Swap agreement aims to protect Bitcoin holders from the next crash

A framework for Bitcoin derivatives seeks to guard against price swings

Businesses that permit Bitcoin transactions may soon have a way to protect themselves from drops in the digital currency's value.

Tera Group, a financial derivatives marketplace, announced Monday what it calls the first standardized agreement for Bitcoin swaps, designed to let businesses and investors enter into a contract to guard against swings in Bitcoin's value. The group is eyeing a full-fledged exchange for the agreements, which would be regulated on the U.S. Commodity Futures Trading Commission, if approved.

Tera hopes to bring derivatives contracts, an established instrument for hedging risks in the greater financial sector, to Bitcoin. The contract would be used to reduce the risk large businesses or financial institutions face while making transactions in the digital currency, which has seen wild swings.

Under the contract, an online retailer such as Overstock or TigerDirect could enter into an agreement with an investor or financial group for a transaction at a specified Bitcoin exchange rate. The seller or business would pay a fee to the backer at the time of initial transaction. After a certain period of time set forth in the contract, if Bitcoin's value had dropped, the backer would pay the merchant the difference.

As a first-run, there is currently one such swap agreement between two undisclosed parties, for a single multimillion dollar transaction, Tera said.

Tera is seeking permission from the CFTC to provide the swap instrument for trading on a regulated marketplace, along with other swap agreements operated by its exchange arm. The CFTC did not immediately respond to a request for comment on its plans for offering such a tool.

Such a swap agreement could lead to "greater acceptance of Bitcoin in the marketplace," said Leonard T. Nuara, president of Tera's exchange arm, the Tera Exchange.

Tera's move to add more safeguards into Bitcoin comes as financial regulators take an interest in the currency. In New York, financial regulators recently said they would be accepting applications for virtual currency exchanges in that state, as they seek to learn more about the risks and commercial applications of the technology.

Bitcoin still faces an uncertain future as governments in other countries take a more critical view, and vulnerabilities in the underlying technology become known. The collapse of Mt. Gox, once the most prominent exchange, showed how vulnerable the system could be to cyberattacks and possibly theft.

Tera Group, which is based in Summit, New Jersey, operates a number of other interest rate swaps and credit default swaps through its exchange arm.

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Zach Miners

IDG News Service
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