Which Coins Will Legacy Finance Adopt First?

Let’s just start off with a list-

Bakkt/Coinbase, NASDAQ/Gemini, Fidelity announcing crypto products coming by end of year, ErisX backed by TD Ameritrade to compete with Bakkt, Yale and Harvard Endowments moving into crypto.

By all accounts starting from Dec 12th when Bakkt launches, Q1-Q2 2019 will provide an influx of “structured products” that will allow Wall Street into crypto markets.

A source from Gemini was quoted saying ““We’ve got months’ worth of backlog that is waiting for the first approval. Some of the biggest institutions in the world have crypto products prepped and ready to hit the markets. We expect 2019 to be a year of accelerated adoption.”

The context behind this is that Binance out-earned NASDAQ in Q1 2018. Exchanges like Binance, Bitmex or Bitfinex have been raking in enormous profits over the past few years and legacy financial institutions are no longer willing to sit back and watch. ICE’s Bakkt, supported by Microsoft and Starbucks, is leading the charge and the rest are scrambling to catch up.

So given this landscape, which coins are most likely to offered in these products?

Let’s start with Bakkt.

Short answer: Bitcoin first, then likely Ethereum.

Intercontinental Exchange ICE invested in Coinbase back in 2015 and has been working on the Bakkt project for over a year and a half now, secretly developing the technology to trade physically backed bitcoin futures.

ICE CEO Sprecher “The big money managers won’t create digital currency funds unless they can first buy the tokens on a federally regulated exchange, and, second, store the tokens for their investors in accounts rendered super-secure by the safeguards provided overseen by federal regulators.”

The emphasis and repetition of federally regulated points to what will be Bakkt’s biggest draw, and will limit it severely in the kids of cryptoassets they will be able to provide. Bakkt is currently waiting for approval from the CFTC which it is expected to get as the regulatory body has already deemed Bitcoin a commodity and approved CME and CBOE BTC futures. So far the CFTC hasn’t said anything about any other cryptoassets but it should be kept in mind that its mission statement is less far ranging than the SEC’s which may make it likely for it to approve physically backed Ethereum futures as well given that the SEC has already deemed it not a security. The SEC states its job is to protect investors whereas the CFTC only aims to have a fair futures market.

One news source (abacusjournal.com) claims to have heard dubious rumours of initial plans of listing Ethereum and possibly a third asset along with bitcoin but pulled back. It claims that Bakkt would eventually like to list non-security tokens across its platforms which would most likely be Ethereum but there’s nothing to confirm this. This is the most likely scenario as those are the only two cryptoassets the SEC has given any kind of green light to.

Which assets would it be most likely to offer in the midterm?

Bakkt has a unique relationship with Coinbase. The parent company ICE invested in the company back in 2015 and last week Coinbase’s former Vice President and General Manger Adam White became Chief Operating Officer of Bakkt. Given his important role at Coinbase it’s likely he was instrumental in developing Coinbase’s Digital Asset Framework (https://pro.coinbase.com/static/digital-asset-framework-2017-11.pdf). This is the closest proxy you could get to what Bakkt might use but likely less strict. Coinbase has listed 0x, a coin that had an ICO which the SEC has deemed rather unclearly would have made the asset at security at the time of the ICO. So far available for trading on Coinbase are: BTC, ETH, LTC, BCH, ETC, ZRX, USDC

Coins they have publicly claimed to be considering: ADA, XLM, BAT, ZEC

Speculative additions (these have come up repeatedly different discussions, the merits of each deserve a separate post): REP, MKR, XMR, DASH, TRX, EOS, LISK, XRP

XRP – Ripple is a unique case in this instance. One of the elements that disqualifies it so far from Coinbase’s criteria is that the ownership retained is a majority stake, as well as debate over whether the network is public and decentralized. These issues may be less important to Bakkt that will look for assets that are more attractive to institutional clients where traditional blockchain community values are less important.

What about NASDAQ?

According to sources NASDAQ plans on rolling out its own cryptocurrency platform in the next 3-6 months. And it is likely that they will offer a range of products to get an edge on Bakkt beating them to the punchbowl. Four months ago they released a statement they were looking into Stellar, Litecoin and Bitcoin as potential products.

Here’s what an insider from NASDAQ had to say.

 “The conversation around listing coins has centered on how they will be classified from a regulatory standpoint. As you can imagine, our leadership is closely connected to the rumbling at the SEC and CFTC around cryptos and what is expected over the next 3-6 months. Even with the longest of time frames assumed, some guidance will be provided and I expect we will act quickly. The framework has already been laid to create a separate silo for coin listings and a robust trading apparatus. Doing the math here, look for regulatory bodies to provide guidance in Q1 of 2019, and an announcement and a ‘coin exchange’ to either be announced or launched in Q2 of 2019.”

NASDAQ has also been working with the Winklevoss twins and Gemini for some time now and has developed a close partnership starting with Gemini using their SMARTS market surveillance on the exchange. While Coinbase and other exchanges are licensed in their individual states as money transmitters, Gemini is licensed in New York as a trust company giving them a firmer regulatory status. In addition to the three coins NASDAQ claimed interest in Gemini also offers ZEC and ETH making them likely candidates for a NASDAQ suite.

The first step by NASDAQ will be to launch crypto analytics products by the end of this year. The company has already laid out plans to launch to the product and will add tools for predicting the price movements of crypto assets to its Analytics Hub. The hub, launched last year, draws on machine learning and natural language processing (NLP) capabilities to parse through social media and other alternative data sources

“Certainly NASDAQ would consider becoming a crypto exchange over time. If we do look at it and say ‘it’s time, people are ready for a more regulated market,’ for something that provides a fair experience for investors… I believe that digital currencies will continue to persist it’s just a matter of how long it will take for that space to mature.” – Nasdaq CEO Adena Friedman

Main Impediments

The most important regulatory signal that both crypto exchanges and legacy financial institutions will be looking for is a No Action Letter from the SEC. They have been very clear in their rejection letters to ETF’s that there are 3 issues which prevent them from approval. 1) removing or mitigating the potential for fraud or manipulation in Bitcoin or Bitcoin derivatives, 2) robust custody solutions, and 3) liquidity — meaning a market of sufficient size to support public trading of this asset.

There are many reasons to believe that Bakkt could solve each of these issues. A clear indicator is the focus of Bakkt’s public statements regarding “price discovery”. The Winklevoss twins ETF’s would have used Gemini’s BTC price as standard for ETF pricing which the SEC considered open to manipulation. Bakkt’s CEO is saying that they expect so much volume that it will determine an objective global Bitcoin price and given ICE’s reputation this is not an unreasonable claim. Thus the potential for and large holding individual or group of manipulating price would become minimal, custody solutions would be cleared given they claim to back all BTC claims and liquidity would be sufficient to support public trading.

Assets other than Bitcoin or Ethereum are not likely to see major institutional backing soon but these are the requirements for their ETF approval. It is most likely that Gemini coins will be first to gain institutional backing followed by those sanctioned by Coinbase. Any coin that had an ICO will likely be considered a security and will have to follow the applicable regulations unless it can be defined  as adequately decentralized as Ethereum. The SEC will not be bending the rules anytime soon when it comes to cryptocurrencies and that while bitcoin remains a commodity, all initial coin offering (ICO) tokens — or coins offered through a fundraising process — classify as securities.

“We are not going to do any violence to the traditional definition of a security that has worked for a long time. There’s no need to change the definition. A token, a digital asset, where I give you my money and you go off and make a venture, and in return for giving you my money I say ‘you can get a return’ that is a security and we can regulate that. We regulate the offering of that security and regulate the trading of that security.” –Jay Clayton, SEC

One last big name to look out for will be Circle. Remember this was the first company to be granted a Bitlicense, New York’s arduous regulatory process requiring strict AML and KYC procedures. They were heavily invested in by major investment banks including $50 million from Goldman Sachs and have been working closely with those institutions to offer financial products that are attractive to them. Circle now owns Poloniex, an SEC registered crowdfunding company named SeedInves and offer a product of 11 cryptoassets known as Circle Invest.  They have also just started announced a partnership with Coinbase known as the CENTER Consortium, to promote Circle’s stablecoin USDC. Here’s what the heads of each company in a joint statement had to say, “Coinbase and Circle share a common vision of an open global financial system built on crypto rails and blockchain infrastructure, and realizing this vision requires industry leaders to collaborate to build interoperable protocols and standards. CENTRE was formed to establish these standards and to build the technology needed for fiat to work over the open internet.” (emphasis mine)

So to sum up, which coins have the best chance to be offered as institutional products?

Bakkt will offer first BTC, then ETH (maybe).

Who is working closely with Coinbase who offers BTC, ETH, LTC, BCH, ETC, ZRX, USDC and has publicly announced is looking at ADA, XLM, BAT, ZEC.

Who is working with Circle who’s Circle Invest includes BTC, ETH, BCH, ETC, LTC, ZEC, XMR, XLM, ZRX, QTUM, EOS.

As well as NASDAQ who is working with Gemini who offers BTC, ETH, LTC, ZEC and has announced is also looking at XLM.

Also DASH it should be mentioned has evidence of moving along with its No Action Letter from the SEC and has flown to DC for meetings to further the process. And XRP of course is positioning itself as the institutional crypto with close ties to the banking world so it would be no surprise to see it in the first or second round of products offered.