The Last Look…

Deep in the weeds of foreign exchange land, it’s sometimes hard to imagine that there are people living entire lives without thinking much about currency trading. This by and large includes most of the people involved in financial markets as well and the fact this ability to pretend FX doesn’t exist gives plenty of opportunity for those in the know to make money.

But what if they’re right not to care? What if FX turns out to be, really just a load of cross-border payment flows that are large enough in aggregate to allow some profit-seeking strategies to make money once in a while? That’s the existential question that’s starting to drive decisions and strategies at some of the largest market participants as clients demonstrate year after year how little time they’d like to devote to FX and how they view currency trades mostly as an inconvenience created by payments. This will influence business models for FX too.

This year, Deutsche Bank’s asset management arm DWS, recently announced that it’s one of the backers behind AllUnity, in a joint venture with Flow Traders and Galaxy Digital, an entity that will launch the first BaFin-approved euro-pegged stablecoin as momentum behind these digital tokens gathers pace. And in recent days, Stefan Hoops, DWS chief executive said he expects stablecoins to become a “gigantic market” as he sees regulated businesses, including banks and regulated financial institutions, using the AllUnity stablecoins for round-the-clock cross-border settlement and in the future to buy assets that are onchain, such as tokenized money market funds.

It won’t be headline news to anyone when I say that digital assets, and stablecoins in particular, are becoming a part of everyday life and financial markets pretty rapidly. This month’s developments include the CFTC announcing that it’s considering allowing spot Bitcoin trading on exchanges like the CME. The White House is creating a strategic Bitcoin reserve. The Federal Reserve has closed its special oversight programme for banks involved in crypto and folded them under their regular, “just banks,” category. Hong Kong launched its stablecoins regime on August 1, which many expect to attract attention from banks and other regulated entities looking to launch stablecoins. Among those that already said they’d apply is Standard Chartered backed Anchorpoint Financial. In Australia, the RBA swiftly moved into phase 2 of Project Acacia which is the trialling of 24 use cases, including the use of a wholesale CBDC for settling tokenized transactions regardless of the type of “money” buyers and sellers hold. Meanwhile, ratings agency S&P said it would create a creditworthiness scale for the various stablecoins out there.

That’s a lot of movement very fast, all pointing to one direction and not a lot of it seems to be good news for FX. Keyrock’s report calls currency markets the biggest opportunity for stablecoins.

The report spells out the failings of the current FX market structure, particularly in payments, with devastating detail: while in the EU, UK and the US 90% of payments arrive to their recipients within an hour. In countries like Angola, however, the timeframe grows to 5 days and costs go up by as much as 8x. Globally, only 43% of transactions arrive within one hour.

Then there are the costs. Curtis Noble, head of INGO markets at charitytransfers.org recently revealed that one charity he’d worked with was losing more than £1.6 million a year without realising it on annual transactions totalling £175 million. They didn’t lose it behind the back of the sofa or because they were careless with donations, but because of the invisible costs involved in moving money internationally (also known as FX). And because nobody reviewed the spreads counterparties were charging.

It’s fair to suspect that this charity is probably not the only one to have this problem. But will stablecoins make outcomes better for users or just become another way for big providers to make money from payments? Either way, the business of FX will look very different.

Banks of course have separate payments and FX desks, and if they were to issue stablecoins to do much of the same business, they would probably be able to capture a lot of the revenues without much ado due to explicit fees. Can they do the same with FX desks? That’s the question, especially if FX moves onchain, meaning that it essentially becomes what clients often treat it as: just a function of other events locked into a smart contract.

(For reference, JP Morgan’s annual statement for 2024 reveals that its revenues from payments are double than those from investment banking, totalling around $18bn vs $9bn. Ficc overall yielded north of $20bn, up 5% YoY partly driven by currencies.)

It would be way too dramatic to sound the klaxon on the death of currency trading, but there are definitely signs of change happening and fast around payments, some of which will have a huge impact on the trading side. As DWS’s Hoops told Financial News: If institutional investors buy stocks, bonds and real estate onchain, they’ll need fiat currency and that will make the stablecoin market very big.

Or not. Banks and their business models are difficult to reconcile with a model where keeping 100% of the assets is required, unlike in the fractional reserves model. This is probably why a lot of bank experiments are focusing on tokenized deposits  rather than stablecoins as rather than unlocking trillions of dollars of idle capital the stablecoins model would make that total higher not lower.

For now, onchain FX is just a concept. But change can be dramatic and fast. Something to look forward to!

Eva Szalay

eszalay@thefullfx.com