The forex market, the backbone of the world economy, is a $702 trillion global currency market. Even with lackluster performance of late, the crypto industry is looking to get a piece of the pie.
Researchers and one of the largest DeFi marketplaces are making a valid case for fiat currency traders, arguing that a move to blockchain would not only eliminate settlement risks, but also reduce the global cost of remittances by 80%. .
Uniswap Labs and Circle International Financials recently published a paper arguing that the $550 billion global remittance industry could greatly benefit from cost savings of $30 billion a year if stablecoins and DeFi protocols were used instead of traditional intermediaries. .
Gordon Liao, Chief Economist at Circle and co-author of the paper, said: “Forex is one of the first areas where decentralized finance has a powerful use case.” Mainly with the use of on-chain currencies and cross-border payments.
DeFi, financial technology that uses a distributed ledger similar to cryptocurrencies, lowers the fees banks charge. Anyone with internet access can use and transfer money between digital wallets. But when TerraUST collapsed, an FTX saga caused the technology’s image to tarnish.
The research paper argues that the traditional currency flow is mature enough to accommodate a paradigm shift in structure. If and when the entire currency exchange was transferred to DeFI, they could close the settlement gap, a mishap that occurs during the transaction.
According to the latest figures from the Bank for International Settlements, the dollar value at the time either party failed rose to $2.2 trillion a day in April 2022, just $1.9 trillion three years earlier. Because of this, the BIS said the risk of currency market sell-offs would undermine financial stability.
The DeFi document further states that:
“On-chain forex trading and settlement using DeFi technologies has the potential to address many of the challenges facing the traditional forex market, such as slow settlement speeds, high costs, and settlement risks.”
The use of payment stablecoins, specifically those pegged to the US dollar or major fiat currencies, has allowed DeFi to find real-world applications in foreign exchange and international payments.
Giving weight to the papers’ findings was due to the involvement of David Puth, former chief executive of the global settlement utility CLS, which is overseen by the US Federal Reserve. Along with authors Mary-Catherine, Austin Adams and Xinwan.
They suggest that stablecoins, by design, are relatively stable in price, making them the most efficient among coins. Adam and Wan are research scientists at Uniswap Labs. Stephane Malrait, president of the ACI Financial Markets Association, said the paper highlighted some interesting points, but argued that the paradigm shift could not happen overnight.
Central banks in major countries are experimenting with stablecoins as a mode of cross-border payment systems, but complications remain high. This could be due to the lack of regulatory clarity, attacks and thefts prevalent in the broader DeFi space, and even a dearth of user-friendly ways to access pools make mass adoption difficult.