DeFi to target $7 Trillion Global Foreign Exchange Market

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For­eign Exchange, the back­bone of the world econ­o­my, is a $702 tril­lion glob­al cur­ren­cy mar­ket. Even with lack­lus­ter per­for­mance in recent times, the cryp­to indus­try is look­ing to get a piece of the pie. 

Researchers and one of the biggest DeFi mar­ket­places are giv­ing valid argu­ments to traders of fiat cur­ren­cies, argu­ing that a shift to blockchain would not only elim­i­nate the set­tle­ment risks but also cut the glob­al remit­tance cost by 80%. 

Uniswap Labs and Cir­cle Inter­na­tion­al Finan­cials recent­ly pub­lished a paper argu­ing that the $550 bil­lion glob­al remit­tances 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, the chief econ­o­mist at Cir­cle and co-author of the paper, said, “For­eign exchange is one of the first areas where decen­tral­ized finance has a pow­er­ful use case.” Major­ly with the uti­liza­tion of On-chain For­eign Exchange and Cross-bor­der Payment.

DeFi, the finan­cial tech­nol­o­gy using dis­trib­uted ledger sim­i­lar to cryp­tocur­ren­cies, cuts out the fees banks charge. Any­one with access to the inter­net can use and can trans­fer mon­ey between dig­i­tal wal­lets. But when Ter­raUST col­lapsed, an FTX saga caused the technology’s image to be tarnished.

The research paper argues that the tra­di­tion­al cur­ren­cy stream is mature enough to adapt to a par­a­digm shift in the struc­ture. If and when com­plete for­eign exchange was shift­ed to DeFI, they could close the set­tle­ment gap, a mishap occur­ring while the transaction. 

Accord­ing to the lat­est fig­ures from the Bank of Inter­na­tion­al Set­tle­ment, the dol­lar val­ue of the time when either par­ty failed rose to $2.2 tril­lion a day by April 2022, a mere $1.9 tril­lion three years ear­li­er. Due to this, BIS said the cur­ren­cy mar­ket set­tle­ment risk would under­mine finan­cial stability. 

DeFi paper fur­ther states that:

“On-chain FX trad­ing and set­tle­ment using DeFi tech­nolo­gies has the poten­tial to address many of the chal­lenges faced by the tra­di­tion­al FX 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, have allowed DeFi to find real-world appli­ca­tions in the forex mar­ket and inter­na­tion­al payments. 

Pro­vid­ing weight to the papers’ find­ings was due to the involve­ment of David Puth, ex-chief exec­u­tive of glob­al set­tle­ment util­i­ty CLS, over­seen by the US Fed­er­al Reserve. Along with authors Mary-Cather­ine, Austin Adams, and Xin Wan. 

They sug­gest that the sta­ble­coins, by design, have a rel­a­tive­ly sta­ble price, mak­ing them more effi­cient among cur­ren­cies. Adam and Wan are research sci­en­tists with Uniswap Labs. Stephane Mal­rait, chair­man of ACI Finan­cial Mar­kets Asso­ci­a­tion, said the paper high­light­ed some inter­est­ing points but argued that the par­a­digm shift could not hap­pen overnight. 

Cen­tral banks across major coun­tries are exper­i­ment­ing with sta­ble­coins as a mode of cross-bor­der pay­ment sys­tems, but the com­pli­ca­tions remain high. This might be due to the absence of reg­u­la­to­ry clar­i­ty, pre­vail­ing hacks and theft in the broad­er DeFi space, and even the short­age of user-friend­ly ways for access­ing the pools make mass adop­tion difficult. 

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