The Last Look…

If POTUS says it’s good, who are we to argue?

At a recent networking event held by a digital asset technology company in London I kept running into staffers from banks and not a single one of them had been previously associated with crypto.

Morgan Stanley and Northern Trust were just two such examples, with their representatives saying that until now, all digital assets-related work was done in the background or as a small side project. Now, however, with President Donald Trump speaking directly to digital asset events to extoll the virtues of stablecoins and blockchain rails, the floodgates are officially open. As one bank staffer put it: “If POTUS says it’s good, who are we to disagree?”

This change has been so sudden, admittedly, that it caught even the CEOs of crypto companies somewhat off-guard. One such executive who was making their way to the SEC’s first ever roundtable on crypto said: “It feels so crazy to walk through these doors and feel like I’m not going to be arrested.”

With all of this in the background, perhaps it’s time for FX to re-examine its relationship with digital assets. While a significant number of currency market folk are already on the crypto side, those who run FX remain rather resolute in their dislike for the technology, but then, liking something and using it are two different things.

For FX is already deeply intertwined with crypto and this connection will only deepen. From a trading perspective, many FX strategies also work for crypto, and firms like Zodiac Markets, by providing on- and off-ramp fiat vs crypto, are inadvertently becoming players in the $7.5 trillion a day currencies space, especially in emerging markets.

Stablecoins are being touted as a key tool in maintaining the dollar’s global role as a reserve and trade currency by none other than the US president and corporate treasury operations as well as large Wall Street banks are creating their own versions of these coins to enable internal value transfers and pay suppliers.

“We are only in the foothills of this,” says Michael Walsh, executive chair for Zodia Markets Ireland. Walsh is coincidentally an FX industry veteran with a vast knowledge of currency markets.

Stablecoins are increasingly being used for FX transactions, but with such buy-in from POTUS as well as regulators around the world (apart from the UK, of course) this trend could accelerate rapidly.

This is because once the rules are clear, the benefits will be hard to resist: some estimates put cost savings at 90% compared to current cross-border transaction fees while the timeframe is dramatically reduced. An FX trade can be done and dusted in five minutes rather than in the old-fashioned two-day settlement cycle. This of course means much faster turnover of capital on balance sheets and leading to all sorts of collateral benefits as a result.

“You talk about adoption of USD pegged stablecoins but we have already transacted in Turkish lira-pegged stables vs USDC (Circle’s USD coin), so there may be a whole train load of on-chain FX coming down the track,” Walsh says. “I expect to be sitting in the dining car of that gravy train supping magnums of Dom P.”

Meanwhile, companies that started in crypto are coming into FX. Hidden Road launched a fixed income brokerage platform, for example, that will make it possible for traders to cross-margin and margin finance across cleared derivatives, FX prime brokerage, OTC swaps and digital assets.

There are big questions for FX firms, and for some, existential ones, but it’s time that FX faced its future head-on as there could be many positives as well

Banks of course have been cautious until now, but with the removal of a truckload of hurdles erected by the previous US administration, they’re feeling the FOMO. Just a few weeks ago the Office for the Comptroller of the Currency published a letter removing the requirements for banks and savings associations to ask for permission to engage with digital assets, making “a range of cryptocurrency activities permissible in the federal banking system.” The missive came hot on the heels of the roll-back of SAB 121, an accounting rule that made it prohibitively expensive for banks to hold crypto on their balance sheet.

So what’s next? The lobbying activity to push back on capital requirements has already started and the crypto lobby has proven to be a formidable spender, sorry force, so far. Could banks adopt stablecoins for their wholesale activities for example? Could stablecoins be a solution for APAC hedge funds struggling with T+1 settlement times in US equities? And if those things happen what role will infrastructure providers such as Swift and CLS play in the foreign exchange market?

These are big questions and for some, existential ones, but it’s time that FX faced its future head-on as there could be many positives overall as well.

The last big bang type change came to currency markets with the arrival of prime brokerage, an event that led to a surge in volumes. With stablecoins speeding up the velocity of capital and money moving around, this could be the next big shift in foreign exchange and the start of a new era. That’s going to be fun, right?

Eszalay@thefullfx.com