(Kitco News) - As things start to heat up in the crypto market, one of the driving forces for the bullishness of late is the institutional adoption of Bitcoin, which many analysts say is now just weeks away from getting its first U.S.-listed spot exchange-traded fund.
While optimism is high and institutions are looking for a way to engage with the market, finding the right formula for success remains a challenge, even for established financial firms with years of experience and a well-funded treasury.
One firm that has reformulated its approach to the crypto market is Bakkt, a publicly traded company serving businesses and institutions in the crypto industry by offering institutional custody services along with retail trading. Bakkt was launched by the Intercontinental Exchange (ICE) in 2018 and has gone through several evolutions to find its niche and provide value within the crypto ecosystem.
According to Daniel O’Prey, chief product officer at Bakkt, the firm has been reinvesting in the institutional side of things recently amid the spot BTC ETF speculation as a way to prepare for a higher level of institutional adoption.
During an interview with Kitco Crypto, O’Prey said the firm is working to expand both its U.S. and international operations.
“We acquired Apex Crypto earlier this year from Apex Financial Services as a B2B2C retail trading platform and have integrated that into the company,” he said. “We’re now in a strong position on the retail trading side, so we’re starting to heavily reinvest in growing the institutional side of our business, given the ICE heritage and where we came from when we started five years ago.”
He said the primary areas of focus for international expansion are growing both their retail and institutional trading business, “with custody being the linchpin.”
Addressing the shift in strategy that has occurred at Bakkt since it first launched, O’Prey said, “We were a bit too early for what we had planned. The institutional market, the plumbing, the infrastructure, the comfort with cryptocurrency generally within bank FCMs and institutions at that time wasn’t there yet and didn’t come as quickly as the market had hoped for.”
Early on, Bakkt offered physically delivered futures. “People preferred the cash and not touching the exposure,” O’Prey said.
“It was still a very different time because a lot of institutions didn't even want to talk crypto at that point. That has changed big time over the last couple of years. Now, we’ve doubled down on being a platform, being an infrastructure for the B2B2C approach, and servicing multiple companies who ultimately deal with end customers.”
“We are working on being a supporting horizontal infrastructure behind the scenes and powering a lot of the larger companies rather than being vertically integrated end to end,” he said.
These changes are in line with the changes that are occurring in the crypto market structure, which is “starting to look a little more like traditional financial markets with the separation of custody and exchange and broker-dealers,” he added. “The crypto market structure historically was pretty combined and vertically integrated, and we've seen the issues that result for this design with exchanges like FTX and others.”
“So that commitment to being a platform that provides the plumbing behind the scenes and separating different aspects to allow others to focus on the exchange and consumer side has been a win in multiple regards,” he said.
When asked if he thought that institutions would be the driving force behind this bull market, O’Prey said that’s “generally true.”
“We've got to focus where the market is today, but also be positioned to skate where the puck is going,” he said. “We’ve seen things picking up in the retail market, in the last quarter in particular, driven by the Bitcoin price and the speculation there. And there’s still a lot of room for growth in that regard, particularly since we’ve been so U.S.-focused. The rest of the world is a huge market for us, so there’s a lot of room for growth in the overall retail space, particularly as the trust starts to get restored after a lot of the bad headlines and clearing out of some of the bad actors. We see tremendous opportunity for growth both internationally and domestically.”
“But this wave that is starting to pick up is the return of institutions, the comfort level that they're getting, and what things like a spot ETF can unlock for players who otherwise wouldn't have access to the market through a regulated, highly liquid, publicly traded security vehicle,” he said. “It means a lot of different types of players will be able to bring a lot more capital into the space now that the infrastructure is mature and ready for institutions to meaningfully adopt. That is really going to ramp up over the next year.”
While many analysts are convinced that the SEC will approve a spot BTC ETF in early January, O’Prey was more reserved in his outlook, saying, “Predictions are tricky, but I think it's going to happen at some point next year.”
“The SEC has come out with more recent guidance on how they would like the redemption process to work, so I think it’s likely to be next year, but picking a month and date feels too hard at this point,” he said. “But when it does launch, I think it's going to be super strong for the market and for Bakkt.”
As for whether the event will be a ‘buy the rumor, sell the news’ event, O’Prey said that in the months following a spot ETF launch “there’s likely to be a huge spike,” and “people will be taking profits,” but in the medium to long term, he is confident that “this is going to be positive overall.”
He also said the halving is a “known and predicted” development that could be a “sell the news” event. “I'm sure a lot of volatility will occur from just the amount of capital and the halving finally happening, but medium term, it's going to almost certainly lead to growth and more demand.”
O’Prey said that 2024 could see an influx of new users and wallets thanks to the launch of an ETF and greater regulatory clarity.
“I think with the regulatory clarity that's around Bitcoin, in particular, relative to the rest of the market and the spot ETFs – that’s going to cause quite a shift in terms of the ability for people to participate in Bitcoin, specifically,” he said. “It will also give people the confidence that there’s long-term significant growth to be had here and the number of hodlers will grow year on year. The ETF will attract a lot of new people into the space, but it remains to be seen whether they stay solely within the ETF sphere, or if that serves as a gateway or entry point for them to go and purchase spot Bitcoin directly and move on from there.”
Layer-one battle
Briefly touching on the topic of the return of the “Ethereum killers” after the price breakout for tokens like Solana and Avalanche, O’Prey said this type of talk has been a recurring theme since Ethereum launched, but it won’t be that easy for any competitor to overtake the top smart contract platform.
“People often look at products and how quickly some products can displace other products, but networks are a different game altogether,” he said. “The network effect, the institutional and enterprise trust that exists for Ethereum over others, and the dominance in activity that's on the network shows that it will not be replaced anytime soon. Traction and momentum are very hard to displace.”
That said, he noted that “Ethereum is being competed with on multiple sides.”
”Bitcoin is winning the sound money, payments, and digital gold argument, while on the other side, multiple competitors that are faster, cheaper, and maybe less decentralized alternatives are rising,” he said. “But looking at the top 10 over the last 10 years, Bitcoin stayed number one forever, Ethereum has been number two pretty much forever, and the rest of the names come and go to some extent. So I would bet on Ethereum outlasting its competitors.”
AI and blockchain
When asked about how the rising trends of artificial intelligence (AI) and blockchain technology adoption could play off each other, O’Prey said his “gut reaction is that when two buzzy things go together,” his “skeptical alerts go up.”
“AI and blockchain have primarily been in competition, especially when it comes to talent, mind share, and investment,” he said. “A lot of the crypto VCs and crypto market participants moved across to AI once it became the trending topic and the AI market boom started. But until we’ve got a proven use case that the mainstream uses on a day-to-day basis, the confluence of those two concepts becoming more meaningful is still a ways off.”
Changes for crypto in 2024 and beyond
O’Prey said that in the years ahead, the crypto landscape will shift towards a more global perspective rather than the focus on developments in the U.S.
“There will be interesting shifts in terms of global influence outside of the U.S.,” he said. “Everyone is seeing the opportunity to compete to be a leader in that space, given the reluctance by the U.S. government to lead the way, make it easy for businesses to operate here, or even provide clear regulatory guidance.”
“There will be a lot of competition globally around who can be the Hong Kong or Singapore or New York or London of crypto,” he said. “But ultimately, I think the U.S. still has a lot of influence on how regulations develop externally, particularly when it comes to securities regulations, as global regulators take the lead from the SEC and view the regulator as the gold standard when it comes to defining those pieces.”
“So there’s a lot still to be seen as to where the securities part of the regulatory landscape ends up landing in the U.S. after some curveballs and a difference in trajectory,” he said. “I still think the U.S. will ultimately have a major role to play in setting those standards globally, but in the meantime, for non-securities activities, the rest of the world has a great opportunity to drive that forward.”
Rising institutional interest
On the topic of institutional firms showing interest in the services that Bakkt offers, O’Prey said the company has been “seeing a lot more demand across the board in terms of businesses.”
He noted that the struggles by custody providers Prime Trust and Fortress Trust pushed “a lot of the entities that were using those firms to move over to Bakkt,” while the firm has been more conservative in their approach to attracting institutional interest.
“It's safe to say we are one of the slower, more conservative players in the space, deliberately so, which is a strategy and part of our heritage,” he said. “When I first joined the firm a couple of years ago, people didn’t quite value the approach that we were taking very much. But after the events that transpired over the past two years, people have come to realize that all the stuff we focus on – the importance of compliance and being responsible and focusing on security and compliance first and foremost – has paid off in terms of positioning ourselves now that there's a lot less competition due to some bad practices and institutional players are entering the space.”
He said the bulk of demand relates to the custody services offered by Bakkt. “If you can't secure your assets, if you can't trust your custodian, then it's very difficult for any serious institutional player.”
Other areas of interest include adding Bitcoin and crypto to corporate treasuries, which includes custody services as well as being able to access liquidity, he said. “As institutions purchase more crypto, they also need the ability to sell. Bakkt is fairly unique in that regard since we have Apex Crypto on the liquidity side and money transmitter licenses in every state – we’ve been a registered money services business and one-stop shop for institutional needs on that front.”
O’Prey said that tokenization is also a “hot topic.” While he acknowledged that the theme of tokenization has trended during several bull market cycles, things are unfolding differently this time around as “more real life, real-world examples are starting to pick up.” Because of this, Bakkt has positioned itself to serve that industry.
“We're not going to be involved in the tokenization directly,” he said. Bakkt will instead serve “as a custodian and as a liquidity provider, facilitating distribution on the retail trading side.”
“I think the tokenization of real-world assets will be a solid but slowly developing sector,” he said. “I still think there's a lot to be solved and a lot of regulatory pieces that need to be in place. Challenges remain with making those types of assets more liquid, more composable, more atomic, and with fewer technology problems. Those pieces, along with the legal and regulatory aspects, tend to take a long time to pan out.”
Likening the current stage of development of the crypto ecosystem to the dot com boom and bust, O’Prey said “No one talks about dot com companies anymore. We talk about e-commerce or social media companies and what these companies do. The fact that they are based on the internet is no longer a remarkable thing to say.”
“And I feel in some ways that the crypto space is similar,” he said. “People talk about crypto companies and the crypto industry as one big thing, when it is hundreds of different industries all doing different things like stablecoins, real-world assets, Bitcoin, lightning payments – these are all totally different subsections of the industry and tend to get lumped together under the dot com-esque crypto label.”
“One prediction I have over the next year is that we will start to make a bit more of a distinction between the different areas within the industry and less crudely lump everything together as a single sector,” he said.
O’Prey said he hopes the ecosystem can move past the, “What’s the new thing I can make, with the most upside” mentality and “focus on delivering value on the more mature projects that provide value today.”
CBDCs
On the topic of central bank digital currencies (CBDCs), O’Prey said he doesn’t see their launch as a catalyst or stepping stone for blockchain adoption because governments will want to exert a high level of control, which is the opposite of decentralization.
“CBDCs is a very loose and vague term with a lot of different implementation details, and we're not going to see a USDC-like CBDC, which is a permissionless bearer instrument on an open network,” he said. “Typically, governments will want to take a very different approach where they have much more control, oversight, and surveillance on how these are used. It's going to be a very different, much more controlled framework.”
O’Prey also said that while there will be difficulties with the launch of a retail digital dollar, “there’s a lot of value and opportunity on the wholesale commercial side for the boring behind-the-scenes settlement components where the wCBDC on the same platform as other assets could provide a lot of additional value and stability to the market.”
He added that one surprising development has been the launch of U.S. Treasuries on-chain.
“It’s been an interesting and surprising development with the DeFi world getting access to the TradFi world assets and yields because previously, it was always assumed it was going to be the other way, with TradFi wanting access to DeFi yields,” he said. “Now, there are people finding ways to bring these traditional assets into the DeFi ecosystem. So I think there will be, bridges, wrapped versions, and baskets or CFD-like instruments that will use oracles to tie themselves to these other forms of real-world assets. But I don’t see those things being directly issued and living natively in those ecosystems just yet.”
ETFs and blockchain adoption in 2024
As the conversation wound to a close, O’Prey circled back to the topic of ETFs, and whether an Ether ETF will be approved once a Bitcoin ETF launches.
“I suspect that if a BTC ETF is approved, it won’t be just one or two that are approved, it’s more in the ‘all or most or none’ category now,” he said. “Once one gets approved, the floodgates will open, and that makes the path to others receiving approval easier.”
“Bitcoin has a fairly unique position in the market as it is one of the very few coins that regulators all agree is a commodity and is decentralized,” he said. “It has a unique status, but Ether is close behind, so there’s a possibility that once a BTC ETF is approved, an Ether one will follow shortly. I don’t think we will see any other spot ETFs beyond that, at least not for the foreseeable future.”
O’Prey also said he looks forward to seeing Bitcoin integrated into the behind-the-scenes infrastructure for systems that will make it so the average person is benefiting from the technology, even if they are unaware they are using it.
“I'm particularly interested in how we mainstream this to utility and move beyond just digital gold or speculation use cases,” he said. “Ways where we break out of just Bitcoiners and DeFi people who are living in that world already and get into the mainstream and really fulfill the promise of what this technology was intended to do and impact normal people's lives.”
He gave the example of Light Spark, which enables Bakkt and several other companies to use Bitcoin and the lightning network “completely under the hood to move traditional fiat currencies around.”
“That use case and application excites me because most people want to pay in dollars or want to do a fiat-to-fiat remittance, and they shouldn’t have to touch crypto in those cases,” he said. “But using it as a rail behind the scenes provides greater efficiency and more value without them even knowing that crypto is being utilized. I think that is a great proof-point of the technology being successful and adopted, not just because of the mainstream portion, but because they're doing it for value sake.”
“Just moving money normally as they would in a far more efficient way is a huge market, a huge opportunity, and a huge driver of demand and usage on the payments infrastructure side,” he said.
“The payments system as it exists today is a patchwork of systems that were built before the internet, so it is layers upon layers of older siloed technology,” he concluded. “Now, we have an internet native bearer instrument that allows you to buy and send instantly or sell with very little slippage because it's so liquid and traded across the world with different currency players. It can significantly reduce the friction, cost, and time of payments behind the scenes.”
