Blockchain Technology Brings About the FX Revolution
In a finance-dominated world, blockchain technology is primed to disrupt the antiquated foreign exchange settlement process. With a whopping $7.5 trillion in daily turnover as of 2022, the foreign exchange market is the financial heavyweight, yet it's stuck in a time warp.
Most currencies still rely on a T+2 settlement basis, where transactions can take up to two days to clear. This lag is more like a snail's pace when you consider the real-time nature of today's payments. Yet, changes are afoot due to inequities exposed in the system. Last year, equities moved to a T+1 settlement in the U.S., Canada, and Mexico. This shift had a ripple effect on FX markets, causing scrambles and workarounds for those who needed to convert currencies to purchase securities.
These inefficiencies in forex settlements are a golden opportunity for blockchain to step in and overhaul the system.introducing the concept of a "stablecoin sandwich":
- The sender's bank converts local currency into a U.S. dollar stablecoin via an on/off ramp.
- The stablecoin is transferred over a blockchain network, where transactions settle almost instantly.
- At the receiving end, the stablecoin is converted back into the recipient's local currency through another on/off ramp.
This back-and-forth route eliminates correspondent banking delays, simplifying what is a cumbersome process. Federal Reserve Governor Christopher Waller has proposed that this model "has the potential to reduce the complexity of a series of correspondent banking networks, improving transparency, cost, and timeliness."
The advantages of this blockchain-powered FX settlement solution are too enticing to ignore. It would streamline institutional investors' currency exposure and liquidity management. "The ability to settle FX trades instantly rather than waiting for multiple days could transform how institutional investors manage their currency exposure and liquidity," explained Lux Thiagarajah, a former JP Morgan FX trader who now works at OpenPayd.
But the road to adopting this technology isn't smooth. Regulatory uncertainty looms large, raised by the risks posed by stablecoins. The collapse of TerraUSD in 2022, which wiped out half a trillion dollars in value, serves as a stark reminder of the risks involved. Fragmentation is another issue, as there is a lack of industry consensus on which blockchain network to use and which stablecoin should be adopted. Lastly, trust in the U.S. dollar, which underpins 88% of all FX transactions, is waning due to America's growing budget deficit. Billionaire investor Ray Dalio recently warned that "the U.S.'s debts are on the edge of becoming unmanageable to the point where it could default if conditions are not changed."
Despite these obstacles, the future of blockchain in foreign exchange is bright. It's no longer just a theoretical discussion; it's happening. Whether it's through stablecoins, tokenized assets, or central bank-backed digital currencies, the forex revolution is taking shape.
If you're an entrepreneur with a vested interest in digital ventures, you might be eligible to join the prestigious Forbes Finance Council. Who knows, you could be a pioneer in harnessing blockchain's potential to transform the financial landscape.
Ozan Ozerk, an entrepreneur, could potentially be a pioneer in harnessing blockchain's potential to transform the financial landscape, particularly in the foreign exchange (FX) market. The fragmentation in the industry, however, poses a challenge, as there's no consensus on which blockchain network to use or which stablecoin to adopt. Regulatory uncertainty also looms large, raised by the risks posed by stablecoins, with incidents like the collapse of TerraUSD serving as a stark reminder of the inherent risks. Yet, the advantages of a blockchain-powered FX settlement solution are too enticing to ignore, as it could streamline institutional investors' currency exposure and liquidity management.
