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Tera Devises the First Bitcoin Swap Agreement

Terra, the operator of a U.S.-based swap execution facility, said it's critical for bitcoin market participants to have tools to hedge their price risk against any currency.

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. “Think of a farmer hedging their crop. This is a true commercial producer of a good that was to receive bitcoin 25-day forwards,” explained Tera CEO and co-founder Christian Martin. “They didn’t want the 25-days of risk, so they swapped out their risk,” 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. “We brought over transparency, standardization, and we’ll report it to an SDR,” said Martin, referring to a swap data repository under the Dodd Frank Act. If the SDR doesn’t 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. “While our exchange has been regulated, we’ve been talking to the CFTC about this for many weeks,” said Martin. “When the agency came to the conclusion that they weren’t 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,” said Martin.

While the bitcoin community was shaken by the bankruptcy of Mt. Gox, one of the world’s largest bitcoin exchanges, which had security flaws, Terra said that a lot of momentum and support is behind the alternative global currency. “I 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,” he said.

Martin emphasized that Tera’s goal is to have the bitcoin swap traded in a regulated SEF. “We’re working with the regulators on that,” he said.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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IvySchmerken
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IvySchmerken,
User Rank: Editor at Large
3/26/2014 | 2:52:53 PM
re: Tera Devises the First Bitcoin Swap Agreement
Yesterday the IRS said that bitcoins are considered property for tax purposes, and not currency. This is the first step toward bitcoin entering the regulatory system as a mainstream financial asset. The tax on bitcoin will be based off capital gains of the changing value from the time it's acquired to the time it's spent, reports the New York Times.http://dealbook.nytimes.com/2014/03/2...
Although no one wants to pay taxes, this is probably good news for Tera's ability to create bilateral swap agreements to hedge the risk of bitcoin's fluctuations.
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