If you haven’t heard of it before, my guess is that you are likely to become more acquainted with the crypto-currency Bitcoin.
“As a non-political online money, Bitcoin is backed exclusively by code,” according to the Bitcoin Foundation website. “This means that — ultimately — it is only as good as its software design. By funding the Bitcoin infrastructure, including a core development team, we can make Bitcoin more respected, trusted, and useful to people worldwide.”
In addition, “cryptography is the key to Bitcoin’s success,” according to the foundation website. “It’s the reason that no one can double spend, counterfeit or steal Bitcoins. If Bitcoin is to be a viable money for both current users and future adopters, we need to maintain, improve and legally protect the integrity of the protocol.”
Bitcoin has also been getting more attention as a growing number of merchants are embracing its usage among consumers. Approximately 1,400 U.S. merchants are taking Bitcoin-based payments. At the same time, U.S. state governments are investigating how to regulate Bitcoin-based transactions.
For securities trading operations, the Bitcoin connection is still a reach although the much-debated “virtual currency” was part of a derivative transaction executed on the newly regulated TeraExchange, which also offers a swap execution facility (SEF). TeraExchange recently conducted the trade between a publicly traded company digitalBTC and a hedging counterparty. It’s early days though as the venue’s derivatives trading platform for US dollar/Bitcoin swaps is months old.
But there are signs that more virtual currency-linked transactions may in the offing.
Another exchange, the Coinsetter low latency bitcoin venue and electronic communication network (ECN) offers an application programming interface (API) for the Financial Information eXchange (FIX) electronic trading communications protocol, according to a Coinsetter statement.
This is the same FIX that has been electrifying front offices for a long time and is now reaching into middle-office and settlement operations.
The Coinsetter FIX 4.4 API will enable customers to connect incumbent trading systems to a consolidated source of bitcoin liquidity, according to a company statement. Securities firms can use the API to place and manage orders, and receive status notifications on them in milliseconds, officials say.
In addition to TeraExchange and Coinsetter, the global push for Bitcoin liquidity continues with the launch of the Independent Reserve Exchange via an Australian company, Independent Reserve. The new venue targets firms that “want a safe, secure place to buy, sell and store” Bitcoin currency, says Adam Tepper, Independent Reserve CEO. The Independent Reserve Exchange will serve market participants that want to buy, sell and store their Bitcoins in US dollars. The company will be audited by PricewaterhouseCoopers.
“The fact that regulators and industry watchdogs are taking Bitcoin seriously is an excellent sign. With increased regulation and vigilance comes improvements in the quality and safety of the industry as a whole, which is something we very much welcome,” Tepper says in a prepared statement.
Tepper adds that his company did a pre-launch survey this month of 442 people across the globe and discovered that only 8 percent had used Bitcoin and 68 percent feel they understand Bitcoin. “More than 75 percent definitely or possibly plan to find out more about it in the near future,” Independent Reserve officials say.
The demographics of respondents include ages ranging from 18 to 74; 44 percent are female; and 56 percent male. “Twenty percent of respondents said they definitely plan to use Bitcoin in the future, while 60 percent said they possibly would,” according to the survey findings.
Independent Reserve officials add that their hardware servers are located at two Tier 3 data centers in its Sydney headquarters, allowing for synchronous replication of all data across four data centers. The company also uses cold storage to “hold the majority of Bitcoins completely offline.”
Independent Reserve charges a flat fee of 0.5 percent on all trades, officials say. However, company officials say they are open to negotiation with market makers and heavy volume traders.
“Bitcoin is currently used by millions of people and increasingly moving toward the mainstream – major companies like PayPal and Dell have embraced it, prices are shown on Bloomberg terminals and new Bitcoin ATMs are opening every week,” says Michael Go, chairman for Independent Reserve, in a prepared statement.
While its acceptance may be following a conventional path, the operational challenges that Bitcoin may present are of the 21st Century kind. In fact, the New York State Department of Financial Services’ proposed a “BitLicense” regulatory framework for New York to oversee virtual currency businesses. The framework reflects the major areas of concern: consumer protection, anti-money laundering compliance, and cyber security rules.
It’s not a huge leap of imagination to see that if Bitcoin-based securities transactions become more common, they will test the limits of post-trade operations. Reconciliation, fraud detection, currency and credit controls, collateral and margin management, and corporate actions processing may have to be revamped to accommodate the new rules of crypto-currencies. The industry still has time as regulators are beginning to weigh in on Bitcoin and more clarity is likely to come.
But, ultimately, the evolution and wider usage of the Bitcoin currency via derivatives and other securities could turn out to be an interesting phenomenon.
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