Three ways cryptocurrencies will transform foreign exchange markets and trading

January 2023 in Digital Currencies

Given current market conditions, casual observers may be forgiven for thinking that future prospects for cryptocurrencies are looking grim. Away from the spotlight however, truly innovative and disruptive use cases for cryptocurrencies are beginning to take root, such as in foreign exchange markets and trading.

In the FX Broker sector, cryptocurrencies, and more specifically, stablecoins, are being used to address some very real pain points and usher in a new approach to broking and trading that’s far better suited to the modern, digital-first world. To examine how, let’s look at three important use cases that promise to unlock immediate value for FX market participants right now.

Improving cross-border payments

Using stablecoins that are pegged to fiat currencies, and therefore not exposed to the huge price volatility seen in other digital assets, FX brokers and in-house treasury teams can settle payments and revenues from markets all over the world faster and at a lower cost when compared to legacy payments rails. This is because the blockchain rails of stablecoins provide a direct route for money transfer, avoiding the costs that come with using multiple payment intermediaries. 

A stablecoin payments solution also eliminates the complexity of managing multiple currencies across a range of jurisdictions. Meanwhile, the relative speed of transfer and 24/7 operations provided by blockchains means that funds are settled faster and avoid risks such as shifting exchange rates and trade slippage. 

Accepting crypto payments

Another consideration for brokers and trading platforms is putting in place the technology and processes needed to collect payments in cryptocurrencies and instantly convert to fiat currencies, ready for their clients to trade with. 

The most obvious benefit of this approach is that it ensures that brokers can meet client demand. More and more, people want to pay using crypto, and that includes when funding their FX trading accounts. By offering crypto as a source of funding, FX businesses can extend their reach to new markets and demographics, especially where traditional banking is difficult to access.

By instantly exchanging crypto deposits for fiat currency, firms keep digital assets off their balance sheets, which means that they are insulated from price volatility and can reduce the overhead of regulatory compliance.

There are other advantages too in being able to accept crypto payments. Processing customer payments via card networks is costly and even direct bank-to-bank payments can be slow. Not only that, the options available to FX brokers for client deposits are often constrained by the outdated working practices of traditional finance. For instance, if a trader gets a margin call last thing on a Friday as their bank closes, the broker often has no option but to extend a credit line or reduce positions to meet the call. In contrast, stablecoin payments are usually sent, received, and settled within a few minutes. Stablecoins can drastically reduce risks for both parties involved in the transaction. 

Unifying FX accounts

The third use case involves firms unifying their various fiat and crypto funds in a single account, and trading between assets inside one platform. This promises to unlock new efficiencies and trading opportunities. Large volume trades can be made via an integrated institutional-grade OTC desk and the business can make and receive payments to and from third parties in all supporting fiat and cryptocurrencies, directly from the platform.

Accessing day-to-day banking services from the platform significantly improves operational efficiency. It also drives agility. By trading positions within the platform, firms can react rapidly to currency price movements, enabling them to protect and improve their positions. What’s more, by offloading the burden of navigating and complying with evolving regulations to the crypto platform provider, organisations can redirect their resources to their core business activities. 

What the future has in store

These three use cases show just how transformational crypto can be when it comes to the FX market. Irrespective of the ‘crypto winter’, more and more businesses are turning their attention to stablecoins and the other blockchain innovations that have proven their mettle in delivering sustainable value. 

When it comes to FX, we can look forward to a world where cross-border, stablecoin payments help foreign exchange brokers move money between internal entities faster, at a lower cost, and in a way that can generate higher returns on capital. In this world, capital will be freed from the balance sheets of market participants and put to work generating value without delays nor the costs associated with a chain of intermediaries.  

Cryptocurrency promises to help brokers extend their global reach, increase deposits, grow trading volumes and operate more efficiently anywhere in the world. The benefits are there for the taking, and as ever, organisations that move first and fastest stand to benefit the most. For any broker or trader looking to navigate the crypto payments opportunity the work must start now; the alternative is to risk falling behind faster-moving competitors able to offer the rapid, low-cost services investors increasingly demand.