How digital currencies are changing the FX landscape Absa | Corporate and Investment Banking > Insights and Events > How digital currencies are changing the FX landscape Robert Cousins Head of Global Markets Digital Product Absa CIB SHARE Digital currencies – whether stablecoins or issued by central banks – are disrupting the cross-border payment space. What are the risks and opportunities for corporate treasurers? The average monthly supply of fiat-currency-backed stablecoins has topped $140 billion in 2024, more than double the supply in 2021. Monthly transaction volumes number in the hundreds of millions, and the monthly dollar value of transactions using stablecoins now tops the $1 trillion mark. What does this mean for cross-border payments and FX? “Digital currencies will change the nature of foreign exchange (forex, or FX),” says Robert Cousins, Head of Global Markets Digital Product at Absa CIB. “Central Bank Digital Currencies (CBDCs) are one aspect, but our view is that these could take longer to implement and are more focused on domestic use cases. They are therefore a medium-term consideration for FX. The stablecoin side of digital currencies, however, is a much more immediate threat.” Stablecoins – digital representation of money collateralised by an existing asset – include the likes of the US dollar-backed USDT and USDC, or the gold-backed PAXG. Atomic swap How will digital currencies change the FX landscape, and what makes them a “threat”? Cousins explains: “Stablecoins are a much more efficient settlement mechanism than typical cross-border correspondent banking-based payments. Cross-border settlement via correspondent banking takes two days at best, whereas stablecoins and digital currencies enable real-time atomic swap of value.” That shift from T+2 to T0 introduces a new set of risks for corporate treasurers. “It moves everything to real-time settlement, and your treasury needs a whole new set of capabilities to manage that,” Cousins says. “Your fundamental currency risk management won’t change much, but you will have an additional set of liquidity risks. Liquidity risk is easier to manage when you have a lead time, but with digital currencies, you don’t have that. You could suddenly have immediate settlement payment commitments that drain your cash liquidity, which you didn’t anticipate. The ability to forecast cashflow will become even more important, but the flip side is that cashflow efficiency will be better and will hence aid cashflow management.” Risks and opportunities Understanding how digital currencies change the FX landscape requires some understanding of how these currencies work. Cousins warns that while many people regard a digital currencies like Bitcoin as being an investment asset class, it is, at its core, a distributed payment rail … and an efficient and cheap one at that. “All cross-border flows will go via digital currencies sooner or later,” he says. “It’s going to happen. It’s just far too efficient to ignore. Look at Bitcoin: there have been a number of $1 billion transfers using bitcoin, and they were settled at a cost of under $1. Along with this efficiency, the security and traceability on distributed ledgers further re-enforce our view, especially as greater regulatory certainty is clarified in digital currencies.” CBDCs add an additional layer of safety and – in some respects – legitimacy to the digital-currency space. These have more issuer credibility in that they are backed by central bank reserves. “The key question with digital currencies is, who issues it, and who are you taking credit risk against?,” says Cousins. “If a central bank backs it, it has credibility. Even when commercial banks issue stablecoins, there’s a lot more credibility around it.” And while much of the conversation is still in forecasts and hypotheticals, digital currencies will change the FX picture for importers and exporters – if not now, then soon. “Very soon,” says Cousins. “We’re seeing a lot of transactional flows starting to happen in this space. Some clients are already asking if they can off-ramp from USDT or Bitcoin into fiat currencies. We also have clients who have invested in digital currencies, and who want custodial services from Absa. This is opening up a whole new set of risks and opportunities.” The key message for Absa’s clients, then, is that digital currencies are no longer the sole reserve of techies, early adopters or risk-taking crypto investors. “Digital currencies – whether CBDCs or stablecoins – are changing the FX landscape,” Cousins concludes. “Our main message to clients now is around risk and cybersecurity, because this is a very technical domain and not everyone understands it easily. But with that risk comes opportunity. The distributed ledger technology that underpins digital currencies is very efficient, very robust, and it could better enable your business.” Robert CousinsHead of Global Markets Digital Product Absa CIB https://cib.absa.africa/wp-content/uploads/2020/07/file_example_MP3_700KB.mp3 Related Articles RISK MANAGEMENT Benchmark Reform | Assistance with publications On 29 November 2024, the Market Practitioners Group published three significant consultation papers, based on the recommendations of various working groups. The Read more RISK MANAGEMENT 2024: The Year in FX Ross Long, Head of Foreign Exchange for the Absa Group, reflects on the factors that shaped FX markets in 2024 and how they influenced the value of the rand. 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