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Treasury Technology

Crypto Creeps Closer to Plausible for Institutions

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March 14, 2018

New CFTC-sanctioned derivative exchange brings cryptocurrencies closer to institutional use

BlockchainSwap execution facility trueEX recently announced that it plans to launch a regulated “derivatives marketplace for digital assets” aimed at bringing “confidence and transparency” to a market that institutional investors have mostly sidestepped.

While the sidestepping is partly because the concept of blockchain and cryptocurrencies is overwhelmingly large and complex, it’s also because there are other more mundane corporate finance tasks for corporate finance to do. For instance, according to a PwC’s 2017 Global FinTech Survey, as a priority, blockchain ranked well behind more mundane corporate functions like data analytics, mobile, artificial intelligence, cybersecurity, and robotic process automation.

But corporations should be paying attention because the tech is cropping up everywhere, from possible central bank use to smart contracts to cross-border payments and now to derivatives.

trueEX, which has the first exchange approved by the Commodity Futures Trading Commission (CFTC) as a designated contract market (DCM) for swaps, plans on offering contracts for bitcoin non-deliverable forwards (NDFs) settled in US dollars. The contracts themselves are still in need of final approval from the CFTC.

One of the other hurdles was liquidity. Blockchain and digital currencies, in terms of market size is still in the billions while all other mainstream asset markets are in the trillions. Nonetheless, trueEX says this is the beginning of a solid foundation for blockchain-based currency use to grow.

"Institutional investors and commercial partners are ready for a regulated and liquid marketplace to gain exposure to and hedge these increasingly important digital currencies and commodities,” said Sunil Hirani, founder of trueDigital Holdings, an affiliate of trueEX, in a statement. “But the marketplace is sorely lacking the necessary foundation, infrastructure and platforms that institutional investors have come to expect in other important markets.”

trueDigital Holdings is also entering into a partnership with ConsenSys, which provides resources, tools, and talent to companies looking for expertise in the sector. The company mainly deals with Ethereum, which is the most widely known cryptocurrency after Bitcoin. With this partnership, trueDigital is hoping to create “a benchmark rate for Ether” as well as build “the infrastructure needed for the broad adoption of digital assets by the institutional community.”

"NDFs on digital assets are the logical next step for institutional investors who are seeking exposure to Bitcoin and other digital currencies,” said Brooks Dudley, Vice President of Risk at ED&F Man Capital Markets. ED&F Man said it will be the first company to offer prime brokerage services for digital asset forwards on trueDIGITAL.

Still it could be some time before the currencies gain currency with corporates. And there remain many aspects of using the technology that need hashing out. For instance, there will be accounting factors to consider. According to PwC, under the current US accounting rules, “cryptocurrency is not cash, currency, or a financial asset; rather, it should likely be accounted for as an indefinite-lived intangible asset.” Thus, suggests PwC, “declines in the market price of cryptocurrencies would be included in earnings, while increases in value beyond the original cost or recoveries of previous declines in value would not be captured.”

Then there are the various jurisdictional issues when it comes to the rules. Some countries like China, are trying to tightly control the market; others like the UK are keeping a close eye on it but at the same time, trying nurture what could eventually be a lucrative (a fee, tax, and license-generating goldmine) market.

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