July 19, 2024

How blockchain technology is set to redefine the forex industry

blockchain-3134234_1280_How blockchain technology is set to redefine the forex industry
blockchain-3134234_1280_How blockchain technology is set to redefine the forex industry

There are very few technologies that stand against blockchain technology in terms of wide-scale adoption. Every industry, including finance, transportation, shipping, or banking, is experimenting with blockchain technology in one way or the other. In fact, global spending on blockchain solutions is expected to exceed $11.7 billion by 2022.

B3i (a blockchain consortium targeting insurance industry), Health Utility Network (a network that focuses on the digital transformation of health industry using blockchain technology), and Energy Web Foundation (an enterprise-grade public blockchain network) are some examples of various initiatives leveraging blockchain technology.

Finance leads other sectors in using distributed ledger technology (DLT) with numerous fintech startups and traditional banks incorporating DLT in different processes. One must note that blockchain technology can cut infrastructural costs in the banking industry by one-third, so it makes perfect sense to implement the technology across various segments of the finance industry.

Blockchain technology in the Forex industry

The forex industry represents the single-largest global asset exchange market, having an average daily trading volume of $6.6 trillion as per the records of the Bank for International Settlements.

Blockchain technology has the potential to address multiple challenges inherent in the forex trading industry. Let’s find out how Blockchain can provide answers to the unique problems within capital markets.

  • Long settlement times: It takes only a fraction of a second to process a trade, but it takes up to two days for the existing infrastructure to settle your trades. Most of the brokers function with a standard settlement period of T+2 days. Not only does it block a trader’s capital, but it makes it difficult for individual traders to track back-to-back transactions, especially reversals.
  • Fragmented technology infrastructure: Despite being the world’s largest exchange market, in terms of trading volume, the forex industry has a fragmented infrastructure. In order to process a single transaction, multiple parties must work together, creating multiple instances of the same data across different databases. Furthermore, it adds to the overall transaction settlement time.
  • High transaction charges: Taking it forward from the last point, the involvement of multiple parties in trade settlement inflates the overall cost of a transaction. Having a reliable single party or group handle all of these processes will cut transaction charges considerably.
  • High systemic risk: The forex market has multiple systemic risks, including volatility, leverage, liquidity, and even counterparty risks. In its present form, forex markets offer little protection to the traders, especially new traders who could end up losing significant sums.

How Blockchain can address these challenges

  • Blockchain can cut settlement times to a couple of seconds: One of the most critical aspects of blockchain technology is its ability to settle transactions quickly, modern blockchains (Not Bitcoin or Ethereum). A forex market built using blockchain technology will use proxy tokens against every trade, which can be settled almost instantly. The trader will get the tokens in his exchange wallet within a couple of seconds.
  • Unified end-to-end trading platform: Blockchain will allow the current fragmented forex market to operate coherently. Forex traders, auditors, and regulatory bodies won’t have to track a transaction across different parties.
  • Lower transaction charges: The ability to reduce operational costs is another significant advantage of blockchain technology. We’ve already witnessed how it helped the banking industry to cut its cost by 30%. Blockchain can automate terms using smart contracts, automate a multistep settlement process, and thereby eliminate intermediaries. All of these savings will help cut the cost of individual transactions.
  • Limit system risk in forex trading: One of the primary requisites for a blockchain transaction to happen is the ownership of assets, funds by either party. This pre-funding requirement will eliminate any credit or liquidity risks.
  • Decentralized trading ecosystem: The forex market is mostly centralized, with some key players (banks) responsible for the functioning of an entire market. Blockchain technology can create a peer-to-peer forex trading environment, where the role of international banks could be restricted to price stabilization only.
  • Improved transparency: On top of these benefits, Blockchain could add transparency to the forex trading industry. The trader, broker, and exchange will be able to track the entire transaction, gaining better insights into the operations of the forex industry, which is, at the moment, controlled by centralized banks.
  • Security: Blockchain technology is also known for its cryptographic encryption. Most of the blockchains offer encryptions that are almost impossible to crack with the existing technologies. It can eradicate any cyber threats posing dangers to the forex trading industry.

Limitations of Blockchain Technology

While blockchain technology offers a fair share of solutions for most of the problems prevailing in the forex trading industry, but the technology has some limitations as well.

  • Regulatory uncertainty: Blockchain is a promising technology, but governments around the world are still trying to understand its various aspects. In order to use Blockchain in forex trading, regulatory bodies must sanction the technology, requiring a global understanding among international, national regulatory authorities.
  • Use of leverage, margin: Leverage is an integral part of the forex trading industry. As per its current working principles, a transaction can only go through if it’s pre-funded. Blockchain technology still needs to find a way to accommodate margin trading.
  • Blockchain is irreversible, so rollbacks would be challenging: Blockchain is immutable, which means any transaction recorded on the chain is irreversible. Rollback transactions are quite common in forex trading, which could pose a challenge to the efficiency of blockchains in forex markets. The only possible way to reverse a transaction would be to process a refund transaction, thereby doubling the trade volume with no value-addition.
  • Lack of trust: Blockchain technology is a relatively new technology, and as with any other technology, it’ll take some time for traders, exchanges, and regulatory bodies to accept its potential. A significant portion of traders may doubt its ability to replace traditional settlement parties.

Use of Blockchain Technology by leading financial institutions

Australian Stock Exchange to replace CHESS settlement with DLT

The Australian Stock Exchange is one of the major players to choose distributed ledger technology for trade clearing and settlement. The exchange is undergoing an advanced planning process to implement DLT. According to the exchange, companies listed on its index are likely to save up to $23 billion through operational efficiencies and cost reduction.

Future expectations about DLT and forex markets

Blockchain technology holds the potential for significant value addition to the forex trading industry. However, it’d be overstating to consider it a replacement for the existing infrastructure. It’s much more feasible to imagine a coherent future when blockchain technology and existing systems work together to boost operational efficiencies.

Working with an innovative forex broker

While it may take a while for blockchain technology to disrupt the forex industry, several brokers are already investing in cutting-edge technologies to improve the overall trading experience. ETFinance is an award-winning forex broker that facilitates CFD trading for multiple assets. The platform uses award-winning analysis tools for intuitive trading experience.

Some of the differentiating advantages of ETFinance for traders are:

  • Advanced MetaTrader4 platform: ETFinance features two of the most prominent trading platforms within its ecosystem, including MetaTrader4 and WebTrader. It allows ETFinance to offer excellent, powerful analysis tools, more than 50 market indicators, and full support for automated trading.
  • Competitive spreads: When compared with other players, ETFinance offers competitive floating spreads for popular trading pairs. It is critical to note that ETFinance offers no-fee trading for Forex CFD trading, making it a cost-efficient platform for traders.
  • Multiple payment options: Traders can use various payment options, including Skrill, Neteller, VISA and MasterCard credit card, debit card payments, bank wire, among other methods.
  • EU wide operational license: ETFinance holds functional license across the EU, allowing traders the flexibility to use the platform while traveling or working with teams spread across the EU.
  • Huge range of CFD products: ETFinance has an impressive list of CFD products, including soft commodities, cryptocurrencies, precious metals, crude, stocks, currencies, and similar financial instruments.
  • Multi-device trading: ETFinance supports trading across different platforms, including web and mobile trading. It’s an efficient trading partner for people who travel a lot. The platform offers intuitive mobile trading experience, featuring one-click trading.
  • Account-wise leverage: ETFinance features different types of accounts for retail and professional traders. Retail traders can use leverage up to 1:30, whereas professional traders can apply maximum leverage of up to 1:200. In order to provide additional financial security to retail traders, ETFinance provides protection through the Investor Compensation Fund (ICF).

ETFinance takes pride in the success of its clients. Their 24/7 customer service is always ready to provide support. Every trader needs a reliable trading partner, and ETFinance distinguishes itself as a trustworthy forex broker.



Ali Ghodsi, Co-Founder and CEO, Databricks and Naveen Rao, Co-Founder and CEO, MosaicML
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