Xin Wan - Facilitating On chain Foreign Exchange and Cross border Payments with Stablecoins

baby [Music] and because we started a little bit late we're going to skip the break and head right into xinhuan from uniswap he's the research lead there and I'm looking forward to his talk there we go okay um so yeah today I'll be talking about on chain foreign exchange and cross-border payments it's actually a paper that you can refer to online if you want with this exact same title it joined work with oh I'm sorry uh yeah it's joint work with some of my colleagues Austin and MC and also Gordon Chief Economist at Circle as well as David puth who was previously head of CLS the international settlement company um okay so this is the agenda of today um so I I just realized this might be the the wrong talk as like pretty much everyone maybe knows about this already but uh bear with me as I repeat what you know but uh the first one is to kind of motivate the analysis uh and to even more motivate the the case for um having this on chain FX and cross-border payment market then we're going to compare the payment infrastructure the third section Compares Market features like uh just decentralized trading of FX stable coins versus uh normal traditional FX Market and the fourth one is some interesting statistics we want to show and last is missing pieces in future directions so motivation um currently the FX cross-border payment costs are are very high and they involve substantial settlement risks so for example this is stats I put from I think World Bank currently every day in every snapshot you take in time non-instantaneous correspondent bank settlements are at about 2.2 trillion dollars a day uh and that just is some some sort of risk that um someone in the world is assuming uh across their counterpart right um and and cause of remittance for smaller particularly small transfers across borders are are really high um I think that that number six percent is for maybe a 500 transfer across border on average again data from World Bank um and so and that that number uh kind of imposed a heavy cost for for some economy that's very dependent on uh these sort of remittance and merchandise exports so I'm I'm listing these countries that are most heavily affected uh in terms of their share of GDP and you can see some countries have like over 40 percent dependence of their GDP on remittance costs um and so it does make a lot of sense to reduce this cost to as low as possible because you're really helping the people who are in need here um the third thing which is partially addressed by unchain FX and and maybe FX amms are the current market structure is kind of opaque if fragmented um and the rules are sort of arbitrary because you know you kind of have to have every country agree to the same set of rules which like I'm not sure if humans have ever done that in in the in in the human history but currently Banks internalized customer flows so you know you trade with a bank and the bank might just like take your flow and internalize into its inventory and you never be able to kind of uh trade through the global liquidity without setting up accounts with each Bank in the world there's limited reporting and it's really not standard across jurisdictions like China has a rule China doesn't even have um free-flowing FX but um us as a rule Europe has a rule the liquidity drastically goes down during um during the weekend basically so from New York close to Tokyo open and during holidays and weekends there's there's very little liquidity compared to the weekdays and finally you have all these Benchmark rigging scandals happening because of this lack of transparency um so yeah so this is kind of a show talk and saying that uh ancient FX Has the promise to solve this but we're still lacking a lot of the infrastructure required um so I think people can agree that there's minimum settlement risk uh 24 7 liquidity privacy preserving is a bit of a stretch you know but uh still like if you manage well you only show up your address efficient aggregation I think it's doing quite well still um and and composability and that that really addressed the the liquidity fragmentation type of issue uh okay so let's compare the payment infrastructure so this is what you do now if you want to uh send your money across border and do remittance through different currencies so the sender uh for example I want to send US dollar to some some currency other than US dollar I first send my money to my own bank in the US and then my own bank pays a correspondent bank through the U.S payment system then this correspondent bank has a a ledger that's bilaterally maintained with another correspondent bank in the country that I'm sending money to so they will have to reconcile through I don't know Swift or something and then that bank then does the reverse of uh what has happened in in the US where I send my money and that goes over all the way to the receiver of of my transaction and each step in here there is some delay some cost and some settlement risk that one party is assuming and for assuming that risk they're going to charge a premium or fee or something um in contrast this is what you do if if you're sending through uh I guess crypto some hand waving here but basically you just send your uh you send your usdc well first you go through some amm right oh well first you on-ramp and after your on-ramp you're swapping in amm and there's currently an amm pool for usdc and euroc then you just send the Uric to your to your receiver and then that that receiver has to go on the off-ramp trip so as we can see like uh the The Exchange and sending part is really simplified in this case uh what what kind of what uh where the issue got kicked out to is the Fiat uh is the Fiat on-ramp and off-ramp system so that's going to show up in the missing piece part of the stock [Music] um Market structure comparison or Market feature value so in in the traditional FX Market you have like this nominal 24-hour market during weekdays and and really poor liquidity between New York close and and Tokyo open and very little trading and settlement on weekends and even it's like nominal 24 hours there are some weird things happening uh whenever you know like the New York desk is trying to close their book and uh I think after New York it's Asia is trying to open and then it's like Europe basically the best liquidity are like New York morning or something but it varies between the day whereas on the mm you know it's always there it's always available um and I'm going to show some stats demonstrating that that's the case settlement time this is really hit like past dependent we we have the technology to do t plus zero basically but right now we're doing t plus two business days by convention and sometimes t plus five if it's you know falls on the Lunar New Year or uh or or Christmas or something uh whereas on FX it really just depends on the finality of the chain um and you know you pay gas costs for it but usually it's pretty instantaneous in a in a grand scheme of things okay the second thing is uh and by the way everything that I show here is is in the paper so um you don't really have to take pictures they're all available uh the second thing is settlement risk um again like uh currently about a third of the deliverable turnovers are are not settled so they're kind of floating there in the open and yes it's a relatively good assumption but you're assuming that be like by the time it needs to settle your counterparty still exists right and during time of financial stress that that might not be the case um and and that's kind of minimized in on-chain FX because everything is atomic if you don't give me money I don't give you money so there's no um there's really no uh counterparty risk there uh transparency and trade reporting um yeah I touched upon this previously and on chain I'm sure you're familiar with doom and all the other kind of unchain intelligence service like Q analysis is a big one trm is a big one there's there's multiple billion dollar businesses built on top of uh just discoverability of on-chain data and I'm sure there's there's more to come as as this Market mature um and finally uh there's like Benchmark transparency we talked about liquidity fragmentation again emm liquidities are kind of fragmented as they are in the uh in the traffic case uh but you do have all these routing service and because everything is composable you can kind of just route everything across different markets really easily and liquidity providers like this is against a somewhat contested case as in uh people are saying oh uh you know on the one hand people are saying amm's really democratize liquidity provision on the other hand people are saying oh LPS lose money on average I think that's case dependent um but again it does mobilize a lot of the uh kind of freestanding currency that that you can uh you you can put into work and there might be better designs of risk sharing and so on through new amm designs so some interesting statistics I'm doing a time okay always on liquidity so I mentioned that in traditional FX markets you have this job in sorry in dropping liquidity uh during the weekend or on on holidays and this is this is showing the opposite for amms so this is the market depth or rather the average Market depth of Euro C usdc pool um and the red part is the weekend so there's really you know no not much variation at least across the week weekday weekend Horizon there is some interesting you know uh fluctuation during like daytime and night time I'm not sure if that's well motivated but overall you know it's it's pretty flat um the second thing I want to demonstrate is uh is kind of the the liveness of the market so and that's really easy to demonstrate this is just two exchange rates through time uh one is the euro usdc exchange rates I think it's from Bloomberg bfix data and the other red line is the unit swap Euro cusdc Pool price and they do kind of track each other really closely and like whenever they um whenever they differ by some noticeable margin like this it's not really because the amm is out of sync it's just because the the frequency of updates for B fix is like every couple of hours so you just don't have enough observation uh during that time and and this is like sort of mechanically enforced right because there's Arbitrage going on so you really shouldn't expect this to to deviate um and when I first started I showed a graph of really high remittance cost for small transactions and here I'm estimating sort of the the the cost of doing a similar transaction uh through amm and uh and and stable coins um wouldn't go into every single detail but I think that the takeaway is uh is kind of cheap so there's a few costs there's unwrapped costs exchange fees Network fees that's gas off-ramp fee and a total transaction and of course it varies uh based on which blockchain you use and and how much you're doing your transaction for but that's that's like the big takeaway is um so right now if you do it through banks so I'm I'm using a 500 transfer because there's a variable part that scales with the size of the transaction uh but like the average cost for a bank is somewhere in the 20 to 30 dollar per transaction case and I've done this many times like I went to college in the US and have to pay tuition every every six months and every time it's it's like uh 15 in my in my origin country and 15 in in the US and some fee in between uh there's money transfer operators which are cheaper and and to be fair to them I'm picking the average number not the cheapest number I know there's really really cheap channels from I think in particular us to Euro but I don't think that represents the the media and user experience in the entire world and then that's that's like over there is uh is if you do it on on defy or do it on crypto again I'm sort of picking up a fair game because I'm picking l2s if you pick L1 you have to add like I don't know five to ten dollar of gas fees to this but there's no reason for you to not use l2s you know you can do direct off-ramp from coinbase to uh to arbitrum I think nowadays so you know you you acquire usdc on on coinbase you send it to arbitrum there's barely any fee in this process okay missing pieces I did a lot of hand waving here um I think these are all things to to acknowledge so we don't have regulatory Clarity I think these might have been increased improving over the last week but we'll see what what happens after uh we don't really have this decentralized ID Solutions and what that means is um uh it is your experience really suck at the Fiat on-ramp and off-ramp front the custody experience is kind of bad uh meaning you know there's stats like Market structure where you have to send through a wallet you have to trade and I work in the industry I still get very stressed every time I do a crypto transaction on chain there's no forward instruments and this is like somewhat FX specific but most of the volumes in in FX is actually not done on spot but through some derivatives and finally you know pre and post trade privacy again like there's a lot of data service half of it is about like discovering some someone else transaction right and and in general you might not want that for yourself you might want to watch other people uh so yeah so that's that's lacking especially for institutions um Okay so main takeaway is um blockchain technology has the promise to address a lot of challenges and but there's still a long way to go major benefits include instantaneous settlement minimum minimum settlement risk lower cost of intermediation it has liquidity aggregation a higher uptime uh and there's challenges like regulatory Clarity and and so on and finally we suggest these directions um you know decentralized ID solutions for instruments and privacy Solutions that will be it and and just to say uh I don't know if everyone is going to ECC or not there's a ton of talks from my colleagues tomorrow uh hidden is there also but do come to my talk also I'm the second one and otherwise you're free to DM me on Twitter and that's my personal website if you want thanks thanks and we have time for a couple questions if anybody in the audience has just raise your hand there yeah sorry all the way in the back come right over with the mic you can start by shooting yeah get rid of the conference yeah thank you very much for the talk um I had a question that connects a little bit to one of the points he said which is the lack of forward instruments so of course remittances are absolutely wild as a market um and if I look at the FX Market itself like the thing financial institutions are involved in and that they use um as far as I understand the thread 5 FX Market is very very efficient whereas compared to amms it seems to be much much more efficient so how I guess my question is how do you feel that connects to what you said about the let's say remittance markets like is there some kind of trickle-down effect or what do you think about this yeah uh yeah I agree with your point that the the traditional like FX Market is extremely efficient like spreads are you know one basis point or something uh but that doesn't like it at least has has not translated into equally as Efficient Market in in cross-border payments and and and so I've I've been hearing this argument that oh all of these benefits are like regulatory Arbitrage to some extent and you know you can spin it that way um but but the reality is like all the inertia comes from some sort of path dependency in like Technologies people will be able to be compliant and and all that right uh and so is it really a regular Arbitrage to SoundCloud to say but I think that the benefit is sort of clear and you know whether or how you have achieved that benefit is is up to debate but um it's unfortunate that we have to pay like thirty dollars for for money that's going to be paid for Education across a different country and this is like of one viable way of solving it thank you uh thank you Shane for the for the talk very interesting and particularly um close to my heart is that you've pretty much reflected my pitch deck so uh so if anybody wants to know how we're solving the problem come and talk to me afterwards um because I think we're very close so um the the challenge that we're finding and you mentioned it in your in two of your graphics there is that you went from USD to Euro uh and and you went from uscc to your AC and then out again uh so that puts a heavy Reliance on those two um currencies those two Fiat currencies so point point one is that the as you said the USD to Euro Corridor is already pretty much well solved certainly for for retail users so in order to actually get and solve the problem for the countries that you mentioned have the biggest problem how do we are we going to either need uh denominated stable currency of of Jamaica Jamaican dollars I'm not sure I'm showing my ignorance here but all of the relevant countries there Samoa Simone dollars um or is there another solution yeah I think you know there's two ways to interpolate one is yes you need a local currency for it to work or as we've seen many countries uh you just need people to accept crypto payments in some other payment payments currency than the local one so if you take usdt if you take ether I'd be happy for everyone to take ether you know it's good for my back but uh you know yeah so effectively you just need to enable like local retail activity to be denominated in any particular currency that's supported on blockchain and that's fine yeah and until that happens I mean I fully believe that's future until that happens I mean companies like unblock will will exist so um it needs to happen yeah right Round of Applause [Applause]