The world’s largest mutual funds provider Vanguard is planning to use blockchain for a new foreign exchange platform. The system is aimed at institutional asset managers to enable peer to peer trading. Hence the participants will be able to circumvent the traditional banks and other intermediaries to reduce the cost of currency trades.
The global currency market handles $6 trillion in trades daily. But the challenge for such a project is getting a sufficient number of players on board.
“In theory, it sounds great because you can reduce your costs if you can match directly with someone else who has a countervailing interest,” said Campbell Adams, a former senior currency trader at Deutsche Bank told Bloomberg.
The massive foreign exchange market has an enormous amount of liquidity provided by these banks and intermediaries. So it remains to be seen if the Vanguard initiative could offer competitive prices.
In a recent interview with The Trade, Vanguard’s head of FX trading, Andy Maack spoke about the opportunity without referring specifically to the project. “There is still a tremendous amount of interest in the potential for disintermediation, whereby trading would be decoupled from banks and price discovery could potentially happen in outside platforms where there might be better facilities to enable peer-to-peer matching,” said Maack. “That is pretty intriguing, especially for the foreign exchange markets which only really started to seriously explore this topic in recent months.”
Vanguard’s platform is being developed by blockchain technology firm Symbiont. The two firms have previously worked together on a project for sharing index data.
There’s already an existing distributed ledger technology system used by the incumbent players. Recently, FX platform Cobalt went live with Deutsche Bank, XTX Markets and Saxo Bank as its first clients. Cobalt focuses on the post-trade aspect to expedite settlements and reconciliation.
HSBC is also using blockchain for foreign exchange. Nine months ago the bank said it had settled $250 billion of group FX trades using the system.
Meanwhile, a group of major banks have plans to tokenize multiple currencies with the potential to settle currency trades. London-based Fnality said its Utility Settlement Coin could potentially be used to instantly settle intraday FX swaps using the Finteum platform.
