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A new blockchain platform for asset managers to run direct foreign exchange trading is currently being tested by the Vanguard Group. The platform is set to increase efficiency and reduce heavy costs associated with trading today.
The Vanguard Group is currently running tests on a new foreign exchange (FX) service which is powered by blockchain technology and will run peer-to-peer. The mutual fund giant is doing this to encourage asset trading and make this activity easier for managers, letting them trade currencies without the costs associated with involving the big investment banks.
Bloomberg reports that a familiar source close to the project has revealed that the platform has already been running for more than two months and has settled several trades already, including Bitcoin. The successful launch of a platform like this will significantly disrupt a market which worth $6 trillion, which is already controlled by heavy hitters such as JPMorgan Chase & Co as well as Deutsche Bank AG.
The Vanguard Group has previously initiated a disruption in finance when it pioneered cost-effective index funds for stock purchases. According to a spokesperson for the Vanguard Group, Carolyn Wegemann, the company aims to use this project for “improving the efficiency and reducing risk of FX hedging.”
The future of this new platform has been doubted by critics who believe that the company will have a hard time actually disrupting this foreign exchange market because for it to be successful, the Vanguard Group would have to find a radical way to pull in a significant number of investment firms, and convince them to adopt. Critics believe that doing this will be difficult as it will take considerable effort, to convince the number of firms needed for the platform to be deemed successful.
On the other hand, however, there is something to be said about the very nature of the platform, which will completely go around the major investment firms and run peer-to-peer, significantly reducing investment costs. Wegemann has noted that the eventual aim is for Vanguard to “lower the cost of investing for all investors.”
Campbell Adams, a former Deutsche Bank senior currency trader, has applauded the idea of direct trading as well. Adams, who also had experience with ParFX – a platform which runs with Citigroup Inc. and JPMorgan as partners – but now runs Pure Digital crypto firm, said:
“Direct trading really is the Holy Grail for the buy-side. In theory, it sounds great because you can reduce your costs if you can match directly with someone else who has a countervailing interest. [However], it will require a critical mass of users.”
Adams also believes that the current FX market, though operational, is about ready for a much-needed push into its next level. Adams explained that many years ago, the only way asset managers could trade currencies was by doing it via banks.
A little after that, the market evolved and some investment firms were then able to find and match their positions with other investors, via the new e-trading platforms. Now, he believes that the next level on the evolutionary journey will be achieved via peer-to-peer trading, bypassing these investment banks.
At the moment, Vanguard’s total assets are worth more than $5 trillion and consistently pulls in annual trades worth $2.5 trillion, making it the world’s largest mutual funds provider.