Tera Exchange’s bitcoin derivative platform approved by CFTC

The US Commodity Futures Trading Commission (CFTC) has approved TeraExchange’s platform for bitcoin-based swaps.

The company said that it worked extensively with the CFTC. President and co-founder Leonard Nuara said, “Throughout this comprehensive process the CFTC Staff has been thoughtful, diligent and thorough in their analysis and review.”

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Key to the approval was the creation of a robust bitcoin price index, which takes an average of prices as traded on six different exchanges with which the company has partnered. Christian Martin, TeraExchange’s CEO and co-founder, called it “a true neutral arbiter of the bitcoin price on a 24-hour basis that’s not susceptible to manipulation.”

Participants will be able to take bets and hedge their risks based on the price movement of the contracts’ underlying asset, bitcoin. No bitcoins will be transacted in the process; the counterparties settle accounts in dollars.

The contracts will range from one day to 2-year maturities. Upon expiry, one counterparty will pay the other depending on the price’s position relative to an agreed-upon threshold.

Bitcoin prices are typically volatile. Martin hopes that the introduction of regulated derivative trading will help stabilize prices, saying, “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.”

One may also argue that the primary contributors to an asset’s volatility are fundamental drivers like earnings, the degree of speculative activity, available liquidity and supply/demand. One would normally not expect the trading of contracts layered on top of these assets to have an upstream effect. Occasionally, major stock price movements are blamed on their underlying options’ expiry. In our case, however, there are no bitcoins are handled by any party during the trading process. Perhaps Martin’s argument comes into play for investors contemplating bitcoin holdings but are holding back in the absence of a reliable hedging mechanism.

While the platform itself has been approved, the swap contracts themselves are still pending approval.