Use of Block Chain in Forex (FX) trading
Based on its success in the cryptocurrency market and some limited applications in other sectors, block chain technology is being actively considered for deployment in fixed income and forex (FX) trading. Though the technology holds much promise in principle, there are challenges to meet, and methodologies to develop and understand, before block chain can gain widespread acceptance and use.
Block Chain Basics
Block chain (or blockchain, as it's more commonly written) is a public or distributed ledger of information, collected through a network that sits on top of the internet. It's sometimes referred to as “The Internet 3.0”, because the technology may be used in developing social networks, messaging software, games, exchanges, storage platforms, voting systems, prediction markets, online shops, and other applications.
This versatility owes to the fact that information recorded on a blockchain can take virtually any form. Recording of data however requires a confirmation from several nodes or devices on the block chain network. Once a consensus is reached between these nodes to store something, that item cannot be disputed, removed, or altered, without the knowledge and permission of the party who created the record, and the wider block chain community.
In what's known as a peer to peer (P2P) network, blockchain stores multiple copies of the same data at different locations, and on different devices (such as computers or printers) on the network. So if one point of storage is damaged or lost, multiple copies of the data remain safe and secure, elsewhere. Information on a blockchain is packaged into blocks, which link to form a chain with other blocks of similar information. Hence, the name.
Once data is recorded in a block it can't be altered without having to change every block that comes after it - making it impossible to attempt illicit change transactions without them being seen by the other participants on the network. What's more, it's possible to securely process and settle transactions without the need for third-party verification. It's this "chain of trust" aspect that has made block chain such an attractive prospect for industries (like health care and finance) which thrive on good data governance and confidentiality.
Implications For Fixed Income And Forex Trading
In 2016, the worldwide market for blockchain technology was worth an estimated US$210 million. By 2021, experts predict that same market will grow to US$2.3 billion. Some believe the industry could hit the US$7.68bn mark by 2022.
With the sell side now buying into technologies like blockchain, changes are likely to occur in forex trading, presenting new alpha opportunities to FX trading desks. Since the block chain presents a reliable, permanent way to record information - be that transactions, currency prices, or anything else - it offers the FX industry a unique opportunity to decentralize its record keeping, and increase the availability of the information being stored.
Challenges To Meet
Financial institutions have so far taken a cautious approach to block chain technology. Many express concerns over security, regulation, and the impact of the new technology on existing systems. Some analysts have doubts over the integration of blockchain with standard trading operations, fearing that human intervention might cause delays in getting the latest prices to investors.
Block chain advocates face other challenges. For example, given the number of stakeholders who must participate in a blockchain ecosystem - the buy side, suppliers of fixed income, market makers, the exchange, etc. - obtaining buy-in and change management processes have to extend across the entire value chain.
The distributed ledger has the potential to transform and digitalize processes in the forex trading space, but organizations will require strategic planning and expertise to optimize the ways that block chain technology can help in managing their foreign exchange flows.
As more technology becomes available to FX markets, traders will face tough questions as to where and how they should you allocate resources, and whether the administrative burden of vendor management is preferable to building up capacity internally. And as technological innovation isn't slacking in pace, trading organizations must provide the talent and resources required for keeping track of new trends, and making continuous investments to maintain a competitive advantage.
Blockchain Adoption And Practical Applications
Cryptocurrencies have always had a big following in Asia, especially in countries like Japan, China, and South Korea. Some of the world’s largest cryptocurrency exchanges were originally based in Asia, and there are many regions on the continent which have directly embraced digital currencies as an alternative to using credit cards. Singapore has become an attractive crypto-hub, due to its highly connected nature and links to global trade flows. Recent events support the view that Asia is set to play a major role in increasing blockchain adoption and usability.
The banking giant HSBC has been experimenting with blockchain for some time. Since joining the blockchain consortium startup R3 in 2015, it has teamed up with Bank of America and the Singapore government on a blockchain supply chain trial. HSBC is also collaborating on the Utility Settlement Coin (USC) project, an initiative designed to make it easier for global banks to conduct a variety of transactions with each other using collateralized assets on a custom-built block chain.
In forex trading, HSBC now relies on its "FX Everywhere" system, a rare example of blockchain technology being put to practical use by a major bank. HSBC coordinates payments across its Americas, Europe, and Asia Pacific trading hubs on the platform. It's a type of block chain known as a "shared permissioned ledger", which allows approved multiple parties to amend and update in real time.
According to Mark Williamson , HSBC chief operating officer of FX cash trading and risk management,.the FX Everywhere platform has slashed the organization's forex trading costs by 25%, when compared with traditional methods.
In January 2019, the bank announced that it had settled over $250 billion in transactions using block chain technology. At that time, HSBC settled 3 million foreign exchange transactions and made a further 150,000 payments over the digital ledger system, which it entrusts with orchestrating payments across HSBC’s internal balance sheets.
Williamson asserts that HSBC now processes from 3,500 to 5,000 trades a day on FX Everywhere, with trades now worth $350 billion. The bank is aiming to provide the block chain tools to corporate clients with complex, cross-border forex flows.
As Mark Williamson concludes: "The more participants that you have joining the HSBC shared permissioned ledger and the ecosystem, the more efficient we're going to become in providing services to our clients."
You can hear:
Eric Neo, Venture Partner,
Golden Horse Fund Management
Ville Oehman, Co-founder and CEO,
Golden Horse Fund Management
Sam Ahmed, MD and Head of Asia Pacific,
speak at Fixed Income & FX APAC on the topic of ‘With the successful development of Delivery vs. Payment (DVP) capabilities using blockchain by MAS and SGX, how can you simplify your post-trade processes to further shorten settlement cycles?’
Download the agenda today for more information and insights.