Dr. Ozan Ozerk is the founder of Openpayd. He is a serial entrepreneur with direct interest in several digital companies.
For years, we have heard of how blockchain will revolutionize institutional finance, all eyes focused on the potential of digital currencies of the Central Bank. The Atlantic Council’s thinking group claims that 130 countries, representing more than 98% of world GDP, explore a CBDC.
China has already piloted the Digital Yuan (E-CNY), Sweden has piloted E-Krona, Nigeria launched the Enaira and the Bahamas the dollar of sand. Other countries have established their plans and calendars for similar CBDC launches. But not the United States in January, Trump published a statement that surprised a lot: the United States has prohibited the federal reserve from creating any potential dollar from the Central Bank, citing threats to stability, privacy and sovereignty.
And although this decree can influence CBDC projects on a global scale, the impact of blockchain on the Central Bank has only just begun. The next great revolution arrives on the largest market in the world: foreigners’ exchanges.
Obsolete FX Rules
The exchange market is the largest financial market in the world, with an amazing turnover of $ 7.5 billion in 2022.
However, in an almost instantly installed payments, the FX regulations remain archaic.
Most currencies are forced to settle on a T + 2 base – transactions can take up to two full days to strive. In practice, in account in different cutting times, this time window can take up to two and a half days. There are exceptions to this: the Canadian dollar is adjusted in T + 1. CLS, the global FX regulation system which regulates more than 7 billions of dollars of payments per day, also set in T + 1. But overall, there is slowness in the system.
The changes in May of last year have highlighted this. Actions have moved to a shortcut of T + 1 shortened in the United States, Canada and Mexico (T + 2). Since 20% of American titles are foreign properties, this has had immediate effects on the FX markets for those who were to convert currencies to buy titles. The means to surround it included the Post-Diffference FX exchange regulations, the FX regulation before the actions trade or even the use of different instruments such as attackers and exchanges to compensate for the risk.
Despite this momentum for change, progress remains slow given the potential awards.
The bottlenecks of the colony
There are three main obstacles to the faster FX colony:
1. Ineffical payment infrastructure: Some payment networks deal with transactions faster than others.
2.
3. Corresponding bank: This is the most important strangulation neck. If the sender’s bank has no direct relationship with the beneficiary’s bank, it is based on intermediate banks, called corresponding banks. These intermediaries hold accounts in several currencies, facilitating transfers via the SWIFT network. However, each corresponding bank must check the funds, make compliance checks and treat payment before transmitting it, adding delays and costs.
Blockchain’s transformer potential
Blockchain technology could revise this process. Consider the concept of a “Stablecoin sandwich”:
• The sender’s bank converts the local currency into a stablecoin to an American dollar via an on / off ramp.
• Stablecoin is transferred to a blockchain network, where transactions are almost instantly adjusted.
• At the reception end, the stablecoin is converted into the recipient’s local currency by another on / off ramp.
This approach eliminates the bank delays of the correspondent, not to mention simplifies which is a heavy process.
The governor of the federal reserve, Christopher Waller, has this model in sight. In February, he said that a stable sandwich model “has the potential to reduce the complexity of a series of corresponding banking networks, improve transparency, cost and speed.”
Lux Thiagarajah, a former JP Morgan FX trader who now works in my OpenPayd company, underlined it at Digital Assets Forum in London: “This is a massive operational victory. The possibility of instantly adjusting FX tradies rather than waiting for the days of several days for risk management and their optimization of liquidity. ”.
Full speed in advance? Not quite
While the FX compatible Blockchain colony looks like a solid solution, several obstacles remain:
• Regulatory uncertainty: Stablecoins are in fact private money, which raises concerns about financial stability and potential banking cycles. The collapse of Terrausd in 2022, which destroyed a half-bill of dollars of value, is a brutal reminder of the risks involved.
• Fragmentation: which blockchain network should be used? What stable should be adopted? Without industry consensus, several competing solutions could slow down adoption.
• Trust: the US dollar underpins 88% of all FX transactions, but the American mounting budget deficit is an increasing concern. Billionaire investor Ray Dalio recently warned that “the debts of the United States are becoming unmanageable to the point where it could be lacking if the conditions are not changed”.
If the US government is entering Stablecoin space, it could be faced with accusations of use of digital assets as a monetary printing tool, given the existing pressure to finance its deficit.
The upcoming road
Stablecoins are ready for generalized adoption on the FX markets, but the transition will not be fluid. Technology, regulatory landscape and institutional trust must align before the FX regulation fueled by blockchain becomes current.
One thing is clear: the impact of the blockchain on FX is no longer a theoretical discussion. It happens. Whether through floors, tokenized assets or digital currencies supported by the bank, the FX revolution is in progress.
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