How Blockchain Technology Could Improve ECN Forex Brokerage Platforms

The distributed ledger technology popularly known as the blockchain has been one of the most disruptive forces of technological advancements in the last decade. Since the emergence of bitcoin and subsequently the other cryptocurrencies in the early 2010s, a lot has happened in the global financial markets.

And while cryptocurrencies have taken most of the plaudits, the real force of change according to experts has been the blockchain technology. Even as cryptocurrencies continue to face various challenges, blockchain technology continues to be embraced in financial institutions while governments are also showing interest.

In fact, some of the biggest banks in the market are already leveraging blockchain technology to launch their own digital currencies. Last month, news emerged that JPMorgan Chase (JPM) one of America’s largest financial institutions was developing digital coins using blockchain for payments. So, the pathway is already being created by top financial institutions.

From the perspective of trading, the derivatives market have already made inroads into blockchain technology with several companies already running pilot projects with a view of launching market-wide systems.

However, such progress is yet to be witnessed in the forex market, especially within the framework of liquidity providers. While dealing-desk (market makers) trade against their clients to provide liquidity, the main liquidity providers in the forex market are financial institutions. Electronic Communications Networks or ECN forex brokers use a pool of networked financial institutions to provide liquidity to their clients. They do this by giving their clients access to this pool, which offers real market rates and fast execution of orders.

So, how useful could blockchain technology become in ECN forex brokerage? First, we need to look at the impact blockchain technology could have on financial institutions (the liquidity providers for ECN forex brokers).

In order to illustrate how important blockchain could be to the providers of liquidity to ECN forex brokers, we need to point out why these financial institutions are so crucial to the global foreign exchange market.

Financial institutions are central to global financial transactions between governments and multi-national corporations. Whenever a company is exporting importing products, there is a foreign currency exchange involved and this requires the banks to play their part in the exchange.

At times, banks finance the transactions for their clients and this provides a certain level of risk. As such, due to various credit requirements by central banks, there is a certain level of capital reserve that banks must keep (tier-1 capital) to minimize the risk associated with credit financing.

With blockchain technology, banks will be able to gather customer data quicker, verify it faster, and keep records that can be shared with other banks with ease. This will help to lower the risk associated with credit finance thereby allowing banks to commit more funds to provide liquidity to forex brokers. The lower the credit risk the high the amount banks can commit to the money markets.

So, what about the general impact on trading activity?

While there are claims that the forex market is decentralized, that is not entirely true. Even given the ease of access to the global forex market, it is hardly a decentralized market. Traders still experience different pricing of exchange rates albeit minute, but when you compound the price differentiation over a long time, it can become significant.

Nearly all financial institutions, the providers of market liquidity to ECN forex brokers, have different forex quotations. Blockchain technology could change this by harmonizing the networks through decentralization. Every trader whether a retail forex trader or a multi-national corporation will be able to access market prices with the same transparency. This will also bring about operational efficiencies that include among others, efficient trade confirmations.

In summary, blockchain technology has revolutionized many markets in the financial sector. Forex trading has not caught up with the wind of change yet but given the current developments, there is every chance this technology will make a huge impact on forex trading.

ECN forex brokers use a pool of networked financial institutions to provide liquidity to their clients. Their services could become more efficient by utilizing the disruptive force of the distributed ledger technology to decentralize the market.