Can a blockchain-based FX settlement system prevent currency market manipulation?

Financial regulators in Asia, the United States and Europe fined several global investment banks a total of more than $10 billion in 2014 and 2015 for colluding to manipulate pricing in currency markets. Although currency markets are open 24 hours a day, five days a week, market participants agree on a daily closing price at 4 p.m. London time.

But this price is often manipulated by colluding traders who submit orders to move the price up or down during this one-minute pricing window according to their needs. The foreign exchange market investigation not only damaged the reputation of the banks involved, but also resulted in huge fines, and many people began to question the way regulators monitor the currency market.

This also raises the question of whether foreign exchange settlement systems based on public ledger technology (blockchain) can prevent future currency market manipulation.

London-based fintech startup Cobalt DL has provided a solution. Cobalt DL is committed to using blockchain technology to redesign post-trade processing for institutional foreign exchange market participants to reduce settlement costs and replace inefficient traditional post-trade infrastructure.

To bring this innovation to market, Cobalt DL has partnered with blockchain company SETL. SETL’s CEO Peter Randell stressed that the project is more than just a proof of concept, but will be “an initiative to make distributed ledger technology profitable.”

Currently, for a single FX transaction, the existing post-trade infrastructure creates multiple transaction records for the buyer, seller, broker, clearing house and third parties involved. By replacing the creation of a single shared view of every currency transaction, the Cobalt DL platform frees up back-end and middle-office resources that are occupied by continuous reconciliation in multiple systems. The Cobalt DL platform is designed to integrate with all trading venues, significantly reducing the existing traditional FX infrastructure costs.

Andy Coyne, Co-founder of Cobalt DL, said:

“The emergence of cutting-edge technologies like distributed ledgers is providing financial market participants with an alternative to the inflexible post-trade infrastructure. Cobalt DL’s combination of market expertise and forward-thinking technology is poised to shake up the post-trade space and significantly reduce costs for market participants.”

Cobalt DL has begun testing its blockchain-based peer-to-peer (P2P) foreign exchange post-trade processing platform with eight institutional FX market participants, including the company’s key technology services partner and investor First Derivatives, ahead of its official launch in 2017.

With a global ledger accessible to all currency transactions, market participants can be better held accountable for their trades as such a system will help regulators monitor for manipulative trading practices.

It will undoubtedly take a long time to use blockchain to resolve multi-billion dollar currency market transactions, but it will also prevent fraud and manipulation by future market participants.