The derivative allows clients to protect the value of their bitcoin
holdings by locking in a dollar value, offering an insurance against
the astronomical price swings that have plagued the
"For a merchant to take bitcoin, there wasn't until this product a
regulated way for them to put on a hedge to manage the risk ... and
now with this product they can," Christian Martin, who heads
TeraExchange, told Reuters.
Unlike conventional money, bitcoin is independent of control or
backing by any government - something its advocates like, but that
has also led to calls for more oversight and raised questions as to
how to treat it for tax purposes.
Bitcoin started circulating in 2009 and is accepted as payment by an
increasing, if small, number of companies. But huge swings in its
value, and incidents where clients lost millions of dollars have
hurt its reputation.
It took TeraExchange, which was launched in 2010, almost half a year
to get the product past the regulator, the Commodity Futures Trading
Commission, since first announcing its plans to launch the swap in
The company, one of a handful of platforms to facilitate regulated
swaps trading that sprung up after the crisis, had to construct an
index to gauge the value of bitcoin that the CFTC was satisfied
could not easily be manipulated.
The global scandal around the Libor interest rate benchmark, in
which large banks were forced to pay billions of dollars, showed how
easily traders can skew benchmarks, and then make profits through
their swaps positions.
The Tera Bitcoin Price Index was based on information from six
different exchanges, the company said, a number it expected to grow.
It had agreed with the exchanges to share information if there were
suspicious price moves.
A decision last year by the U.S. Treasury to classify exchangers of
bitcoin as money transmitters put such firms under the remit of
state regulators, and the industry has met with a fractured response
from federal regulators.
[to top of second column]
The decision by the CFTC, which regulates swaps and futures,
constitutes the first recognition by a U.S. federal regulator of a
bitcoin financial product, even if the product does not itself
involve the exchange of actual bitcoins.
The swap locks in the dollar value of a given bitcoin amount, and
the difference is settled in dollars when the contract expires. At
both moments, the contract references the new price index, which is
published in real time.
TeraExchange said it had signed up some 50 clients that were
interested in the products, merchants, hardware suppliers and the
so-called miners who retrieve the bitcoins from the computer
programs that generate the virtual currency.
The swap had been available to trade from Friday morning, and the
company would now start marketing it. It had already received
commitments from market makers, companies that offer prices for
buyers and sellers to facilitate trading.
(Reporting by Douwe Miedema; Editing by Ken Wills)
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