How Is Blockchain Disrupting the Forex Trading Market?
Recently, the interest in blockchain applications in Forex trading has increased tremendously. There is no wonder that this technology has been implemented in Forex since it has applications across multiple industries and sectors. The advantages brought by blockchain exceed the implementation costs. And today, we are in the face of a complete transformation of trading foreign currencies, thanks to this technology. For those curious about the relationship and dynamic of the two, we have more information below.
Increased transaction speed
Forex brokers that have implemented blockchain technology to carry transactions have experimented lower transaction fees. All this, after banks and financial institutions have tried to cut down foreign transaction fees for decades. Now, they have succeeded by adopting a fast and transparent technology that benefits banks, traders and clients at the same time. According to the World Bank, transaction costs for foreign operations can be diminished by a generous $ 16 million per year. Ripple, a cross-border payment network is the perfect example of this instance.
The network is a real-time exchange system that carries transactions with minimal costs. It consists of an extended network of financial institutions and banks and allows payment in multiple currencies, including virtual currencies like Bitcoin.
More than this, blockchain technology can transform the FX industry by turning it into a peer-to-peer type of deal, according to the specialists at FX-List. In this new model, transactions can be handled not only by individuals or small start-ups but also by giants in the industry, banks, and other financial players. Essentially, through wider adoption of blockchain technology in Forex trading, the concept of intermediaries and brokers could soon disappear.
Maybe the biggest benefit of blockchain technology adoption in the FX industry is the increased transparency we will be witnessing in the near future. We mentioned previously how intermediaries will become obsolete when blockchain technology is adopted at a large scale. In return, this type of trading will become more transparent. It will also change how the industry is regulated.
The Forex industry is mainly based on several players and key-elements. Banks, traders, investment funds, brokers, corporations, and governments are all part of the entire mechanism.
The biggest advantage brought by blockchain technology is the increased transparency levels it offers. The distributed ledger that characterizes blockchain is a transparent and secure way of registering records. These cannot be changed or altered by anybody. In this case, laws, currency quotes, regulations, transactions, everything will be secured in a reliable and immutable way of registering transactions and currency movements.
In this scenario, the FX industry can create its own, decentralized and completely transparent database. This way, information on each transaction will be available at all times, to all interested parties.
Currently, in spite of what traders believe, the forex market is not decentralized at all. Currency prices are well-established by Central Banks. While governmental entities make the game, small corporations, but also brokerage agencies are kept in the dark and outside the system itself. Nobody, with Central Banks’ exception, has control over currency prices and trends.
However, with wider adoption of blockchain technology in Forex, everybody will have access to relevant information, like currency price trends, in real-time. Nobody will be disadvantaged.
Another way blockchain will soon disrupt the Forex industry is by offering traders, banks and every element involved, higher security levels.
For millions of transactions, the records and sensitive information and details will remain secure.
We all know that Forex is an incredibly liquid market. Huge amounts of money can be moved around without influencing or affecting currency prices. While this is a huge advantage in many cases, the model also has some vulnerabilities. It is vulnerable to cybercrime, human error and trading accounts can be easily manipulated, in this case. Illegitimate traders can leave honest ones with no money in their accounts, struggling with huge losses and few recovery prospects.
But blockchain can change forever these facts and it can offer extra security to all traders, no matter their buying power. This type of data is encoded in such a manner that makes cybercrime impossible. The “hashing” encryption method consists of blocks of information with unique hash numbers. Each block is linked to the previous one. This turns the entire system into an incredibly difficult, if not impossible to manipulate one.
Ultimately, sensitive data becomes impossible to track and use in fraudulent ways.
So, why isn’t blockchain technology widely used in Forex trading already?
Although blockchain has huge potential in Forex, many traders and brokers are still hesitant to adopt it. In Forex, blockchain applications have not been tested enough until now. Although the potential is huge, companies and brokers are still wary to adopt it at a large scale. There have been attempts, however. CLS, a UK-based financial player has pioneered for blockchain introduction in forex settlement services since 2002. But after a huge number of companies have enrolled in CLS’ initiative, half have backed since then.
One of the biggest concerns these have is the increased transparency of blockchain technology. The main motivation was that skilled parties might profit from the information they see and work to less skilled traders’ disadvantage and financial well-being.
Soon, we should expect to see more debates on the topic. Although the ways in which blockchain can disrupt the industry are many and advantageous since governance, regulations, and legal frameworks have to be solved first. Also, there are operational frameworks that have to be established before adopting at a large scale blockchain technology in the sector.