DeFi to target $7 Trillion Global Foreign Exchange Market

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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