“The use of a bitcoin swap is an inflection point in the evolution of crypto-currency.” Those were the words of Tera Group CEO and co-founder Christian Martin as he announced the availability of bilateral bitcoin swap agreements on his company’s platforms.
An operator of a CFTC regulated swap execution facility (SEF) named Tera Exchange, and Tera Advanced Technologies, Tera Group provides services and products for the derivatives marketplace. Among their products include solutions for swap contracts. Primarily used to mitigate interest rate and currency risk, swaps trades involve the transfer between parties of different expected cash flows or payments. For example, a firm selling products in euros but has loans denominated in dollars, could create a trade to swap their expected euro cash flow for dollars.
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According to Tera, the implementation of bitcoin swap agreements “allows two parties to hedge price risk (volatility) of bitcoin using standardized terms”. Tera added that they have created terms for a planned multi-million dollar swap agreement between two US firms to hedge the value of bitcoins in US dollars. In their press release, Tera explained that the initial swap agreement is for a 25 day non-deliverable swap agreement based on dollars. However, Tera added that any duration or currency can be specified in the swap agreement.
According to Tera, the current transaction is unregulated, but the firm stated that they were seeking permission from the CFTC to offer swap agreements on their regulated platform.
As non-deliverable forwards, upon completion of the duration of the contract, no bitcoins are transferred between partners. Instead, the swap seller agrees to a price in the future for the value of the bitcoins. If prices drop below that value, the swap seller provides the buyer the difference in value between current prices and the agreed upon hedged value. In terms of which firms would need such a product, bitcoin swaps can be used by retailers accepting bitcoins to hold onto the digital currency while hedging versus a decline in prices.