On January 15, 2015, the Swiss National Bank let go of the Franc peg against the Euro. I was at a bank trading desk in London when this happened. The FX market started drowning within seconds of this biblical tsunami.
The Swiss Franc, a top 5 global currency, whipped up 40% to eventually settle around 20% appreciation in half an hour. Many retail and institutional FX traders lost their shirts. Citibank fired half of their institutional customers from its FX prime brokerage, which is the unit that allows people to get into the FX market through Citibank. Those were hedge funds, pension funds, and buy-side firms that do not have access to interbank markets.
This coincided with Basel III, a regulatory push that was the result of commitments that G20 countries made in Pittsburgh in 2010. After the financial crisis, G20 governments got together in Pittsburgh to agree on a financial system regulation that will not repeat 2008.
Over the last forty years, banks have traded derivatives to the tune of 40% of the global economy. The derivatives market is $700 trillion or ten times larger than the global economy. The derivatives sit on and off balance sheets.
There have been some tricks used in the industry to get around regulations. For instance, a bank regulated by a North American regulator can place all of its derivatives in the London Branch. This is done by all banks. CitiBank, which traded at $0.08 USD after the crisis, was basically bankrupted by the derivatives on its books.
Ultimately, it was decided all risks would be on balance sheets, and the capital required to trade derivatives had to cover all the risks that a bank takes. This had massive implications for individuals and SMEs. With the Basel III regulations, the seed was planted.
Basel III requires banks to have 10% of capital on the books. They need to have everything in that risk calculation, and it doesn’t matter if it’s on the moon or on mars. The regulations cover everything.
Suddenly, banks find them in a position in which they need capital.
Based on the new regulations, banks needed $8 trillion worth of capital. They had approximately $5 trillion. Therefore, they were missing approximately $3 trillion in capital if they hoped to cover the risk of derivatives.
At first, they fired customers that were too small or carried too many risks. Then, starting in 2014, fees started getting passed onto the consumer. $2 fees for using another bank’s ATMs. International transaction fees increased to $3 with 3% for foreign transaction fees. Banks merged and withdrew from entire regions, like Southwest Asia, where there were fewer profits to be had. The results of the regulatory push, and the bank’s desire to shrink its customer base, meant that SMEs and individuals lost access to their banking services.
Everex’s technology makes it significantly easier to service these customer bases electronically. Human error accounts for 95% of bank errors and blockchain technology can change this, while lowering overheads. There is very little room for error on a blockchain.
At Everex our goal is to help individuals and SMEs by making global payments more efficient and cost-effective by tokenizing fiat currencies.
Most currencies in Southeast Asia are non-deliverable, which is a defense mechanism against the US Fed exporting US problems to trading partners in Asia. Japan went into a 25-year financial coma due to circumstances like this.
Other Asian and BRIC economies realized they needed to protect themselves against similar issues, which resulted in the implementation of capital controls that made it difficult to send payments across borders.
Everex partners with FX market makers, and FX platforms, and receives access to interbank liquidity. The majority of transactions we anticipate in our network can be settled electronically. So, we will partner with FX players to tokenize currencies, and manage FX risk, as we sell those currencies for other currencies.
We can allow people to make cross border payments effectively without using a bank and allow the recipient to spend that money on their business. Obviously, that vision will depend on a wider array of customers being a part of the network, which is our real goal for the next six months, alongside building out our regulatory framework.
Blockchains vary in settlement times. The Bitcoin blockchain settles about every ten minutes, whereas the Ethereum blockchain settle much more quickly in around 20 seconds. In the FX market, settlement takes as long as ten days, particularly during the Japanese Cherry Blossoms season, when the entire country is closed. It is the third largest currency pair in the world, but for ten days there is no settlement.
Everex is changing this.
The vision I have for Everex is to provide an all-encompassing suite of products for individuals and SMEs.The lifecycle of a trade can be handled electronically. The more diverse the set of clients which Everex serves, the better we can serve everyone.