April 19, 2019
Back in November 2017, MEDICI reported on the X-Trade–SecurionPay partnership. It was a collaboration that gave X-Trade access to a technologically advanced payment platform – one that allowed the forex company to monitor all transactions in real time securely, detect irregularities, and deliver uninterrupted payments. Such partnerships are good for business, as it legitimizes the platform – a clear sign of a forex company’s desire and willingness to offer its traders the best services possible.
Within the industry, legitimacy is key; safety and security are crucial, too – this is why blockchain technology can be extremely useful. In an interview, FirstLine FX founder Jason Leinwand claimed that blockchain technology holds true value in forex. Leinwand states that blockchain will ultimately be a game changer in the FX and financial services business. In the context of forex, in particular, the main benefit of blockchain technology adoption is the transparency it ensures. To understand this further, keep in mind that despite claims that the forex market is decentralized, the opposite is actually true. Currency prices are ultimately determined and maintained by a central bank. E.g., the Federal Reserve here in the US or the Bank of England in the UK. To be fair, the price differences are often minuscule, but there are differences nonetheless. In the grand scheme of things, these differences can actually mean the difference between bigger profits or a slightly smaller one.
The problem with this setup is that other market participants, from the biggest of corporations to the small time traders, are kept out of the loop on how currency prices are maintained or determined. Blockchain presents a solution to the current lack of transparency. It allows for true decentralization as pricing is moved to this high-tech virtual ledger. With blockchain, banks will no longer be able to dictate currency prices as every market participant will have easy, convenient, and real-time access to said prices.
Additionally, blockchain adoption can mitigate risks in the forex market. Transactions, along with personal & financial records, are vulnerable to data hacks and – even more so in a centralized and highly liquid system like forex. A post by FXCM on the forex market outlines how its daily trading volume is over $5 trillion, which means it is the most liquid market in the world. This high liquidity, as pointed out by The Balance, means large amounts of money can be moved into and out of foreign currency with minimal price movements. Therefore, a breakdown at any level has far-reaching implications, mostly to the detriment of traders. A single mistake or a hacked account can potentially lead to legitimate traders losing big money to unscrupulous individuals who take advantage of the current system.
This is where blockchain comes in. A defining feature of blockchain is that it cryptographically encodes data via an algorithm-based process called hashing. Once data is recorded in a block, a unique hash number corresponding to it is generated. The next block is then linked to the previous block by using the latter’s hash number to generate the former’s hash number – this means that if a block is tampered with, it is detected since the hash number that is linked to the subsequent blocks will be lost. Additionally, blockchain incorporates other unique security features that make recording data – and transactions, in general – much safer and harder to manipulate.
Forex stakeholders aren’t necessarily diving into blockchain adoption head first, which is unsurprising. Despite its many benefits, blockchain represents a new frontier, and that in itself is reason enough for many to still be cautious. That said, it is undeniable that the technology and everything it brings to the world of finance is set to disrupt the forex market in the times to come.