Blockchain: a Cure for Foreign Exchange Discrepancies and International Trade Issues

Statista

Drawing from Keynes’ liquidity preference theory, it makes sense how risk-averse investors would drive towards the easy accessibility of a CBDC and the liquidity offered due to the central bank’s backing, so CBDCs could hypothetically end commercial banks as a whole. This further centralizes our money, which impacts transaction time and could yield harsh fees for users. It also greatly impacts the control that the banking organizations have over users, which is critics’ current biggest fear. The question is if the current digital banking oligopoly in the US (and the world) will cease to exist or emerge stronger than ever before as CBDCs get rolled out. 

With the lack of decentralization, CBDCs are likely not the direction in which currency digitalization is headed. Stablecoins like USDT are not necessarily the direction either because the central bank influences and fiat currencies that back them. Many have started to discuss the value and relevance of decentralized blockchains and what their role should be in solving these problems. However, most blockchains are not as decentralized as most people think. A closer look at Ethereum’s chain, for example, shows that the data is centralized, and stored on Amazon Web Services, a large publicly traded enterprise cloud solution. Transparency is vital for a cryptocurrency to emerge victorious in the international trade market.

Internet Computer Protocol (ICP) and other arising cryptocurrencies might just be a step in the right direction toward a solution for financial constraints on international trade and money movement. ICP, for example, can not be forked, is decentralized yet secure, and the transaction speeds and gas fees are the lowest the blockchain space has ever seen. Most importantly, ICP is immensely scalable, which is needed in the international trade space. ICP seems to solve the previously-unslolveable blockchain trilemma of achieving decentralization, scalability, and security at all once. The remaining factors to tackle are fraud and government confidence.

Rejecting modern-day technology would be like rejecting paper money and trying to stick with bartering goods back in the day. Although all change takes time, given the rate at which this technology is advancing, it would not be surprising if we start to see widespread adoption of digital currencies in the next five years– whether they be in the form of CBDCs, stablecoins, more standard blockchain protocols, or something entirely new. Either way, it is absolutely undeniable that this technology will bring a much needed level of transparency, speed, honestly, and efficiency to global currency markets. 

Because it’s likely that already existing technologies will be the solution, large financial institutions have recognized that the infrastructure to support these technologies (wallets and exchanges in particular) will be where most of the value can be captured. Citadel, Fidelity, and Charles Schwab, for example, recently launched EDX, a centralized, non-custodial crypto exchange. They know all too well that a lot of money can be made from transaction fees. Citadel has been capitalizing on exchange fees for years, in fact, 75% of its 2022 profits came from transaction fees rather than market arbitrage, contrary to popular belief. 

The day this article is being relreased (July 20, 2023), JP Morgan, Wells Fargo, and BNY Mellon pioneered the adoption of FedNow, the US government’s new instant payment system. Competing with the likes of Zelle, Venmo, and Cash App, FedNow offers fast money transfers across banks, a step in the right direction for a more efficient financial system. Zelle, Venmo, and Cash App have reduced the physical spending of dollars and created transfers with nonbank money, which has posed a threat to centralized banking, perhaps why FedNow is pioneering bank-to-bank instant transactions where credit and liquidity risks are minimized.

Solving foreign exchange and international trade issues are puzzles that will take time, disruptive innovations, and ingenuity. That said, it’s not that out of reach and something that the brightest minds in both technology and finance around the world are currently working around the clock to solve. Technology is changing all aspects of our lives right in front of our eyes, but very few people are realizing it, and even fewer people are going to participate in the upside. With the seismic shifts happening, those who put in the work now will be able to capitalize on the opportunity of a lifetime. 

Thank you for reading, 

The Black Mountain Investment Group Team

As always, the contents of this article are a cumulation of our own research and opinions; nothing put forward in this article is or should be considered financial or legal advice.