BLOGS | 07 OCTOBER 2019 By: Matt Starkey
To put that into perspective, New Zealand dollar is the 10th most traded currency globally despite its relatively small market cap. New Zealand dollar is used as a risk-on, risk-off lever and can also be a proxy to the emerging markets given its correlation to the Australian dollar.
Every three years the Bank for International Settlements (BIS) conducts a survey on the size of the foreign exchange market and publishes its findings. The most recent version was undertaken in April, canvassing 1,300 banks in 53 jurisdictions, and discussed widely among its constituents.
Surprisingly to most participants, BIS found the FX market had grown some 29 per cent in the last three years, concluding the size of the market to be US$6.6 trillion traded daily, up from US$5.1 trillion recently. This reinforces the foreign exchange market as the largest in the world, and most impressively, it is still an over-the-counter (OTC) market for the most part.
As the FX market grows, so too does the digital asset market, with a recent tweet from Gold Bullion co-founder and macro commentator Dan Tapiero showing the rise of bitcoin in market capitalisation, illustrated below:
This shows that a proper trading currency such as the New Zealand dollar doesn’t necessarily have to be that large to gain market acceptance and usefulness in a global system. What it needs to have is an open and transparent jurisdiction to trade in, a non-controlling (to a large extent) central bank, and few barriers to entry for people or traders looking to participate.
These same conditions exist for bitcoin, ethereum, ripple, bitcoin cash and litecoin on many global trading platforms. Other coins and tokens such as tether trade heavily and used as a mechanism for exchange as much as they are for investment purposes.
What else is interesting about the BIS statistics is that FX trading remains rooted in the world’s largest financial centres, with the UK dominating the market and increasing its share.
Combined with the US, Hong Kong SAR, Singapore and Japan, a staggering 79 per cent of all foreign exchange trading takes place in these centres. Singapore and Japan are friendly jurisdictions for digital assets and will no doubt lead the way in the trading of these assets going forward.
Curiously, a changing of the guard between Canada and China has taken place in the FX space, where a significant rise in trading activity in China has seen it overtake Canada to become the eighth largest currency trading centre in the world, hosting 1.6 per cent of market share. This has coincided with New York slipping a little as well, largely translating to North America in general giving way to Asia and the UK.
This holds true at the emerging markets level also, where currencies continued to increase their share of daily volumes, accounting for a quarter of the overall $6.6 trillion figure. But growth in the renminbi slowed from previous years, as the Chinese currency failed to advance from its position as the world’s eighth most traded.
And where does that leave bitcoin and digital assets broadly in Asia? China is very clear on plans to introduce their own digital payments framework with the PBOC’s plans seen accelerating in the wake of Facebook’s announcement of Libra. This may well buffer the loss of market share for renminbi.
As the appetite for digital assets grows via exchanges, merchants and trading houses, Asia is uniquely placed compared to the rest of the world. Lawmakers in the US are pushing back against Facebook’s Libra and in Canada authorities are happy for the use of digital assets, but they are not considered legal tender.
While Australia is taking a cautious approach, the New Zealand government has recently become the first country in the world to legalise salary payments in cryptocurrencies, a move that surprised many in the space.
When added to friendly nations actively working with participants like Singapore and Japan; the behemoth that is China looking to create a national standard; and the shift towards China in the FX space, things in Asia are improving for digital assets.
Matt Starkey, chief operating officer, Mine Digital