TeraExchange: Wall Street Focuses On Bitcoin
TeraExchange is a young company, founded by wall street veterans Leonard Nuara and Christian Martin, with no initial intention of focusing on Bitcoin. The company was founded in response to The Dodd–Frank Wall Street Reform and Consumer Protection Act, the financial law with a stated aim to, “To promote the financial stability of the United States by improving accountability and transparency in the financial system.”
TeraExchange states, “One principal goal of the Act was to establish a means by which regulators can monitor, in real-time, the growth of systemic risks in the financial system and intervene to prevent the emergence of another crisis.”
The focus for the founders was to build an exchange, in the traditional sense, the company explains “TeraExchange will play a central role in helping market participants to meet globally recognized regulatory goals of increasing transparency, accountability and oversight in the Over The Counter derivatives markets.”
Founded in 2011 TeraExchange has an experienced financial team working behind the scenes, including capital market veterans from banks or broker dealers. Martin himself worked for Merrill Lynch for 20 years, and Bank of America for 5, as a fixed income and derivatives trader for emerging market debt. But the team had no idea at the time that Bitcoin would become a corner stone for the exchange.
The founders went through the rigors of regulatory approval, with a view to building a Dodd Frank compliant platform, this process was lengthy and complicated, the United States Commodity Futures Trading Commision approval coincided with Bitcoins price spike in late 2013, bring the technology into mainstream focus for the first time.
“I started to see bitcoin fight for its seat at the table. Being a young product, it didn’t have any mature regulated institutional level solutions around it. Which is what our company brings to the story. For me that is when it all clicked” Martin told BNC, “for most of the last year have been working with the CFTC to get our Bitcoin products certified and listed for execution,”
Martin advises that it was a matter of chance that TeraExchange happened to be speaking with the CFTC at the height of Bitcoins price spike, with reports on the MT. Gox failure and Silk Road seizure making headlines around the world. “the confluence of our newness combined with Bitcoin newness came together at the same point in time.” Martin explains ”We’ve enjoyed bringing these disciplines and regulatory imprimatur, that we have from the CFTC, to a new derivatives product based on Bitcoin,”
TeraExchange, advises Martin, was not a simple concept to develop as they had to consider two spheres of influence.
- The first sphere of influence is commerce, adoption, enterprise, traditional GDP production and this is now taking a life of its own. TeraExchange are able to provide hedging tools which are traditionally used for treasurers, offices, and people who manage balance sheets. The more balance sheets that have Bitcoin on them, the more there is a need to manage that risk. TeraExchange feels that they have a place here to perform.
- The second sphere of influence is capital markets such as swaps, futures, options and currencies. Martin explains that this is also a very unique position to be in, as these disciplines are another feature of bitcoin that they can incorporate.
“For now because everything is so young, we think of both of those spheres as distinct [...] and a lot of that is to do with the regulatory status of bitcoin. There have been many more commercial adoptions of Bitcoin, on the enterprise side and the balance sheet side than there has been in the traditional capital market world,” - Martin
With the support from the CFTC, TeraExchange are now able to invite the second sphere to the party. In the past they have been prohibited from working with a non-regulated product. Through hedging tools for consumers and providing a regulated product for the banking community, the platform provides ample opportunity for the adoption of bitcoin in the two defined environments. Martin explains, “As a new institution it was easier to keep our eyes open and not become encumbered by our legacy clients or legacy business lines, so it was fortuitous. I will give us some credit in recognizing the opportunity, we have enjoyed the ride immensely.”
The company have moved quickly, with a slew of announcements since their approval by the CFTC in October this year. Their inaugural Bitcoin trade with digitalBTC took place on the 9th October 2014, and is noted to be the first Bitcoin derivative transaction to be executed on a regulated exchange.
TeraExchange advised that an important aspect to their business is the security of clients funds. Their next big announcement was their partnership with BitGo, a multi-sig security platform, on 3rd November 2014. “We had to present this use case to many different wallets, and BitGo was the one that seemed most flexible and were more hungry to come up with solutions,” - Martin
The companies use of the Bitcoin blockchain provides the transparency needed by TerraExchange, funds can easily be validated and accounted for. The addition of Multi Sig wallets provide security, for both client and service provider.
In addition to the security a multi-sig wallet can offer, Martin advises that as a regulated exchange they come to market with a host of best practices; They are audited technologically; audited financially, by the CFTC; and work with the National Futures Association (NFA) as the third party to their own Self-Regulatory Organization (SRO) obligations.
“It was an enormous lift to build a regulated exchange and with it comes great security throughout our workflow from inception to today,” - Martin
The most recent announcement from the company is its partnership with Nadex, a company providing Bitcoin binary options. TeraExchange are connected to 14 different crypto exchanges, providing an aggregated price of Bitcoin for Nadex. The data is filtered to provide a qualitative and quantitative average. This results in two outcomes, first there is a neutral party (TeraExchange) and a fair value of Bitcoin price, at any moment in time during the day. And the second is an index price that is not susceptible to manipulation.
“It’s a good partnership, a good use of our index and a good example of our desire to partner with folks when it makes sense,” - Martin
Martin also advises that he feels every business needs partners to succeed, and that there benefits to helping other in the industry. They are willing to put their hand out to young businesses, and support them with their experience.
“When they are ready to become a commercial client of ours that’s fine, when that comes it comes, but in the interim we believe in the virtuous cycle of helping out and believing in the network effect of nurturing along prospects and clients so that one day they become true partners,” - Martin
Martin advises he has slowly dipped himself into the underlying technology of Bitcoin. It has opened up the possibilities that TeraExchange could develop further utilizing blockchain technology in another phase of their business.
“As we mature our own business, we’re excited potentially about being a user of blockchain technology to facilitate work flow internally here at our own firm. That is the slower part of our journey as our expertise is in the first part, the capital markets, and the second part is being a user of the blockchain,”
- Martin
B.Holmes, author of The Range of Illusion and The Private Key installments, is currently located in Thailand, researching and writing about crypto. You can follow B.Holmes on twitter @BanteringB, or contact via email: bholmes@banteringbeepublishing.com
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