Mutual fund leader Vanguard is set to disrupt the forex exchange market by using blockchain to challenge the global banks’ grip on it. To do so the US-based company has partnered with blockchain startup Symbiont to develop a blockchain-based forex trading platform. With blockchain becoming the world’s most disruptive technology big changes are expected.
A boon for forex
CoinDesk notes in a report on the Vanguard-Symbiont partnership that the platform recently completed its first trades, as it has been operational for two months now. This development is seen as a positive for the forex market, as it can, among other things, better facilitate peer-to-peer trading and lower transaction costs. These can, in turn, lead to even more growth for an already massive industry. A post by FXCM on the forex market explains how the it is the largest liquid market in the world with an average trading volume of US$5 trillion. The Vanguard system will make this market more accessible to investors by eliminating the need for banks to act as the middleman.
The key to Vanguard’s novel platform is the streamlining of the forex market. Peer-to-peer trading will make this possible, as institutional buy-side firms will be able to trade directly with one another rather than go through the banks. In the process Vanguard’s blockchain-based solution will reduce the cost of trading. At the moment forex traders are by and large beholden to the banks, with trading largely determined by banking hours. Crucially banks “have long acted as the price-setting middlemen in the FX market,” and have often charged exorbitant commissions. This inevitably drives the cost of trading forex up. But the Vanguard platform offers what promises to be a viable work-around to the traditional bank-based forex trading model.
Vanguard global head of forex trading Andy Maack calls the model disintermediation, a term that is a reference to the bypassing of banks as intermediaries. “Trading would be decoupled from banks,” Maack points out, “and price discovery could potentially happen outside platforms, where there might be better facilities to enable peer-to-peer matching.”
Pushing back on blockchain?
Vanguard using blockchain is not an entirely novel concept. Rather it is indicative of a larger trend happening in the financial services sector: industry players are looking to develop tech-driven means that will allow more flexible but less costly transactions, like trading on the forex market. But not everyone is onboard with blockchain. A crypto exchange traded fund (ETF), for instance, is unlikely to get approval anytime soon from the U.S. Securities and Exchange Commission (SEC). It cited fraud risk and market manipulation as the reasons crypto ETFs have not been green lit as of yet. In turn this means that the widespread adoption of blockchain will be much harder to push through.
There is also the implementation of the technology, which could cause issues. Crypto expert Campbell Adams in an article for Asia Blockchain Review explains that the Vanguard platform must have enough users to disrupt the industry. “In theory, it sounds great because you can reduce your costs if you can match directly with someone else who has a countervailing interest,” says Adams. “Yet it will require a critical mass of users.” But the trade-off of using the platform might actually appeal to many. Among the aims of this blockchain-based system, according to Vanguard spokesperson Carolyn Wegemann, are to improve efficiency, reduce risks of FX hedging, and lower costs of investing.
Should Vanguard and Symbiont deliver on these fronts, widespread adoption of the platform could be possible in the near future.