The world’s first bitcoin swap could be just days away, provided Tera Group Inc has its way.
The startup derivatives exchange claims to have created the first bitcoin swap and hopes the new derivative will allow financial institutions to hedge the volatility of bitcoin.
Tera says it has already constructed the terms for a multi-million dollar swap between two US institutions which would hedge the value of bitcoin against the US dollar.
In layman’s terms, if betting on derivatives does not get your adrenaline pumping, betting on bitcoin volatility probably should.
Standard swap framework with bitcoin on top
Tera says the legal framework behind its bitcoin swap is more or less standard. Institutions can make transactions at a specified bitcoin exchange rate against any currency and hedge the exchange rate for a specified period of time. The initial transaction agreement is a 25-day affair.
However, it also points out that this type of transaction is not regulated, hence its availability will be privately arranged and over the counter. Tera is seeking permission from the Commodity Futures Trading Commission (CFTC) to offer a similar swap instrument on a regulated marketplace.
Said Tera President and co-founder Leonard T. Nuara:
“The infrastructure and regulatory protocols already exist in the conventional OTC swaps markets to support these hedging instruments. […] Regulatory approval is crucial to the long-term growth of the market utilizing bitcoin.”
If Tera gets the green light, it plans to offer bitcoin swaps on TeraExchange, which is a CFTC regulated swap execution facility.
More questions than answers
The problem with Tera’s plans is that regulatory approval might not be forthcoming. For the time being, it is not clear whether the CFTC even has authority over digital currencies and fancy financial products built on top of them.
Tera says it has provided the CFTC with information about its swap framework and that it is actively seeking approval, but won’t make much of a difference if the CFTC concludes it has nothing to do with digital currencies. If, on the other hand, it decides to treat bitcoin and other digital currencies like commodities, Tera might get regulatory approval after all.
Tera CEO and co-founder Christian Martin argues bitcoin swaps could be an “inflection point” in the evolution of cryptocurrencies.
“There is incredible momentum and support behind this alternative global currency. But even with all this excitement it is critical that the market participants have tools at their disposal to hedge their price risk.”
In theory, a bitcoin swap would make a lot of sense, as it would allow reluctant investors to employ an effective hedge when dealing with bitcoin.
For example, merchants could protect their interests against a sudden drop in bitcoin value, allowing them to accept bitcoin payments and hold bitcoins without many of the risks associated with volatility.
A swap would allow them to take volatility out of the equation, while speculators could effectively buy the risk and reap the potential windfall, or take a hit of the price goes down.
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