There are several potential obstacles that could prevent cryptocurrencies replacing fiat currencies in the long-term. However, things are developing quickly in the crypto world, with governments increasingly embracing the use of blockchain-based technologies to facilitate various transactions. The age of tokenised fiat currencies could be here as the disruptive force of the blockchain technology continues to impact different markets.
Singapore Is Leading the Way
Singapore has been on the forefront in this new paradigm shift after completing the first phase of developing a tokenised version of the Singapore Dollar last year.
The project’s main goal is to replace the country’s MAS Electronic Payments System (MEPS+) which is Singapore’s version of the Clearing House Interbank Payments System (CHIPS) in the U.S. This prototype system will simply convert MEPS transfers into private Ethereum-based blockchain transfers in a process that will eventually “see bank customers send and receive payments and exchange currency without lengthy processing times, fees or intermediaries.”
Now, Singapore is only among the early adopters of blockchain-based transactions. And if events follow the normal trajectory relative to how markets embrace new products, then it is only a matter of time before the rest of the world follows.
Fiat-Based Tokens Are Already Being Created
Based on recent developments, things are already looking up in this respect following the launch of FBT (Fiat-Based Token), a cryptocurrency that will be backed by real cash deposited with various banking institutions. Initially, FBT will have USD, EUR, and GBP in its portfolio of tokenised fiat currencies, but the rest are expected to follow soon after. So, it is correct to say that the path has been cleared for the tokenisation of fiat currencies. What does this mean for global trade and especially the currency exchange markets?
Things Could Get Interesting
There is a potential for the democratisation of the foreign exchange market, where issues like the EUR/CHF flash crash of 2015 may never be witnessed again. With governments and banking institutions ceding control of the global forex market, this could change the rules for day trading. The global forex market oversees upwards of $5trn worth of transactions daily. If this figure was to somehow find its way into the blockchain infrastructure, then the cryptocurrency market will have the liquidity it has been screaming for since bitcoin first emerged in the early 2010s.
Even more important is the fact that the movement of cash from cryptocurrency wallets to bank accounts will become quicker, simpler and less costly. This will make cross-border trade more dynamic, fluid and efficient by eliminating structural frictions between regions and institutions.
In today’s market, transactions between countries take days to clear while currency translations also create headwinds for multinational corporations. While most people recognise foreign exchange based on online trading and transactions between countries, interbank exchanges are the ones that account for the huge chunk of the daily transactions volume. Bringing governments and banking institutions to the same playing field with retail traders and on equal footing, this will usher a fully decentralised global market with little room for fraud and government control.
Will Fiat-Based Cryptocurrencies Tame Forex Trading Fraud?
Tokenisation of fiat currencies could go a long way towards ridding the world of some of the most common financial crimes in the world. Fiat currencies are fungible. On the other hand, cryptocurrencies like bitcoin are not, which means that every coin can be traced to its origin across the blockchain network.
As such, while anonymity has been hyped to be one of the biggest advantages of using blockchain-based altcoins, this does not mean that a trader’s activity cannot be traced back to them. For instance, bitcoin is not completely anonymous, but rather, pseudonymous. And adding the fact that it is also not fungible means that it could be a lot easier to identify and flush out instances of fraud.
With fiat currencies, rogue corporations find it quite easy to clean dirty money through fake enterprises. And since one cannot trace the origin of every dollar to check whether it was earned authentically, it becomes difficult to flush out fraud in the global financial markets. The online trading market is filled with fraudulent brokers that scheme from their clients and vanish without a trace. While a few cases like this have also emerged in the cryptocurrency market, the footprint that every bitcoin leaves after changing ownership could be used to nab those involved.
This is a period that could eventually reinvent the global currency markets. Tokenisation of fiat currency could change the game in the forex trading market through decentralisation, while the cases of fraud are likely to decline. Eventually, the global financial market could become more dynamic, eliminating trade frictions between different participants.
Currently, different countries have different trading rules and regulations, but if the current trend is maintained, individuals could soon all be participating under a unified trading law that would govern the global cryptocurrency market.
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