Tera Group said it has constructed the first bitcoin swap agreement for two commercial entities using the same protocols and standardization found in the derivatives marketplace.
The move is a landmark event for the global bitcoin community that is looking for ways to hedge the risk of the fluctuations in the value of bitcoin.
Terra devised the terms for a multi-million dollar swap between two U.S. institutions, which needed to hedge the value of bitcoin against U.S. dollars. âThink of a farmer hedging their crop. This is a true commercial producer of a good that was to receive bitcoin 25-day forwards,â explained Tera CEO and co-founder Christian Martin. âThey didnât want the 25-days of risk, so they swapped out their risk,â said Martin, noting that the parties were seeking to hedge the exchange rate for 25 days.
Though Tera was not able to identify the two commercial entities, Martin said they wanted the swap trade to have all the regulatory sturdiness of a SEF trade. âWe brought over transparency, standardization, and weâll report it to an SDR,â said Martin, referring to a swap data repository under the Dodd Frank Act. If the SDR doesnât want it, Tera plans to report the bitcoin swap transaction to the Commodity Futures Trading Commission.
Although this type of transaction is unregulated, Tera is actively seeking permission from the CFTC to offer a similar swap instrument for trading on a regulated marketplace.
Terra operates TeraExchange, a U.S.-based swap execution facility (SEF), which is regulated by the CFTC, along with Tera Advanced Technologies, LLC. âWhile our exchange has been regulated, weâve been talking to the CFTC about this for many weeks,â said Martin. âWhen the agency came to the conclusion that they werenât able to oversee the trade as a regulatory body, we ported all of our regulatory protocols to the transaction as well as created the documentation by which it happens,â said Martin.
While the bitcoin community was shaken by the bankruptcy of Mt. Gox, one of the worldâs largest bitcoin exchanges, which had security flaws, Terra said that a lot of momentum and support is behind the alternative global currency. âI will say that the story ark of bitcoin right now is very similar of any new currency or form of commerce that is deposited into the ecosystem of commerce. It starts to need commercial hedging tools. And the more transparency and standardization and hedging tools that exists, then the underlying currency starts to get acceptance and credibility,â he said.
Martin emphasized that Teraâs goal is to have the bitcoin swap traded in a regulated SEF. âWeâre working with the regulators on that,â he said.