How Blockchain is Impacting the Forex Market
The FX space is a huge global marketplace, and one that sees more than $6.6 billion traded every single day.
Incredibly, this market also has a total value of $1.934 quadrillion, while more than 170 global currencies are included in pairs and available for individuals to trade.
The market has also undergone a significant tech-led revolution through the digital age, with online forex brokers now enabling investors to plan, execute and manage their orders through a single interface. More recently, blockchain technology has also evolved to disrupt the marketplace, delivering significant advantages to traders in the process.
But how exactly is blockchain technology achieving this aim? Here are some examples to keep in mind:
Increasing Transactions Speeds and Reduced Trading Fees
The use of automation and advanced forex robots has already increased transaction speeds markedly online, while there’s no doubt that blockchain’s distributed ledger technology has the potential to reduce these speeds further.
It also has the potential to reduce the fees associated with forex transactions, which may be applied by brokers and central banks at the point of exchange.
But why is this the case? Well, blockchain is a completely decentralized technology that negates any third party or central point of control, arguably doing away with the need for the brokerage platforms that we use today.
This also means that there’s no central authority that can charge to process transactions, with blockchain utilizing different protocols and consensus mechanisms to select network validators and optimize transaction speeds.
Even banks and leading financial institutions have adopted blockchain in a bid to reduce foreign transactions fees and incentivise customers, while platforms such as Ripple (which is a real-time exchange system that has virtually eliminated transaction costs) currently allows the payment and exchange of various fiat currencies.
In the future, blockchain technology may also help the FX industry to evolve into a peer-to-peer platform, where even large-scale transactions can be handled by a much broader pool of financial market players that enables you to access the most competitive transaction fees and optimize your profits.
Introducing Transparency Into the Forex Space
The global and disparate FX market has an issue with regulation, with this creating significant challenges in terms of both trust and transparency in the eyes of customers.
This is one of the major ways in which blockchain technology can help the forex market to evolve, as its decentralized nature contributes to far more transparent and immutable record keeping pertaining to individual transactions.
That’s right, blockchain and distributed ledgers cannot be altered by anybody once a transaction has been completed, while every single transaction is accounted for and recorded online.
This extends far beyond mere transactions too, as blockchain also creates an opportunity to secure currency quotes, regulations and currency quotes in an immutable ledger, creating a superior and more transparent regulatory framework for traders to operate in.
If we extend this idea further, blockchain will enable the FX marketplace to create its own, decentralized database over time, virtually eliminating the risk of fraud while making it much easier to identify instances of market manipulation.
Enhancing Trader Security
Universal forex money management techniques encourage you to carefully manage leverage and never control positions that equate to more than you can afford to lose, enabling you to cope with the incredibly liquid nature of the marketplace.
In most cases, this allows for significant swathes of currency to be traded without affecting asset prices, and while this model offers huge benefits to investors, it also has many vulnerabilities.
It’s certainly vulnerable to cybercrime, human error and the manipulation of trading accounts, for example, creating significant security risks and obvious opportunities for rogue traders or hackers posing as online investors.
However, blockchain can help to negate such threats, with the underlying technology ensuring that sensitive transaction data is encoded using a “hashing encryption method”. This consists of blocks of information with unique hash numbers, with each one inextricably linked to the previous block.
This creates a virtually hackable system that’s inherently secure, and this can be built on top of industry standard 128-bit SSL encryption to help trades operate safely at all times.
Remember, blockchain also makes it possible to trade with far greater anonymity, which means that personal or sensitive information such as your primary email address or name need not be connected to individual transactions.
This rule already applies across millions of blockchain transactions every single day, and there’s no doubt that this technology can offer banks and traders far higher security levels in a real-time setting.