Tokenizing the FX market would accelerate global trade worth $7.5 trillion daily

The tokenizing of everything has lately been a shared interest of not just crypto enthusiasts but also banking and institutional players.

The emerging markets of digital assets powered by decentralized blockchain technology offers varying unique solutions for vast value systems to be built atop. Tokenization, which is simply the process of creating a cryptographically secure digital identity(representation) of an existing real world asset, product, service or traditional assets like stocks onchain, creates a unique opportunity to sideline the present rigid system to which most business operations function on and embrace a globally accessible market solution that's not just permissionless, but is also cost-effective and more rewarding.

So far, there are about 108 tokenized real world assets(RWA) issuers with over $18.61 billion in value tokenized onchain.

This value is up +21.47% in the last 30 days according to data from RWA.xyz.

Tokenization efforts spearheaded by institutions like BlackRock are currently heavily focused on US Treasury bills, private credits and commodities. Whilst stablecoins, which are essentially tokenized fiat currencies account for over $224 billion of crypto's total ecosystem market capitalization, with over 153.40 million reported holders, there isn't much focus on explicitly deploying tokenized assets that serve as instruments to facilitate FX trades onchain.

FX tokenization is a much needed additional to the world of tokenized asset markets. The problem however is that we cannot do that without inevitably sliding into enabling the use of CBDCs.

That said, there's a good reason why it should exist nonetheless.

I have made peace with the fact that central bank digital currencies(CBDCs) will exist. Certainly not in the form which it was envisioned early on but there will exist a lot of traded tokens that are just CBDCs under the hood.

Stablecoins will be a major part of this class of tokens enabling the central banking system to keep its claws on the finances of many. It will be a case of sacrificing a little bit of centralized control for continued market dominance.

The good news is that we are positioned as an ecosystem to not be obligated to transact through these tokens, hence, their integration will be a case of providing market solutions to a group of people already heavily involved.

Reportedly, the FX market processes trades worth over $7.5 trillion daily. Statista estimates however are much higher than this, but this remains a widely cited report from 2022.

Certainly, there's a handful of banks and other financial institutions pushing significant volumes but there still remains a large number of individual traders and business persons who engage these markets for varying reasons.

I did a little reading in the various compositions that exist in the Foreign Exchange(FX) market and I immediately found a flaw that makes blockchain an attractive piece of solution to tackle the present inefficiencies in the system.

Scaling FX spot settlement could increase trade engagement

Out of $7.5 trillion daily volume reported for 2022 in FX markets, spot trades account for over $2.1 trillion, yet, it faces flaws that may disincentivize engagement by specific segments of market participants.

The FX spot market is limited to its T+2 days settlement periods set on trades. This means that trades are settled within 2 business days after being initiated.

While it may not seem like a big deal for some people, it also explains why compositions like forward markets exist to enable business persons lock-in trades ahead of specific timeframes to avoid paying the cost of potential market fluctuations over time.

Tokenizing the FX market in entirety and delivering trading solutions onchain would drive settlement times from 2 business days to a few seconds or minutes, depending on the base blockchain.

Generally, the limitations set are primarily due to operational, regulatory, and banking system constraints, all of which blockchain fixes.

The foreign exchange market is a giant value pot that would drive up revenue for blockchain networks through fees as currencies flow through billions of transactions daily.

The factor of enabling CBDCs remains, but it only affects willing market participants, which currently, are already subject to extensive centralized oversight in the various FX trading channels they leverage. It's a win-win situation because on one hand, it opens up the FX market for more flexibility, not just for regular traders but for institutions and governments and on the other hand, it attracts liquidity to the cryptocurrency ecosystem and drives up revenue for blockchain networks.