Tera Group said that it has made available the first bilateral swap agreement for the digital currency bitcoin. The legal framework now allows two parties to hedge price risk (volatility) of bitcoin using standardised terms.
The group, which operates the US-based swap execution facility TeraExchange, called the agreement “a landmark event for the growing bitcoin community that is looking for ways to better manage the risk of fluctuations in the value of bitcoin”.
Tera added that it has already constructed the terms for a planned multi-million dollar swap between two US institutions, which would hedge the value of bitcoin against US dollars.
“The use of a bitcoin swap is an inflection point in the evolution of crypto-currency,” said Tera chief executive (CEO) and co-founder, Christian Martin.
“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 a typical example, the swap will be used by a seller to protect itself from the price risk of bitcoin accepted in a commercial transaction.
Under the terms of the non-deliverable forward swap agreement, institutions can complete a transaction at a specified bitcoin exchange rate against any currency and hedge the exchange rate for a specified period of time. For the planned initial transaction the parties are seeking to hedge the exchange rate for 25 days.
Although this type of transaction is unregulated, Tera is seeking permission from the Commodity Futures Trading Commission (CFTC) to offer a similar swap instrument for trading on a regulated marketplace.
“The infrastructure and regulatory protocols already exist in the conventional over-the-counter [OTC] swaps markets to support these hedging instruments,” said Tera president and co-founder Leonard Nuara.
“Regulatory approval is crucial to the long-term growth of the market utilizing bitcoin.” Subject to regulatory approvals, Tera plans to make bitcoin swaps available to eligible contract participants on TeraExchange.
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