A group of engineers and traders from SFOX (a US-based cryptocurrency broker) are working to expand access to bitcoin for banks and large investors. For one simple reason, these financial institutions cannot use Bitcoin because it remains a risky financial asset with a high degree of volatility. Engineers are looking to eliminate this disadvantage due to the emerging financial derivative. What are the benefits of this derivative product and what technology will it operate on? You will find out about this in this article.
Financial derivatives: Financial derivatives are instruments that derive their value from the value of the so-called underlying asset. They are essentially a form of futures trading, ie. There is a certain delay between the negotiation and execution of the transaction. They usually take the form of a contract between two parties: they may or may not therefore be securities.
The goal of the Bitcoin Banking Derivatives program is to help banks and large financial institutions mediate bitcoin transactions for their customers and convert this virtual currency into cash. George Melik, co-founder of SFOX, described the benefits of banking in his presentation.
“They know it’s a regulated product and they can count on them to be exposed without holding the underlying asset.”
Bitcoin derivatives should use NDFs – non-deliverable forward contracts, usually used in cryptocurrency markets. Given that banks are already using NDFs to trade other assets, there should be no major problem introducing the new financial product into the banking infrastructure. Goldman Sachs Group, which began trading NDFs last year, paying cash and using bitcoin futures to secure its exposure, is already using the technology for some experimentation.
Banks Bitcoin and Liquidity
The main condition for the NDF contract to function as an exposure to Bitcoin for cash is sufficient liquidity. SFOX itself has liquidity from 120 institutional clients. However, with the increasing demand for cryptocurrency futures, there is a need to create a more liquid NDF market in order to provide adequate financial resources to large financial institutions.
Another advantage of NDF contracts is that users can purchase them through leverage. This solution is particularly friendly to small investors, but places a higher demand on the financial security of the service provider. SFOX estimates that their bitcoin derivatives can earn over $100 million per day due to financial leverage.