Forex has long been one of the major focal points in the world of finance. Then Bitcoin was introduced in 2009 – a decentralised and deregulated “crypto” currency. Nowadays, cryptocurrencies like Bitcoin are taking over financial circles. The blockchain technology that powers it is likewise making waves, even in non-financial industries like healthcare and education.
Crypto and the blockchain’s decentralised and highly secure nature is its major selling point. Central banks over the world are recognising the benefits they offer and are even releasing their own digital forms of fiat currency, as exemplified by our recent report on India’s digital rupee. Even financial giants HSBC and Wells Fargo use the blockchain to settle bilateral forex trades.
This has caused many market analysts to speculate whether crypto and the blockchain are competing with and will ultimately overtake forex. Yet another possibility is that the two emerging technologies are merely a catalyst for positive transformations in the market. So with all that in mind, this article is going to dive into the latter argument in more depth.
It streamlines transactions
When trading forex, it’s likely that you’ll come across transaction fees. Most of the time this is because you pay middlemen like brokers to help manage your trades. Conversely, crypto and the blockchain were built precisely to cut out middlemen — like brokers or banks — and facilitate direct peer-to-peer transactions. This not only makes trades faster, but cheaper as well. The concept of removing long-standing intermediaries like brokers is undeniably a revolutionary one in forex, but doing so can have significant payoffs.
It diversifies the market
Forex is best known for grouping fiat currencies into pairs. Here, traders pit the value of one currency against its partner in the hopes of turning a profit. This organisation is useful in that it makes forex easier to navigate: it offers significantly fewer products than, say, the stock market. However, this also means that forex isn’t diverse. Crypto is fixing that with its slow but steady entry into forex. It’s now possible to trade varied crypto-fiat currency pairs like BTC/USD, providing the trader with more opportunities to earn a profit. Crypto can also be traded on forex platforms by leveraging contracts for differences (CFDs).
It enhances security
The blockchain uses cryptography to effectively limit access to records and make them tamper-proof. This can solve pressing cybersecurity issues, like hackers obtaining sensitive user information from forex platforms. It can even be combined with current safety practices aimed to reduce risk for traders. On FXCM’s Trading Station Web platform, user data is encrypted and stored in the cloud. It also facilitates trading CFDs. Investopedia explains that CFDs are safer to trade because users don’t own the asset in question, but instead profit off of the asset’s price changes. Here, the blockchain can be used as an added level of security.
Ultimately, crypto’s blockchain technology helps make trades more transparent. The blockchain is distributed over a vast network of computers, making the secure and tamper-proof records mentioned earlier accessible and visible to all parties involved in a transaction. In the case of forex, a currency’s value is usually established by a country’s central bank. If this bank moves its pricing information to a decentralised, blockchain-powered ledger, all market participants — from part-time traders to large, multinational financial institutions — have equal access to relevant price information.
These benefits are some of the first we may see from adopting crypto and the blockchain in forex. However, this adoption has yet to be regulated by governments around the world — so we just might have to be content with seeing heated discourse on the topic for now.