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Blockchain Technology Slashes Forex Costs By 25% For Hsbc
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Banking giant HSBC recently revealed its new blockchain-based system, called FX Everywhere. The company explains that the system has reduced costs for foreign exchange (forex) settlements by an impressive 25%. According to Mark Williamson, HSBC's chief operating officer of forex trading and risk management, the bank processes some 3,500 to 5,000 trades a day, with a total worth of about $350 billion. He shares, “We’re able to demonstrate that this is not a one-off proof of concept or just one or two trades.”
Just last month, the bank reported that it had settled 3 million forex transactions worth $250 billion in 2018 using the same platform. All in all, it successfully processed 150,000 payments since the system’s launch in February 2018. And while the bank clarified that these transactions made on blockchain are just a small portion of all forex trades it had settled over the same period, it is still a significant milestone for a mainstream bank to be utilizing blockchain technology — a fringe concept that is now steadily becoming more and more of an industry standard.
Proponents of blockchain have always talked about how it can boost speed and efficiency as well as save on costs. This is because the technology settles transactions securely and instantaneously without the need of a third party. And like many other industries, banking traditionally relies on intermediaries for its transactions.
In the case of forex settlements, banks constantly deal with one another on behalf of themselves or their customers. FXCM’s post on the forex market highlights how trading in this particular market is all about currency exchange rates, which is why investors trade in currency pairs. It’s the exchange rate between two currencies that you have to look out for. Common pairs include EUR/USD, GBP/USD, and EUR/GBP. It's also worth noting that forex is the largest market in the world.
Now, forex spot trading desks often involve one or two market makers responsible for each currency pair. The primary dealer would give quotes on the currency, while a secondary dealer can give quotes on smaller transaction sizes. With blockchain, the process is made simpler as quotes are simply recorded onto the system.
The technology has also helped the bank in other aspects. Last May, CNBC highlighted HSBC’s first trade finance transaction with blockchain. HSBC had issued a letter of credit for US food and agriculture firm Cargill for a transaction involving a bulk shipment of soybeans from Argentina to Malaysia.
Banks issue letters of credit in order to guarantee that a seller receives payment under a set of conditions. Traditionally, this process takes 5 to 10 days as it entails back and forth communication between two parties and numerous paper records. This transaction however only took 24 hours. Blockchain technology speeds up the process since it records all transactions on a digitized public ledger, keeping both sides instantly updated and on the same page.
A previous post here on The Technology Headlines talked about how blockchain could enhance global trade finance by $1 trillion over the next 10 years. This would be done by relaxing the funding for small and medium sized businesses in emerging markets. Currently, the overseas trade funding gap is approximately $1.5 trillion and is expected to rise to $2.4 trillion by 2025.
HSBC is just one of the more prominent names that are currently testing out blockchain, which could mean a brighter future for the technology. Previously, TransferWise co-founder Taavet Hinrikus said that there hasn’t been enough uptake from institutional banks to use blockchain in order to improve payments systems. According to him, if more banks are adopting the technology, the world will be able to realize its benefits. That’s why with HSBC announcing the results of its blockchain platform; the technology's future is brighter than ever.
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