A new competitor in the FX NDF market.
Recent weeks have seen the proliferation of stablecoin projects. With more than 50 projects, the space is getting crowded. While we believe the space will eventually be dominated by a few key players, we are excited by the potential for stablecoins to function as tokenised FX.
Stablecoins can be broadly divided into collateral-backed and algorithmic tokens. Collateral-backed stablecoins can be backed by crypto, fiat or gold and pegged to existing currencies. Examples include Tether (USDT), TrueUSD (TUSD), Paxos (PAX), Digix (DGX) and Dai (DAI). The most common peg is the US dollar, with other fiat currencies (EURO, KRW) emerging too.
Collateral-backed stablecoins with a fiat peg have the potential to compete with the Non-Deliverable Forwards (NDF) FX market. NDFs are cash-settled forwards that exist to allow trading of currencies that are not internationally traded or whose trade is limited in the domestic market. NDFs traded in USD/CNY, USD/INR, USD/KRW are among the most commonly traded. In Asia, the NDF market is especially important, equilibrating market demand and supply in the presence of capital controls.
Thus, stablecoins can trade as a form of tokenised FX, functioning as a more efficient and decentralised (sometimes) NDF. As market makers, we are excited about the growing global liquidity in stablecoins and the prospect of a new competitor to the trillion dollar NDF market.
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