THETRADETECHFX DAILY from the floor
Sunil Patil , senior trader , APG Asset Management
Distributed Ledger Technology ( DLT ) in combination with the CBDC can fundamentally change market infrastructure over the next decade . With the advent of digital currencies , big-tech involvement in payments , and rapid rise of digital transactions , traditional cash is quickly losing its charm and CBs [ central banks ] are concerned about losing control over how money flows in the system , and now almost every major CB has plans to introduce CBDC [ central bank digital currencies ]. Inherent features of DLT like instant settlement , on-chain smart contracts and innovative usage of permissioned blockchain have unlimited potential in traditional finance , however , regulation , platform uniformity / standardisation and robustness will eventually lead to broader acceptance of the technology . Traditionally , big asset managers like us are risk averse and will be skeptical to be first adopters of a new unproven technology . FX markets tend to follow the volume and without volume a new tech / venue / platform will not be successful , it ’ s the proverbial chicken and egg problem . So no , I don ’ t see FX markets to be traded via ledgers in next few years . That said , I believe the benefits and cost savings from DLT will eventually tip the market in its favor . We are still in the early days and lots of innovation and development is still needed before it becomes safe and robust to trade huge volumes . When that happens , DLT can essentially take
“ DLT can essentially take away settlement risk and thus enable a big institutional trader to transact with , say a retail investor , without worrying about the paperwork or needing a prime brokerage in between . A proper democratisation of FX markets .”
away settlement risk and thus enable a big institutional trader to transact with , say a retail investor , without worrying about the paperwork or needing a prime brokerage in between . A proper democratisation of FX markets . Web3 as it ’ s evolving will probably create several ecosystems where the “ money ” circulates within , with limited overlap with FX markets . FX markets will eventually benefit from the
pace of innovation in web3 , CBDC being a great example , where the idea was really put on fast track after the announcement of Libra by Facebook ( Meta ). Defi apps or DApps have created a lot of buzz recently and have also made financial inclusion a reality , anyone who has a smartphone is able to access some of the most sophisticated products on market . Increased interest from retail investors in financial products and FX specifically can lead to higher trading volumes . Some of the DApps architechture can materially enhance traditional financial products ( depo / repo , sec lending , swaps ) in addition to opening up a world of new products , say auto-hedging a bond trade on smart contracts . A big feature of DeFi is instant trade settlement making the creditworthiness of counterparts a technicality rather than an obligation , which can reduce a significant amount of work for contract negotiations and risk teams , not to mention efficient usage of collaterals . How these features will eventually affect traditional finance and FX markets in particular , will depend a lot on what view regulators and market participants take in general .
Disclaimer : Views are personal and APG as no plans at the moment to work on DeFI / DLT etc .
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