On-Chain Foreign Exchange and Cross-Border Payments

Abstract

This paper studies the use of distributed ledger technologies in the trading and settlement of foreign exchange (FX) on public blockchains as well as use cases in international payments. We compare the traditional trading and settlement of FX with blockchain-based implementations using payment stablecoins and automated market making protocols. Using public blockchain data, we quantify the liquidity, stability, and transaction costs of on-chain FX transactions in early adoption. We find consistency between on-chain FX exchange rate and those observed through traditional trading venues and stable on-chain liquidity throughout all times of the day and weekends. Our estimates suggest that on-chain FX can reduce the cost of remittance by as much as 80 percent. We also discuss potential opportunities for financial inclusion, applications in small and medium-sized enterprises and corporate contexts, as well as barriers to further adoption and relevant policy considerations.

Keywords: foreign exchange, automated market maker, blockchain, distributed ledger technology, tokenized cash, financial stability