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How blockchain technology could change FX

An improved KYC process is just the beginning

Bitcoin grabs the headlines, but the blockchain technology behind it could have significant impact on the foreign exchange business. Bitcoin grabs the headlines, but the blockchain technology behind it could have significant impact on the foreign exchange business.

After my initial review of blockchain technology and Bitcoin from the perspective of an FX strategist (“An FX strategist looks at Bitcoin’s future”) I decided to have a second look. This time, I’m looking not at the value of Bitcoin and cryptocurrencies but of blockchain technologies for the FX market.

Bitcoin’s price and the price of other cryptocurrencies has risen significantly since my last blog—and they remain both volatile and speculative.

But long-term I think the true value is in the blockchain distributed ledger technology.

As organizations that work tirelessly for clients in helping them establish and maintain their banking relationships, banks will find that the advent of blockchain will ultimately be a game changer in the FX and financial services business

What's the big deal?

In today's financial markets banks spend endless hours on building a relationship with a new client. Then that moment comes when your prospective client agrees to establish a formal business arrangement with your bank.

Next step is the KYC document (know your customer). This is a process that should be painless. But it often drives many bankers to the brink. Often it takes months to finalize the KYC paperwork. By the time it is finally completed the pending relationship has been stressed to the limit.

I have personally experienced working on KYC processes for a client for over a year.

So, how could blockchain help?

Here’s how a blockchain-era process could work.

As a prospective client of a bank you could publish all vital information for your KYC to a secure ledger. Any bank looking to establish a credit line, for example, could gain access to the ledger and have the information at hand and ready to review and validate.

In most cases that will cover 90% of the required information.

The added beauty of the ledger is that once a bank reviews and signs off on the KYC, all other banks will have a reviewed and approved document. This could cut the time down to days or a week, as opposed to months. The room for error will be reduced. So will the strain on your bank's legal, compliance, and operational teams.

How else could blockchain help?

That’s only part of the potential benefit. Think about the credit process and the limits banks have in place with their customers. Very often a client’s credit lines with a specific bank will be filled up because that institution is a preferred counterparty. At the same time, there will be significant unused credit with other banks.

If the excess credit of a client is posted to a secure blockchain ledger, your favorite client can provide you access to the ledger and provide an efficient method to borrow credit capacity from other banks.

For a small fee banks with limited credit can borrow from banks with excess credit. The need to transact business with a bank that does not often provide competitive pricing will be gone. Clients can borrow credit and trade where you want.

What about trading?

Despite years of technological advances, currency trading remains fragmented and opaque.

While many providers of foreign exchange liquidity aggregate prices for their clients, there is no single decentralized view of all prices in the market.

As this is an over-the-counter market, different banks offer different prices. While the differences may be miniscule, they do exist. Yet while the market claims to be decentralized, in fact it is not.

Liquidity and the ultimate price of any currency is maintained by a central bank (The Federal Reserve, the Bank of England, or the European Central Bank, for example). Moving FX pricing to a decentralized ledger will allow all market participants— from the largest of multinational corporations to the smallest exporter—to receive the same price transparency.

There are other benefits. Operational efficiencies are abundant. From trade confirmations and settlements to securities lending, the process could be measurably improved.

While the full value of blockchain may be a few years away, we are already seeing financial institutions developing and testing solutions in the equity derivatives space. It will not be long before the broader markets move towards similar beta tests in their own asset classes.

In the not too distant future, your client's ability to use blockchain will give you, as a bank, endless enhancements to add value to your customer.

Jason Leinwand

Jason Leinwand is the founder and CEO of FirstLine FX, a foreign currency advisory firm. He has nearly 30 years of experience as a trader and global markets strategist in the currency markets. FirstLine FX was founded with the express purpose of providing independent, strategic advice on the foreign exchange markets. Prior to founding FirstLine, Jason held various senior positons in the FX markets including nine years as head of FX for MetLife. He can be reached at [email protected]

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