In an exclusive interview for Cryptonews Bakkt Holdings CEO Gavin Micheal blasts the damage wrought by FTX and says it is now incumbent on the industry to rebuild trust. He thinks highly regulated Bakkt will be one of the crypto winter winners.
Bakkt is among the few publicly listed crypto companies in the U.S. and Michael has been in post as its CEO and President since January 2021.
Owned by Intercontinental Exchange Bakkt has, perhaps, an unrivalled pedigree among crypto firms – ICE is also the owner of the New York Stock Exchange.
It is this provenance that stands Bakkt in very high regard against the background of the collapse of FTX and the continuing revelations about the absence of basic controls and systems deployed in the running of the now collapsed crypto exchange.
In fact, indirectly, Bakkt could be said to be a beneficiary of the FTX failure, because it means the moves led by FTX’s Sam Bankman-Fried to upend the way futures trading is conducted, which threatened the role of intermediaries such as ICE, is now dead in the water.
However, Bakkt has not escaped the impact of the drawdown in the valuation of crypto stocks.
According to Bloomberg, ICE has written down the value of its Bakkt holding from $1.5 billion to $400 million. Bakkt stock is down more than 80% year to date.
Bakkt will be one of the crypto survivors
Bakkt’s mission is to connect the digital economy and in furtherance of that aim it announced at the beginning of November its intention to acquire Apex Crypto for $200 million in cash and stock.
The acquisition is not expected to complete until some time in 2023, but this example of industry consolidation does suggest that Bakkt is highly likely to be one of the survivors of the Crypto Winter, not one of its victims.
With its custody, payments and loyalty program services, Bakkt is something of a pioneer in the space. And combined with its strongly compliant approach to regulation, it looks like the company is well positioned for the upturn.
Also, acquiring Apex Crypto, which specializes in implementing crypto systems for fintechs and other financial institutions, sounds like a smart move by Bakkt, even if in the near term implementing crypto features may not be a top priority for many fintechs post FTX.
As you would expect Michael thinks there is a future for crypto and that the underlying technological offering is robust, even if some market actors are not.
The key to the future is building trust, says Michael in the interview below.
What’s the US regulatory and perhaps the global environment going to look like post FTX?
Great question. Look, I think there’s no doubt that everything we see highlights the need for better oversight of the retail focused platforms.
So we look at things like controls, policies, procedures around the customers’ funds leading to change.
And part of that involves greater transparency, so we know what a business is doing with the funds that they receive! I think we’ll see this evolution now, which I think is something that we all agree on.
A future where we see great regulation is a great thing for the marketplace and for consumers.
I think that regulatory clarity is what the market is looking for in terms of broader adoption of crypto infrastructure.
So I think this serves as a catalyst to drive that, and that’s a very good thing.
As you may know Bakkt was founded by the Intercontinental Exchange, so from the outset our approach has been a more mature one, where we see a prioritization on regulation and compliance.
I think when we look at one of the things that need to change, it is making sure that from a regulatory perspective, we’re seeing a regulatory framework develop. And that doesn’t matter if it’s multiple agencies or not. But we need to make sure that we understand the role of each of the agencies in oversight.
And, when I think about here in the U.S., that, means making sure that there is an understanding of how disclosures operate, how it is that we operate in an environment where we can see the right level of trust and transparency, so we have fair market discovery, fair price transparency, and ensure that there’s clarity.
We also want to be able to see the right separation of roles and functions. For example, we’re a regulated custodian that is run as a Trust. That’s separated from areas such as trade executions so that we have no conflicts of interests between those functions.
We treat our customers’ funds as their funds. There’s no lending or leveraging or any of that.
We don’t do things like taking care of business investment through trust funds. We have legal walls between our different activities – it’s that level of transparency that is going to be central for the industry as a whole in how we move forward.
We set up our company with the guiding principles of compliance measures, controls, and rigorous risk management firmly in place. We want to make sure that we see that end to end regulatory clarity coming forward.
Do you see where we are now being an inflection point at the same level perhaps as the dotcom bubble bursting back in 2000? So there will be the strong that survive and hopefully it’ll flush out the weaker players and the out and out bad actors.
I think that’s a good analogy. I mean, it’s the market is facing a lot of problems, but it is due to a failure of controls and inappropriate risks, not of the technology. Bitcoin and crypto is still a nascent value.
And in many ways the failures that we’ve seen, in terms of clearing up the mess, actually show that the tech works when you think about blockchains leaving an audit trail that regulators will be able to use.
Beyond the present disruption, we believe that the downturn will provide opportunities for companies like us to make strategic decisions on that foundation.
For a successful future. We have to think about how to squeeze out the bad actors.
This is not a situation where we see a failure around the technology. We’ve seen the technology doing what it should do. But just because these assets are decentralized doesn’t mean that they’re immune to counterparty risk, to any of the contagion or any of the broader challenges that we see in a centralized market structure.
Do you see anything cultural, perhaps, about the way that the industry has developed? I’m thinking here about the approach of VCs to their target investments.
Why didn’t these VCs go out to Bahamas first, maybe, and talk to the team, see how they work, just some of the basic stuff a mutual fund might do before they invest in a firm – go down to the factory, see how it actually works. Maybe there is just too much trust in human beings.
So everyone needs to do their homework. I think it’s also important that the level of scrutiny is there. From our point of view, we make sure non-disclosure is always fully transparent.
We respond to questions all the time that review our policies and procedures. And it’s that level of diligence that we go through when signing up some of our partners. So yes, we would expect everyone in the industry to follow through. I think it’s somewhat surprising that this doesn’t seem to have been the case.
Indeed. Okay, what about other areas of crypto?
We used to feel that FTX was stable and strong. What about stablecoins? Is that going to be an area of strength or an area of possible huge risk for the industry if a de-peg happens to a major stablecoin? Do you see those sorts of threats ahead?
Well they’ve become popular over the last few years, but there’s multiple types of stablecoins. They have had a positive impact, especially the ones that tend to be the most widely used.
And they’re definitely a useful way to shift value on a blockchain, as you can see with a very popular stablecoin issued by Circle, which has a 1-to-1 ratio of US dollars in the bank account.
Of course the risk is around how well reserved a stablecoin is. And we saw how everything can deteriorate very quickly if the reserve is not big enough and people start leveraging against the asset without the underlying collateral being available.
So again, I think it’s important that we see the right level of regulation – we see the confirmation of dollars backing each token as a key to the framework that we need to achieve this.
I think there’s a plus side as they certainly provide value and there’s still a use case. We just need to make sure that they are used for their original use cases and as such bring the right value to the market. It is when we see the emergence of these heavily leveraged environments that we start to see issues.
From what you’ve just said, I get the feeling that perhaps, between Tether and Circle’s USDC, Tether is not seen as the stronger of the two.
Tether has been very reticent to get a full audit done. It’s been going on for years. And at this point in time, I’d imagine people are a bit nervous as to why they won’t get a proper audit done. Is that problematic for the industry? It does seem to be a very strange way of running their business. Surely it should be in Tether’s interest to get an audit done?
Sure, but that’s really for the issuers to work through. Looking at things as a whole, it all comes back to transparency and disclosure. Because here at Bakkt we’ve always taken a strongly compliant approach. That work has led to us being in a very strong position with respect to disclosures, and the policies and procedures that we follow.
We are regulated at the highest levels that are available. And as we continue to see the regulatory environment evolve, we will always follow the path of highest compliance, whether we reach that through the state-based approach or federally.
For example, we have built license deals with 50 states, but when we see more regs coming out from federal agencies, that will be welcome.
Vitalik Buterin was commenting about FTX recently and he observed that DeFi protocols have held up well. They’ve functioned as they should do. How do you feel about DeFi – what is the balance of risk and opportunity there?
I know you guys are not directly involved so much in DeFi perhaps, but do you see DeFi as a success story of crypto? It’s maybe shown that crypto-led financial innovation works, but it has weak points such as who’s doing the custody for some of these coins.
When we look at it, I think overall from a technology point of view, it’s fair to say that there are still some technical issues which make DeFi unlikely to scale as well as we would like.
But I think it’s also one area where regulation may well hinder the expansion. Regulators have made it clear that they’re looking to prosecute DeFi projects for non-compliance.
Then there is ease of use. DeFi and DEXs are behind CEXs in that regard. Despite all the issues around trust we see now, in many ways CEXs advantage was that they made the buying and selling of crypto extremely easy.
Everything goes back to trust. As an industry we need to regain the trust of consumers. As far as DeFi goes, I’m going to be looking for where consumers can find a great experience and a great experience they can trust. I’m not sure DEXs are really the solution.
So the technology is nice but very hard to use. Difficult to see how it’s going to go mass. Well, that brings us to your products, I guess, because you’ve definitely been trailblazers in a number of areas, such as your loyalty program initiatives.
There has been a lot of talk about this over the past couple of years, and you’ve been making progress, as I can see on your website – the Apple program caught my attention, and your work in payments. Can you say a little about adoption progress in those product segments?
The goal of the company is to connect the digital economy. And so we look to provide this mixture of tools and experiences so that our partners can innovate around the space.
We are constantly exploring with our crypto partners. Payments, for example, is a nascent area that we can say has limited appeal right now, with not a lot of crypto spending going on.
But we are using this period as a basis for us to understand what other things we can introduce around how payments are changing. So look at the work that we’ve done with pay with points, the redemption of rewards to buy products, or, for example, being able to get paid in crypto or earn crypto rewards.
We’ve been taking the loyalty proposition and expanding it from just spending points into earning crypto in your everyday purchases and then using these new acquisition mechanisms as a way to stimulate payment activities on both sides of the transaction, as we think about merchants too.
It’s important that we continue to innovate in this area and use the rails that we’ve built to be able to show new ways of interacting with the digital economy.
Bakkt is providing market level infrastructure that gets integrated into our partners environment so that consumers can interact with this crypto economy through their brands and through the outlets that they know and trust.
We recently announced the definitive agreement to acquire Apex Crypto as we push into the fintech solutions arena. We found with Apex that in some ways it had a very similar approach and the acquisition gives us strong scale.
But in a differentiated segment, like when we think about fintechs, or trading platforms, then Apex complements the work that we’re doing to embed capabilities in the more traditional finance organizations, and bringing together this broad spectrum and using those features to innovate around seamless experiences for merchants or when integrating loyalty programs and crypto solutions for financial institutions. All this really starts to set us apart.
So do you work with Web3 leaders like NFT marketplaces for example or gaming products and such like? Are you providing back office functionality to these new emerging projects?
We’re acquiring an NFT marketplace platform as part of the Apex Crypto acquisition. NFT marketplaces act as an easy onboarding experience for consumers. With this new capability, we plan to look at the sector in more detail.
What differentiates the experience that we have is that it allows you to be able to buy and sell things using fiat-based purchasing. So we take care of taking the fiat, translating into the right crypto to allow the purchase to happen. Again, simplifying the experience by using a phone and providing options on the platform.
On gaming and the metaverse, I think it’s fair to say we’re watching it closely. We’re looking at our capabilities and analyzing when and how this metaverse paradigm makes sense. Timing is important.
Last question, which you might not be allowed to answer – where do you see the bitcoin and ETH price in six months?
Our role is to bring crypto utility to the economy. The growth is about providing that utility – whether that’s the ability to access it, whether it’s the ability to pay with it, whether it’s the ability to earn it.
It’s really bringing utility to the crypto space that matters. And so our goal and our vision is connecting the digital economy; to continue to drive this utility.
And I think that’s what drives sustainability of the environment, and that’s what drives utilization. Whatever happens with prices flows from that starting point.