It’s time for FX to Harness Crypto’s Potential
Jonathan Cumberlidge, FX Sales Director for BVNK, makes the case for cryptocurrencies in improving the efficiency and flexibility of foreign exchange trading.
It’s 5 pm on a Friday when the foreign exchange markets start to run thin with liquidity. The markets are volatile, and a trader has a margin call to meet before the closing of business. With banks closing and same-day wires off the table, the broker faces the choice of reducing or closing positions or taking on extra risk by extending a credit line. What’s wrong with this picture in 2023?
The main issue is obvious: foreign exchange markets today are still hindered by practices that date back to the last century. Yet we already have the tools to overcome such legacy challenges. And the FX sector could be putting them to good use now.
Cryptocurrencies have received plenty of less-than-flattering mainstream attention. But beyond this noise, the financial service sector is waking up to the fact that blockchain technology, cryptocurrencies, and in particular, stablecoins are opening the door to a range of valuable, innovative real-world applications.
Nowhere is this more apparent than in FX. Take the late-trading example above.
Using cryptocurrencies or fiat-collateralised stablecoin rails to move fiat money, the FX broker does not have to worry about traditional banking hours and can see payments sent, received, and settled in a matter of minutes, 24/7, resulting in dramatic improvements in the risk positions of all parties.
Crypto to fiat payment processing
And the technology is available now for FX brokers and trading platforms to collect payments in cryptocurrencies and instantly convert to fiat currencies, ready for their clients to trade with.
By connecting via an API to a crypto payments processing platform, brokers can integrate cryptocurrency payments into their operations without having to manage any of the complexity of collecting and converting crypto, or having it on their balance sheets. The conversion from crypto to fiat is handled by the processing platform with exchange rates locked in.
As it stands today, in trying to cover positions, the broker would be waiting for confirmation from the client’s bank that the funds in question were on their way, with the funds arriving a day or two later.
In comparison, with the ability to accept payments via stablecoins and cryptocurrencies, calls can be settled almost instantly at any time of day or night. And these transactions can take place free from the restrictions of geography and whatever that might mean in terms of local regulations covering international bank transfers and payments. Location need not be a limitation when funds are being moved using the blockchain.
Helping with market growth
Beyond FX payment speed and simplicity, brokers and trading platforms would do well to embrace crypto simply because of the added volume it can bring. Today an estimated 220 million people worldwide own cryptocurrencies, and adoption is rising at 113% per year.
By offering crypto as a source of funding, FX companies can extend their reach to new markets and customer demographics, especially those which have challenges with traditional banking models. Furthermore, payments made using cryptocurrencies carry negligible costs compared to those made via card networks. All this makes for a much better customer experience.
Improving operational efficiency
Another example of how cryptocurrencies can benefit FX brokers is by allowing trading within a single platform.
Once a broker has been onboarded onto a crypto platform, they can open an unlimited number of fiat and cryptocurrency accounts. The business can then move funds between these accounts, effectively trading on the platform.
An integrated, institutional-grade trading desk makes it easy to deal with large volumes and businesses can make and receive payments to and from third parties directly from the platform, in fiat and cryptocurrencies. Immediate access to a network of liquidity providers and ready-made trading processes reduces the customers’ administrative burden and associated costs and inefficiencies—including those related to regulatory compliance since checks are carried out by the platform provider.
Using a single platform for managing fiat and cryptocurrencies and handling day-to-day services such as accounts, payments, and invoicing can significantly improve operational efficiency while enabling rapid responses to currency price movements. And letting the platform deal with regulatory changes means you can put more resources into core operations.
As FX providers look to maintain profitability and improve efficiency at a time of continuing economic uncertainty, cryptocurrencies have a lot to offer.
It is becoming clearer that cryptocurrencies can offer greater speed, lower costs, fewer chargebacks, better access, and greater flexibility than traditional payments. FX operators would be wise to investigate them further in 2023.