Stablecoins Emerge as Possible Fix for US T+1 FX Woes for Global Fund Managers

Stablecoins could ease challenges for non-US fund managers in meeting the shorter settlement cycle for US securities introduced in May. The use of stablecoins, digital assets designed to maintain a stable value, allows for instantaneous delivery versus payment (T0) on the same day as a trade, due to the utilization of distributed ledgers. Stablecoin issuance has been on the rise, with its supply increasing by over 14% in the first quarter of this year, highlighting their growing utility. Stablecoins can be used to transfer funds more quickly than traditional fiat methods, enabling synchronized settlement of foreign currencies (FX) with US dollars needed for purchasing equities.

Stablecoins Emerge as a Potential Solution to T+1 FX Challenges for Global Fund Managers

Introduction

The impending implementation of a shorter settlement cycle (T+1) for US securities in May 2024 has raised concerns among fund managers outside the US, particularly those in Asia Pacific. The challenges stem from the difficulty of completing foreign exchange (FX) trades in time to meet the revised settlement timeframe. However, stablecoins, a form of digital asset designed to maintain a stable value, are offering a glimmer of hope as a potential solution to these FX challenges.

T+1 FX Conundrum

The standard settlement cycle for most US broker-dealer transactions in securities will soon be reduced from two business days after a trade (T+2) to T+1, effective May 28, 2024, in the US and May 27, 2024, in Canada. This shorter timeframe poses a significant challenge for asset managers outside the US, as it limits the time available to complete FX trades necessary for purchasing and selling US stocks.

Stablecoins Offer a Timely Solution

Stablecoins, digital assets designed to maintain a constant or "stable" value by holding reserve assets, such as US dollars, at a fixed rate, offer a unique advantage in the context of the T+1 settlement cycle. Unlike fiat currency, which is held on a central record by a bank, stablecoins do not require the involvement of banks and can be issued by technology companies or crypto-native firms.

The supply of stablecoins has experienced a surge in recent months, with a 14% increase in the first quarter of this year, according to the Q2 2024 Guide to Crypto Markets report from Coinbase Institutional and Glassnode. This growth underscores the increasing acceptance and utility of stablecoins.

Zodia Markets and Fireblocks Collaboration

Zodia Markets, an institutional crypto trading platform backed by Standard Chartered and OSL Group, has partnered with Fireblocks, a provider of infrastructure for digital asset operations, to facilitate the use of stablecoins for cross-border payments and FX transactions. This collaboration aims to enable clients to transfer funds more quickly and efficiently than traditional fiat methods.

Benefits of Stablecoins for FX

The use of stablecoins for FX transactions offers several advantages, including:

• Synchronicity: Stablecoins operate on blockchain platforms that are available 24/7, allowing for synchronous settlement of eastern hemisphere stablecoins with the US dollars required for purchasing equities, regardless of regional payment cut-offs.
• Reduced Counterparty Risk: By utilizing stablecoins, FX hedges can be executed in non-US time zones, eliminating the risk associated with FX settlement occurring after the payment cut-off times of eastern banks.
• Cost Savings: Stablecoins can facilitate cross-border payments and FX transactions at a lower cost compared to traditional fiat methods, as evidenced by the example of an African oil importer who saved significantly by using stablecoins for payments to suppliers in the Middle East.

Regulatory Considerations

While stablecoin regulation is still evolving in many jurisdictions, a key metric for assessing the reliability of stablecoins is the nature and amount of their reserve assets. Zodia Markets emphasizes the importance of selecting stablecoins with robust reserve asset frameworks and transparent issuance practices.

Zodia Markets' Growth Strategy

Zodia Markets' growth strategy revolves around expanding its product offerings, including the addition of digital bonds, other securities, and derivatives. The firm also aims to deepen its integration with existing currencies and expand into new markets, particularly in the Asia Pacific region.

Conclusion

Stablecoins have emerged as a potential solution to the FX challenges posed by the T+1 settlement cycle for US securities. Their ability to facilitate synchronous settlement, reduce counterparty risk, and lower transaction costs makes them an attractive option for fund managers outside the US. As stablecoin regulation continues to evolve and the technology matures, their role in the financial ecosystem is expected to grow, paving the way for greater efficiency and accessibility in cross-border payments and FX transactions.

Additional Insights from Industry Experts

"Stablecoins are in some respects similar to Eurodollars as they are U.S. dollar-based liabilities with origins outside the regulated banking system." - Timothy Massad, former chairman of CFTC and former Assistant Secretary at US Treasury

"The real magic is when you have a stablecoin and digital security on the same rails on the blockchain." - Nick Philpott, co-founder and head of partnerships at Zodia Markets

"This migration of money and finance to the open internet has an air of inevitability, particularly in an age when more people have smartphones than bank accounts." - Nick Philpott, co-founder and head of partnerships at Zodia Markets