Foreign Exchange (Forex)
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. 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.
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.
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.
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.