In an effort to increase security in bitcoin derivative trading, TeraExchange, a swap execution facility (SEF) for bitcoin, is partnering with bitcoin security platform BitGo.
BitGo will provide multi-signature blockchain-based custodial services for USD/bitcoin swaps executed on TeraExchange. The relationship means TeraExchange is the first to allow its market participants to collateralize bitcoin derivative trades.
"We are addressing an ease of use issue for an existing and important subset of market participants, the natural hedgers," Christian Martin, CEO and co-founder of TeraExchange tells Sell-Side Technology. "The concept of "custodial services" isn't easily addressed by most wallet architectures. BitGo, to their credit, worked with us over the past many months to create solutions to the point where we both feel confident bringing this service to the marketplace."
Bitcoin's cryptographic ledger system, also known as the blockchain, will be combined with BitGo's multi-signature platform. The partnership will eliminate physical third-party custodianship that traditional collateral depositaries require.
TeraExhange participants will have a BitGo Enterprise account and establish a multi-signature, custodial wallet. BitGo will ensure bitcoins deposited as collateral for USD/bitcoin swaps are held on the blockchain. Transactions sent from the enterprise wallet will require BitGo's multi-signature approval process, establishing a complete electronic trading lifecycle for bitcoin derivatives trading.
"This is the first time that the blockchain is serving as the collateral repository for a regulated product on a regulated exchange, it is not a replacement but rather a complimentary solution that creates more options than traditional third-party custodial services," Martin says. "In the past, USD, US Treasuries and Investment Grade Debt has been used to collateralize trading activity, by adding bitcoin to that list it only stands to reason that we'd enforce the use the of the blockchain as the repository."
While the partnership took a few months to develop, Martin says the concept of partnering with a bitcoin custodial provider was considered during the initial planning stages.
As bitcoin derivatives trading evolves, so too will TeraExchange, according to Martin.
"It is very likely that in addition to our USD product we'll be adding other currencies in the near term," Martin says. "The entire crypto currency or digital commodity space is an area that we think has a great deal of growth potential over the next many years and we're excited to be an essential part of that growth."
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