Dr. Ozan Ozerk is the founder of OpenPayd. He is a serial entrepreneur with a vested interest in several digital ventures.
For years, we’ve heard about how blockchain will revolutionize institutional finance, with all eyes focused on the potential of central bank digital currencies. The Atlantic Council think tank says that 130 countries, representing over 98% of global GDP, are exploring a CBDC.
China has already piloted the digital yuan (e-CNY), Sweden piloted the e-krona, Nigeria has launched the eNaira and the Bahamas the Sand Dollar. Other countries have set out their plans and timetables for potential launches of similar CBDCs. But not the U.S. In January, Trump issued a declaration that surprised many: The U.S. banned the Federal Reserve from creating any potential central bank dollar, citing the threats to stability, privacy and sovereignty.
And while this decree could influence CBDC projects globally, blockchain’s impact on central banking is only just getting started. The next big revolution is coming in the world’s biggest market—foreign exchange.
The Outdated FX Settlement Process
The foreign exchange market is the largest financial market in the world, with a staggering $7.5 trillion in daily turnover as of 2022.
Yet, in an era of near-instant payments, FX settlements remain archaic.
Most currencies are obliged to settle on a T+2 basis—meaning transactions can take up to two full days to clear. In practice, factoring in different cut-off times, that time window can take up to two and a half days. There are exceptions to this: The Canadian dollar settles in T+1. CLS, the global FX settlement system that settles over $7 trillion in payments daily, also settles in T+1. But overall there is a sluggishness to the system.
The changes in May of last year brought this into sharp focus. Equities moved to a shortened settlement of T+1 in the U.S., Canada and Mexico (from T+2). Given that 20% of U.S. securities are foreign-owned, this had immediate knock-on effects on the FX markets for those who needed to convert currencies to purchase securities. Ways around it included settling the FX difference post trades, settling FX before the equities trade or even using different instruments such as forwards and swaps to offset the risk.
Despite this impetus for change, progress remains slow given the potential rewards.
The Settlement Bottlenecks
There are three main barriers to faster FX settlement:
1. Inefficient payment infrastructure: Some payment networks process transactions faster than others.
2. Risk and compliance measures: Anti-money laundering and counter-terrorism financing checks slow transactions further.
3. Correspondent banking: This is the most significant bottleneck. If the sender’s bank doesn’t have a direct relationship with the recipient’s bank, it relies on intermediary banks, known as correspondent banks. These intermediaries hold accounts in multiple currencies, facilitating transfers through the SWIFT network. However, each correspondent bank must verify funds, conduct compliance checks and process the payment before passing it along—adding delays and costs.
Blockchain’s Transformative Potential
Blockchain technology could overhaul this process. Consider the concept of a “stablecoin sandwich”:
• The sender’s bank converts local currency into a U.S. dollar stablecoin via an on/off ramp.
• The stablecoin is transferred over a blockchain network, where transactions settle almost instantly.
• At the receiving end, the stablecoin is converted back into the recipient’s local currency through another on/off ramp.
This approach eliminates correspondent banking delays, not to mention simplifies what is a cumbersome process.
Federal Reserve Governor Christopher Waller has this model in his sights. In February, he stated that a stablecoin sandwich model “has the potential to reduce the complexity of a series of correspondent banking networks, improving transparency, cost, and timeliness.”
Lux Thiagarajah, a former JP Morgan FX trader who now works at my company OpenPayd, highlighted this at the Digital Assets Forum in London: “This is a massive operational win. The ability to settle FX trades instantly rather than waiting for multiple days could transform how institutional investors manage their currency exposure and liquidity. … It fundamentally changes the game for risk management and liquidity optimization.”
Full Speed Ahead? Not Quite
While blockchain-enabled FX settlement sounds like a solid solution, several hurdles remain:
• Regulatory uncertainty: Stablecoins are effectively private money, raising concerns over financial stability and potential bank runs. TerraUSD’s collapse in 2022, which wiped out half a trillion dollars in value, is a stark reminder of the risks involved.
• Fragmentation: Which blockchain network should be used? Which stablecoin should be adopted? Without industry consensus, multiple competing solutions could slow adoption.
• Trust: The U.S. dollar underpins 88% of all FX transactions, but America’s mounting budget deficit is a growing concern. Billionaire investor Ray Dalio recently warned that “the U.S.’s debts are on the edge of becoming unmanageable to the point where it could default if conditions are not changed.”
If the U.S. government enters the stablecoin space, it could face accusations of using digital assets as a tool for money printing, given the existing pressure to finance its deficit.
The Road Ahead
Stablecoins are poised for widespread adoption in FX markets, but the transition won’t be smooth. The technology, regulatory landscape and institutional trust must align before blockchain-powered FX settlement becomes mainstream.
One thing is clear: Blockchain’s impact on FX is no longer a theoretical discussion. It’s happening. Whether it’s through stablecoins, tokenized assets or central bank-backed digital currencies, the FX revolution is well underway.
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