‍Introduction

A few years ago these two words; "blockchain and forex market" couldn't be used in the same sentence. They had no relation and experts in either field knew little or nothing about the other. However, things are now very different, and although it is still in its early stages, these two words are no longer strangers.

But before we dive too deep, let's briefly discuss what the forex market and blockchain is.

The foreign exchange (forex) market is what is considered to be the backbone of global finance, as it serves as the world’s largest and most liquid marketplace. With a daily trading volume of $805 billion in 2023, it operates 24 hours a day, five days a week. The foreign exchange market determines the exchange rates for currencies based on the supply and demand ratio thereby enabling international trade and investments.

The forex market’s primary function is to ensure currency exchange, thereby allowing businesses, governments, and individuals to convert one currency to another. This is what makes it possible for companies to import goods, investors to be able to invest in other countries, and helps national banks to stabilize the economies in their country.

What is Blockchain?

Blockchain on the other hand is a digital ledger that records and verifies transactions across a network of computers. This ledger stores information continuously in the form of blocks, where each block is linked to the previous one, and this chain of blocks is the “blockchain.”

Each block contains a set of transactions or data that, once validated and verified by the network, is added to the chain. This verification process is carried out by a large number of computers in the network simultaneously.

One of the key features of blockchain is the security of data. Once a block is added to the chain, changing, editing or deleting that block becomes almost impossible unless all the blocks next to it are also changed, and then to change those, you also need to change others, so the cycle continues. To achieve this would require control over the majority of the network’s computers, making it extremely difficult or next to impossible.

What is the Difference Between Blockchain and Forex Trading? 

There are various markets that use different platforms for trading and transacting on currency values, and the two major markets are the forex market and the cryptocurrency market which traditionally uses the blockchain. 

Now these two markets are very different.

The forex market has greater liquidity and market size, while cryptocurrencies have higher volatility, meaning prices can drastically increase or decrease. The forex market runs 24/5, while crypto markets run 24/7. The forex market is heavily regulated, while crypto regulations are widely different by jurisdiction. Economic indicators and geopolitical events are the major issues that affect the forex market, while the cryptocurrency market is more susceptible to hype, or technological developments.

Also, the people who trade these markets are different. The forex market has banks, corporations, and traders, while crypto or blockchain is more layman and open to anyone.

However, the major difference between these two markets, or what used to be the major difference between these two markets before is the technology used to trade. While the Forex markets work on traditional financial infrastructure, cryptocurrency runs on blockchain technologies, with unique features such as decentralization and anonymity.

How is Blockchain Used in Trading?

Traditionally, blockchain has been used as a secure and effective way to execute trades especially trades where participants wanted to remain anonymous but don't want to be duped, trades like crypto exchange, NFTs etc. 

However, in recent times, blockchain is changing things in forex markets. This is because with its introduction into the forex markets it has brought a new level of safety and speed to trades.  Blockchain has also cut down on costs and makes currency exchange simpler.

Below are important things to note about the use of blockchain to trade forex:

Blockchain technology improves transparency in forex trading. Everyone on the network can see the ledger of transactions. This builds trust and accountability.

There is increased security and as a result reduced fraud as  benefits from utilizing blockchain solutions in forex trading.

Forex trading with blockchain also helps smoothen processes and reduce costs.

Blockchain technology does not need a central authority and this lowers risks(decentralization).

Once a transaction is in the ledger, it can’t be changed, making it a permanent record( Immutability)

There is also the potential for smart contracts to automate various forex trading operations and this would be more efficient.

So are there any cases or examples of Forex Using Blockchain?

There are numerous tests and project cases of companies establishing forex trading capabilities using the blockchain technology.  While there are many known and even many more unknown, we would be listing just a few in this article:

One successful example of using blockchain in Forex is the “UBIN” project The Monetary Authority of Singapore announced on November 16, 2016, that it had signed a partnership with some of the top financial institutions in the world as well as the blockchain technology company R3. Their aim was to find out how they could make use of distributed ledger technology to benefit Singapore's financial ecosystem. The project they worked on was called Project Ubin. Simply put, Project Ubin is to create a digital Singapore Dollar (SGD).

Another successful example of blockchain use in Forex is the “Ripplenet” project, developed by Ripple. The reason why this payment platform is considered a successful example is simply because it has partnership with UAE exchange, which is one of the world’s largest remittance and foreign exchange companies. UAE exchange and Banks such as Santander and Standard Chartered use Ripplenet to instantaneously send and receive international transactions. 

Apart from CBDCs, and payment platforms, several blockchain-based trading platforms and systems are being used in Forex trading. 

One of these platforms is “We.Trade”. It is a joint-venture company owned by 12 banks, including technology provider IBM, HSBC, Deutsche Bank, UBS and global credit bureau and business information provider CRIF.  However, unlike any other forex trading platform, We.Trade is a blockchain-based trading platform that enables international business transactions using smart contracts. The blockchain platform created by we.trade and IBM has two key features that enable businesses of all sizes to participate in international trade: distributed ledger technology (DLT) and smart contracts. 

"Corda," developed by the company R3, is another Forex trading platform that uses blockchain technology. Corda is a blockchain project that uses open source software. It enables you to create interoperable blockchain networks with strict privacy. Corda can also be used to create customizable DLT platforms for regulated markets that prioritize security, speed, and control. Specifically designed for the financial industry, Corda ensures secure and transparent financial transactions. This platform is used by a number of major banks and financial institutions, including ING, for international transactions and asset management.

Another successful blockchain-based platform in the Forex market is “Chainlink.” Chainlink is a blockchain oracle network. Chainlink's token is based on Ethereum. The network is designed to aid in the transfer of tamper-proof data from off-chain sources to on-chain smart contracts. Chainlink services are powered by decentralized oracle networks that have a proven track record of high availability, reliability, and data accuracy. Chainlink connects existing systems to public or private blockchains, allowing for secure cross-chain communication. This platform contributes to better accuracy and transparency in Forex trading. Chainlink is used by several exchanges and trading platforms, including Synthetix and Aave, to access forex market data.

The last on the list is the “Stellar” platform, developed by the Stellar Development Foundation, which also has widespread applications in Forex trading. Stellar is a decentralized, public blockchain that gives developers the tools to create a fast and low-cost payment network for international transactions, and it also has extensive collaborations with banks and financial institutions worldwide.

The Differences of Blockchain from Forex Trading Databases currently being used.

The use and implementation of blockchain in Forex trading is still in its early stages, and while there are a lot of potential opportunities, much differences cannot yet be made out, however there is one major difference that is glaring.

The databases that were originally used by forex trading companies or banks were more central; that is mostly in one place, one server, one cloud, making them very easy to be attacked by hackers or for information to be manipulated. Blockchain on the other hand spreads data across many computers in various locations, making it hard or even impossible to change records as well as hack the database.

Four categories of market participants and how they would benefit from the use of blockchain technology in the forex market

1. For issuers

Blockchain provides significant benefits to issuers by enabling easier, cheaper, and faster access to capital through programmable digital assets and securities. New securities can be issued in minutes, with their corresponding rights and obligations encoded and automated. This allows issuers and facilitators of new issues to increase the velocity of funding events.

The ability to program or encode terms and conditions into assets (in the case of securities issuance, for example) provides greater flexibility and customization than ever before. Blockchain technology can streamline KYC/AML processes and provide real-time updates and analytics with a single interface for investors, increasing transparency and efficiency.

One of the key advantages of digital assets is the ability to fractionalize each asset. Digital assets can be broken into more affordable and transferable units that create an opportunity for greater liquidity and investor diversity in certain markets. Moreover, the barriers to issue an asset or security are significantly lowered opening up greater opportunity for smaller issuers while existing issuers benefit from new markets or forms of securities. Lastly, the entire lifecycle of an asset has the potential to be automated from investor servicing to event handling in the case of dividends.

2. For fund managers

Fundamentally, blockchain enables the peer-to-peer trading of any asset on a verifiable ledger. Funds benefit from faster and more transparent settlement and clearing which reduces default risk or systemic risk in more opaque markets. 

Faster processing means that funds and managers have less tied-up capital and are able to more efficiently utilize and allocate their existing capital. Funds will reduce costs from increased operational efficiencies like the simplification of fund servicing, accounting, allocations, and administration. 

Fees paid to third parties for services such as fund accounting and administration, transfer agency, and even custody can be reduced or eliminated through automated fund services.

Undoubtedly there will be numerous new types of financial products and instruments created using blockchain technology which will create novel asset classes for capital allocation. Although there will be an explosion of financial products, most of these assets will share specific programmed standards, thereby simplifying the structuring of new financial products or instruments. 

The ability to issue digital assets and fractionalize existing assets will create a broader investor pool, especially as newer investors are more comfortable with the idea of owning a portfolio of digital assets.

3. For investors

Blockchain technology significantly reduces the barrier to issue new assets or financial products. As the cost of issuance of new securities drops and the speed of issuance increases, issuers will be able to tailor new instruments to the bespoke needs of each investor. The enhanced ability to more exactly match investor desire for return, time horizon, and appetite for risk with custom digital instruments may profoundly impact the relationship between investor and issuer, creating a direct bond between capital seekers and investors.

Investors aim to mitigate risk while increasing their potential returns. One of the key drivers of risk is a lack of liquidity. This is addressed by the programmable nature of digital assets and financial instruments which allows for lower transaction costs, increasing the potential liquidity of an asset and enabling more comprehensive risk management. 

Combined with the increased connectivity and efficiencies across capital markets, investors will see greater liquidity and a decreased cost of capital. Additionally, the transparent and distributed blockchain ledger will enable more robust insights into asset quality with the potential to enhance the due diligence process.

4. For regulators

Regulators are often criticized for getting too involved in capital markets or not getting involved fast enough, as in the case of the 2008 financial crisis. Government agencies and regulatory organizations can benefit from a blockchain’s distributed ledger, which is transparent and verifiable at all moments of the day. The immutable nature of blockchain—meaning transaction data cannot be altered—enables regulators to automate functions such as auditing and compliance.

As multiple institutions use the same blockchain network to track their holdings and asset lifecycle events, regulators will be able to devote more time to analysis and risk prediction, rather than on learning the idiosyncrasies of each firm’s system environment and bespoke transaction representations. The ability to reduce friction across various labor and time-intensive processes will streamline the legal and regulatory process. The enhanced quality of data and disclosures enabled by blockchain’s ledger will reduce overhead costs and potentially prevent specific types of systemic risk.

The Benefits of Blockchain technology in the Forex markets

The following are the benefits of having the blockchain technology used in the foreign exchange market:

1. Transparency in Forex Transactions

Blockchain technology makes forex transactions more transparent. Every deal gets recorded on a permanent ledger. This means everyone can check and confirm transaction histories instantly. This transparency builds trust and accountability. It makes traders and brokers more confident in the market.

2. Improved Security and Reduced Fraud

Blockchain increases forex security by providing protection against cyber threats and fraud. Each deal is encrypted and linked to the last one, making the chain hard to fake, edit or delete. This means less fraud in forex trading, protecting traders and financial groups.

3. Reduced Processes and Cost

Blockchain also speeds up settlement, reducing costs and time making trading smoother from start to finish. This means trades settle almost instantly. It helps traders make the most of market chances right away. This boosts trading efficiency and the ability to act fast on market changes.

4. Reduced Operational Costs

Blockchain saves money on forex trading by automating trade settlements and reducing errors. Those savings help traders maintain their competitiveness. Blockchain also helps to reduce fraud and errors, which saves even more money. This makes forex trading less expensive.

Conclusion

With the advancements and the growing integration of blockchain in various financial sectors, it is expected that this blockchain technology will play a very significant role in the Forex market in the future. One of the main trends is the increased use of smart contracts for performing Forex transactions. 

By eliminating the need for middlemen, smart contracts carry out transactions automatically, drastically cutting down on transaction costs and time.

Another predicted trend is the increase in use of digital currencies and blockchain-based tokens in Forex trading. With the rapid growth of the cryptocurrency market, it is expected that more traders and financial institutions will use these currencies for their transactions.

Another significant trend for the future of blockchain in Forex is the growth of decentralized oracle networks, which will give traders access to current and trustworthy data so they can make better informed decisions.