Commodity Futures Trading Commission approves first bitcoin swap

The bitcoin derivatives market just took a giant step forward. Reuters reports that the Commodity Futures Trading Commission (CFTC), the federal regulatory body responsible for preventing fraud in futures contracts, gave full approval to a new bitcoin-backed swap created by TeraExchange. The new derivative allows clients to lock in a dollar value to their bitcoin holders, essentially creating insurance against future price swings for the duration of the contract.

TeraExchange chief Christian Martin told Reuter: “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.”

The company first announced the bitcoin swap plan in March, but it took six months of examination and review by the CFTC for the product to finally see approval. Much like the Winklevoss ETF’s WinkDex, TeraExchange was required to create a six-exchange price index before the CFTC was convinced that bitcoin prices were difficult to manipulate. Reuters noted that price manipulation is still a major concern for the CFTC in the wake of the Libor scandal earlier this year.

The CFTC approval is the first concrete recognition of a bitcoin derivative product by U.S. federal regulators. With the approval, TeraExchange can now begin marketing the product broadly. The company claims to have a group of around 50 clients on a waiting list for the product. The TeraExchange approval may also serve as a bellwether for other bitcoin-derivative and investment products on the horizon, most notably the Winklevoss Bitcoin Trust ETF, which is still in the SEC approval process.