TeraExchange, a swap executive facility (SEF) registered with the US Commodity Futures Trading Commission (CFTC), announced today the launch of the first regulated platform for Bitcoin derivatives and a spot Bitcoin price index. The trading of USD/Bitcoin swaps will be subject to the rules and regulations of the Summit, New Jersey-based SEF and the CFTC.
TeraExchange said in a news release that the Bitcoin derivative and Tera Bitcoin Price Index were developed to meet the increasing demand of international merchants, payment processors, miners, and hedge funds for an efficient hedging tool.
The company said the demand for regulated Bitcoin derivatives trading and hedging has risen considerably following the announcement this past March of the first unregulated USD/Bitcoin swap, structured by a TeraExchange affiliate. The Wall Street Journal reports that this entailed a swap contract for a Bitcoin-based purchase of a rare Stradivarius violin. TeraExchange said it has worked with the CFTC for more than six months to make sure the swap and index now meet all regulation requirements.
The platform allows investors to list and trade dollar-denominated Bitcoin currency swaps. As reported by the Wall Street Journal, “such swaps, which in the case of TeraExchange’s bitcoin swaps will range from one day to two-year maturities, are bilateral contracts under which one counterparty must make a payment to the other upon the swap’s expiry, depending on whether the price of the underlying asset exceeds or stays below an agreed-upon threshold.” The newspaper notes TeraExchange’s Bitcoin swap contracts themselves are still pending CFTC approval.
Since 2010, CFTC’s scope has included regulating trading in derivatives called swaps, in addition to futures, and stipulates that routinely used swaps must be transacted over SEFs, reports the Wall Street Journal.
TeraExchange CEO and co-founder Christian Martin told the newspaper that regulated derivatives trading would over time help mitigate some of the extreme volatility for which Bitcoin is known and which serves as an obstacle to Bitcoin’s widespread adoption as a currency. Martin said that “generally speaking, the products that trade without a hedging instrument tend to be much more volatile because there is no way to hedge risk without going back to the underlying product.”
Martin told the newspaper that key to garnering CFTC approval was the creation of a proprietary benchmark Bitcoin index. As stated in the press release, the Tera Bitcoin Price Index uses a dynamic algorithm that compiles and filters data on a real-time basis from a variety of widely used global Bitcoin exchanges. Exchanges wanting to be included in the index must execute and maintain an information sharing agreement with TeraExchange, as per CFTC rules. TeraExchange serves as the index administrator and calculation agent.
One facet of the arrangement that might have smoothed the regulatory process is that fact that all contracts are written, quoted, and settled in dollars, meaning that neither TeraExchange nor investors “deliver or touch the underlying Bitcoin,” said Martin to the Wall Street Journal. The newspaper notes that Bitcoin exchanges on which investors directly exchange Bitcoin for dollars have had a difficult time receiving regulatory approval in the States, partly because they are typically designated as money transmitters and have to get specific licenses from many of the states in which they operate. Such a process can often be lengthy.
Martin told the Wall Street Journal that the target market for his company’s Bitcoin derivatives range from existing players in underlying Bitcoin market who envision a need to hedge their exposure – whether they be investors or Bitcoin payment processors – to newcomers who would rather use this platform to gain “synthetic exposure” to Bitcoin than own it directly.
Image via press release