absolutely. It plays a vital role in the world’s economy. It collects small amounts of money from many people and puts that money into big funds. Governments, businesses, farmers, and banks use those funds to grow, make money, and create jobs. Investors get a small reward for letting Wall Street do this.
In return, Wall Street takes a small profit and makes sure everybody gets a fair deal. Clearinghouses, settlement companies, recordkeepers, compliance professionals, traders, brokers, and many others get a cut of the action.
This is actually how Wall Street started. In 1792, U.S. equity markets were horribly disorganized and rife with fraud. A group of traders cemented an agreement in a house on Wall Street to deal only with each other using fixed, transparent fees. They set up small businesses around Wall Street to help them with settlement, clearing, certification, notarization, and all the legal and administrative activities that go along with an orderly, effective operation.
Over time, it grew into the U.S.’s financial center—and for financial institutions, a massive profit center.
Crypto kills profits
Cryptocurrency makes Wall Street’s services obsolete.
You won’t need clearinghouses once assets get tokenized and recorded on a blockchain. You won’t need broker-dealers once developers create user-friendly smart contracts and decentralized exchanges. You won’t need trading companies once distributed financial apps gain traction.
You will no longer need Wall Street for legal and administrative services like clearing, processing, certifying, and brokering your financial transactions.
You may not need Wall Street at all.
Finance as a whole could move to an AirBNB-like network of professionals and small companies connected by technology. You’re already seeing a movement in FinTech away from clunky, bureaucratic firms to more nimble competitors like Personal Capital, SoFi, Circle, and other upstarts (some of whom are subsidiaries of Wall Street firms).
Cryptocurrency will speed up that trend.
Bakkt is Wall Street’s best hope to keep its profits
Bakkt can’t change this trend, but it can get ahead of it. It can incubate the technologies that make smart contracts more useful. It can nurture the networks that connect entrepreneurs and cryptocurrency companies. It can develop the infrastructure needed to support mass adoption of cryptocurrency. It can use its image and credibility to build public faith in the legitimacy of cryptocurrency.
Consider this famous quote by Mahatma Gandhi:
Bakkt is doing an inverse-Gandhi. Rather than ignore, laugh at, or fight cryptocurrency, it’s trying to win. It’s led by some of the most well-connected, established players in the world. It’s backed by some of the biggest crypto advocates on earth. It has a bold vision and strong partnerships. It has the attention of the entire cryptocurrency market. It has the attention of the entire world.
Will it succeed?
For Wall Street’s sake, it needs to. Otherwise, Wall Street will disappear.
Mark Helfman is a cryptocurrency commentator and author of Consensusland, a book that explores a country that runs on cryptocurrency.