The foreign exchange market, or Forex market, is currently traded on an over-the-counter network of traders, banks, brokers and market makers. These parties operate to make Forex a 24-hour market, with different trading sessions opening and closing simultaneously around the world. It clocks in at around US$6.6 trillion in trades per day.
In contrast, the digital assets market cap is only US$2.1 trillion as of 4 April 2022. In terms of its 24-hour volume, it is only US$94 billion on the aforementioned date.
To be fair, the modern Forex market has been around since the 1800s, while the first digital asset was only minted in 2009.
Centralised financial (CeFi) institutions have taken an interest in blockchain technology since then. Banks such as HSBC and Wells Fargo have been experimenting with blockchain to settle their foreign exchange trades. Likewise, the Sydney-based Australian Securities Exchange (ASX) will be launching its blockchain settlement system in 2023. In Singapore, the Monetary Authority of Singapore (MAS) launched a project exploring the use of blockchain for Singapore Dollar (SGD) interbank payments in 2016.
According to a poll on the global foreign exchange and over-the-counter (OTC) derivatives markets in 2019 conducted by the Bank for International Settlements, Singapore was ranked the largest Forex centre in the Southeast Asian region and the third-largest globally, after the United Kingdom and the United States.
The study ranked Singapore as the third-largest financial centre, holding 7.6 per cent of the global share of Forex trading.
The integral component of enabling Forex exchange on the blockchain is stablecoins.
Stablecoins are digital assets that exist on the blockchain, bearing similar properties to cryptocurrencies. However, unlike cryptocurrencies which can be volatile, stablecoins are pegged to a certain value of an asset. For example, the StraitsX Singapore Dollar (XSGD) issued by StraitsX is collateralised one-for-one with the Singapore Dollar. USD Coin (USDC), issued by Circle, is collateralised one-for-one with the US Dollar.
Many digital assets can be traded on DeFi (decentralised finance) protocols. Some of the most common digital assets that are traded are stablecoins, which are the closest things to fiat currencies within the Forex market. Some of the largest stablecoins are the USD Coin (USDC) and StraitsX Singapore Dollar (XSGD).
In some cases, swapping stablecoins yields better rates than trading currencies on the Forex market. DeFi protocols leverage smart contracts, which run autonomously when predetermined conditions are met. Smart contracts allow decentralised protocols to boast extremely competitive FX rates in addition to faster settlement times.
As of 22 March 2022, the mid-market FX rate for the USD/SGD trading pair is an average of 1.35662 for the past 30 days.
On the same date, swapping USDC and XSGD yields a rate of 1.35861 on a DeFi protocol such as DFX Finance. Investors could get even better rates if they swapped zUSDT (Zilliqa-bridged Tether) and XSGD on ZilSwap, yielding a rate of 1.37434.
Investors can also provide liquidity on these DeFi protocols with their stablecoins. Those who do so will be rewarded with attractive yields as high as 15%.
Forex charts are volatile, where prices swing up and down. This volatility mirrors the digital assets market but at a much lower rate.
The digital assets market is quite nimble to react to this volatility with its low settlement times. Forex market transactions, however, take at least two business days.
The time taken to complete a settlement is due to the middlemen involved. These middlemen do transaction monitoring to ensure that the funds are legitimate and accountable.
However, blockchain or distributed ledger technology (DLT) allows for much faster transaction settlement times by automating this process with smart contracts. Smart contracts can be coded to execute orders if certain parameters are met, such as updating records once payment has been received, or verifying trades.
Current blockchain transactions for digital assets range from 1.5 seconds to 60 minutes – a far cry from the conventional Forex, which may take days or weeks.
Take a look at the table of the transaction times below:
Source: ResearchGate & Moralis Academy
Note: StraitsX’s XSGD and XIDR are built upon the Ethereum and Zilliqa blockchain. This enables XSGD and XIDR to take advantage of each network’s speed, scalability, and cost-efficiency.
Given the transparency of DLT, numerous regulatory bodies can easily conduct audits or investigations if necessary. An added bonus is its increased availability, syncing timelines for the opening hours within the Forex markets. For example, discrete opening hours and time zones in Singapore, Moscow, Dubai, etc., can sync and always be online 24 hours a day, 7 days a week.
A simplified Forex structure with blockchain underpinnings can lower transaction fees. This is because smart contracts automate processes like payment reconciliation and transaction monitoring, which would usually incur fees in CeFi institutions. While some CeFi institutions offer good FX rates, the rates often get eaten up by fees, and the user gets less overall.
Different DeFi platforms may offer different rates, and as such, it is best to compare amongst them to get the best FX rates. At the first glance, some of them might offer lower swap rates as compared to mid-market FX rates. However, the amount that the user gets is more overall, even after factoring in gas fees
In addition, processes like payment reconciliation and transaction monitoring are transparent on the public ledger. Blockchain technology is naturally transparent and immutable, allowing transactors to track, view, and trace their transactions.
StraitsX takes the spirit of Forex trading with our stablecoins, XSGD and XIDR. Essentially, the StraitsX version of Forex trading is done through minting, swapping, and redeeming between different stablecoins within the StraitsX Ecosystem and its DeFi partners.
It is a simple process:
Note: If you are a high net worth individual, or institution, you can take advantage of StraitsX’s OTC Desk feature that offers deep liquidity and OTC block trades.
StraitsX and our DeFi partners are especially catered for our Indonesian and Singaporean users because of our native support of XSGD and XIDR. This would allow our regional investors to trade in their home currency, as opposed to factoring in the conversion of their home currency to the US Dollar (USD), minimising transaction fees, and slippages.