What Is Forex Trading?
We’ve all been there. We arrive at the airport, head to the currency desk, and look at the bewildering array of digits on the screen. Names of far flung places; their strange symbology fascinating. Yet a quick glance over the screen comparing the value of one currency to another seems off. Wasn’t the exchange rate higher just a few days ago? Or was it actually lower? These numbers continuously change because of the Forex market.
Forex 101
Forex, or FX trading, refers to the foreign exchange market, an international market that makes the value of national currencies change on a daily basis. We haven’t got a truly international currency yet. Maybe one day — perhaps with the blockchain’s help — we will. For now, upon arriving in a new country, when engaging in cross-border value transfers, settling debt, or simply for the purpose of banking on the ongoing value changes, the Forex market is needed.
What you do upon arriving in the airport, at your local bank or exchange office, is something that businesses and governments do on a much grander scale. To pay for goods and services in a different country, national currencies must be used. This can entail anything from gigantic infrastructure and investment projects, local aid work, or hostile takeovers. Everyone needs cash, be it in physical or digital form.
This creates an ebb and flow in the market, as different country’s currencies rise and fall in response to the global state of affairs. These small shifts in the tide of value — as the timescales are necessarily slow-motion due to the complexity of human arcania — are then utilized by traders, who trade at high volume (the largest of any market in the world) to exploit the micro-differences in currency that occur.
Untapped Opportunities in Forex
Together, this creates the Forex market, an ocean swell through which $6.6 trillion measured in USD value flows through daily. This is more than the prestigious New York Stock Exchange. These movements detail the intricacies of nation play, the rest of it making sure everything gets done — including being able to purchase train tickets in a foreign country, or remit money to family living overseas.
Forex then, is the largest untapped market for the blockchain. Cryptocurrency has already proven cross-border efficiency. The ability to transfer data seamlessly, securely and, crucially when it comes to bickering nation states and high-art geopolitics, trustlessly — means the opportunity for a central hub for this global and essential market is ripe for the taking. Institutions, companies, and everyone in between is interested in moving capital quicker, with no intermediaries in between.
Challenges in the Forex Market
The Forex market poses some tough challenges though. Forex is a time-consuming endeavour for companies and businesses. International payments require a large implementation of resources to do effectively. This is due to the different requirements laid out that differ from country to country. Moreover, these requirements shift over time, with sudden legislative changes putting ongoing payment terms at risk and exposing people to having their money snarled up in red tape, sometimes with grave consequences.
Navigating all of these requirements, at speed and volume, becomes an enormous headache that requires a dedicated Forex desk, or an expensive outsourcing to a major institution. This also comes with a rate which eats into the bottom line of anyone, no matter how big or small. If a company does it in-house, a large financial team will be required to track this capital inflow and outflow.
The Spectre of Settlement Risk in Forex
And of course, all this is not without risk. Settlement risk remains a major factor in why the Forex markets are still so cumbersome today. Settlement risk is when a bank pays the currency it sold but does not receive the appropriate currency in return. There are many reasons this can occur. The counterparty can default or be fraudulent, there may be a sudden seizure of liquidity that was not foreseen, or national governments can block, delay or simply over-regulate transfers they believe inimical to their own interests.
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Considering the vast sums that are exchanged on the Forex market, the risk can have shattering consequences too, as the sums involved can be larger than a bank’s entire available capital. The bankruptcy of Bankhaus Herstatt in 1974 — even though they were one mid-sized German bank, led to shockwaves through the international money markets that led to a lending rate spike and credit crunch all over the world. The bankruptcy occurred because, although they acted correctly and paid their currency, they never received their dollars in return.
Although regulatory overgrowth or routine roadblocks can mean that settlement risk is often resolved and the money is exchanged eventually, even these short term throttles of capital exchange can have knock on effects, as banks can suddenly find themselves bereft of the capital to enact their trades and investments, or companies can suddenly find themselves unable to pay all their international workers. These delays, even of a few hours or few days, can grievously hamstring ongoing commercial operations for all parties — and lead to escalating issues of dissipating trust.
The Role of Major Players
This has led to major institutional players gobbling up vast portions of the available market share, and in turn having to create cumbersome, expensive bureaucracies that rely on fast-track trust gained from inside connections. To be able to handle such colossal risk profiles, you need a colossal operation. This creates imbalance in the market, and heavy bottlenecks that throttle the flow of international commerce, and leaves heavy tariffs being levied by exchange desks or Forex charges on your credit card to pay for this inefficient system.
Yes, the major players are making profit. Yet even they are frustrated by the myriad complexities associated with Forex trading, with charging mainly accounting for the risk they have to take in deploying such extravagant sums. The banks, just as much as anyone, would welcome a more fluid market, where transactions can occur at pace and in a trustless manner. This would be especially effective when dealing with legal frameworks cross-border and sidestepping the potential geopolitical risk of capital being suddenly imprisoned due to sudden, act-of-god factors. Blockchain systems, then, have the capacity to do this.
What Blockchain Can Do For Forex
Migrating assets on-chain would unlock enormous amounts of the bank’s own asset pools and give them the opportunity to trade internationally at an even higher volume than they do today, whilst supporting their own profitable endeavours. The chance to eliminate settlement risk altogether and no longer need to implement burdensome risk-management on their Forex activities would lead to an explosion of “hot money” that would rival the economic boom that occurred after the move away from the gold standard.
Banks are keen to migrate their deep resources on-chain in a cost-efficient manner, with all the necessary systems pre-loaded for them, so that they can be more agile in their international investments. It’s no easy task, however, and implementing it in-house across the siloed blockchain environment would be a slow, arduous task that may mean they miss the revolution altogether.
Smaller traders and individuals, too, would have access to a cleaner, more open market. They would not have to trade the vast sums required to be competitive, can sidestep bankroll draining transaction fees and managing capital on their behalf, while gaining proper access to the arbitrage opportunities that are inherent in such a sprawling, micro-adjusting and multi-faceted market. Finally, if businesses could quickly generate the appropriate currency they need on the blockchain, without needing an intermediary taking their (necessary) cut and perhaps cancelling entire investment opportunities altogether, it would lead to a more fluid state of global capital — a cross-border utopia where everyone has the money they need, when they need it.
How Onomy Protocol Will Change the Forex Market
To do this, a blockchain protocol would need to have extremely high throughput to handle the 6.6 trillion dollars worth of transactions. It would need a system to eliminate settlement risk entirely, and it would have to cost a fraction of the fees required so that the Forex market could really become open to all. More so, adoption shouldn’t be hindered through friction-intensive processes or cumbersome interfaces that cause nothing but confusion.
Finally, converging Forex and decentralized finance (DeFi) requires a protocol able to produce virtual representations of every available currency seamlessly, and create an entire webwork of trading pairs so that even volatile or unpopular currencies could find on-chain stablecoin representations that are safe, deployable, and transactable.
Our core goal at Onomy Protocol is to provide the tools that retail users, businesses, and institutions require to truly tap into decentralized finance, by moving their fiat holdings on-chain. This would augment the Forex market, give banks a helping hand moving their assets on-chain, and provide smaller traders with the opportunity to participate in the world’s most liquid market without facing the aforementioned disadvantages.
Onomy strives to cover the entire Forex spectrum — from minting stablecoins, trading them across prominent blockchain economies, and accessing yield opportunities unavailable in traditional markets, to moving capital cross-border in a secure and non-custodial manner that does not entail a complicated learning curve. Our planned releases also include the launch of a cross-chain credit market facilitating borrowing and lending via multiple fiat currencies, as well as the ability to create fiat/crypto, crypto/crypto, and fiat-fiat trading pairs that traders can leverage for profit-seeking purposes through our hybrid order book and AMM-based decentralized exchange.
Once deployed, our crypto-collateralized and decentralized stablecoins will create a more fluid Forex market, as numerous user types deploy their capital on-chain. In the grander scheme of things, Onomy Protocol is building a complex financial ecosystem prime to become the de-facto decentralized reserve bank, as more of the world’s finances migrate into the decentralized realm.
