The Path to Mass Adoption — Step 1: universal access to OTC & DEX
Digital currencies have a lot of advantages over traditional money when it comes to payments and value transfer:
- They’re faster and cheaper than legacy banking and payment infrastructure, making crypto ideal for cross-border and P2P transfers. It’s possible to send digital currency to anybody in the world, regardless of where they live, in seconds — no bank account required, just a mobile device.
- They’re excellent for paying for goods and services. When stores (online or offline) accept debit or credit cards, they pay 3–5% in fees to card schemes and then wait up to 7 days for the funds to settle. Digital currencies eliminate the middlemen and make the payment experience faster, cheaper and friendlier for consumers and merchants alike.
- They’re suitable for Machine-to-machine (M2M) payments. We are moving into an era of unprecedented interconnectivity; there will be an estimated 25 billion connected devices by 2020, and transactions between them are inevitable. The only problem is that M2M payments are not possible using traditional banking instruments, which are slow and expensive. Digital currencies could hold the key — they’re fast, scalable and available 24/7/365.
The benefits of digital currency are obvious, yet we don’t use them in everyday life and mass adoption is still a distant prospect. I’m going to explore the role that Wirex will play in the digital transformation of the payment industry in a new series of blogs. First up on the ‘Path to Mass Adoption’ is OTC/DEX currency conversion.
Currency exchange: traditional vs. digital
While digital and traditional currencies have a lot in common (both are meant to be used as means of payments or value transfer), the way that they are exchanged has marked differences.
The traditional currency exchange market (known as Forex or FX) is the world’s largest financial market, with a daily currency turnover of US $5 trillion (way above the combined daily volume of equity markets, which are pegged at $30 billion). As an OTC (over-the-counter) market, there is no central clearing house that regulates FX trading — unlike stocks, futures or cryptocurrency exchange.
Digital currency trading takes place on centralised exchanges; however, most of them are not regulated and located in offshore zones, which makes using them difficult for licenced companies and institutional investors. The main reason that digital assets are traded on centralised platforms (despite their decentralised nature) is youth — the crypto market is relatively young. There was no market for cryptocurrencies when Bitcoin emerged in 2008, and exchanges played a vital role in these early days by providing a major source of liquidity.
As the market matures and digital assets become more liquid, token trading is shifting toward a traditional OTC model. As a result of this shift, several exchanges have launched their own OTC desks. Others are building decentralised exchanges (DEX), which are very similar in nature to OTC trading.
OTC & DEX vs. centralised exchanges
Not many people realise that the OTC market for digital assets is bigger than the exchange market. Exchanges might set the price, but medium-to-large trades don’t happen there. The OTC market has been growing rapidly over the last 2 years thanks to following key benefits:
- The market’s over-the-counter structure eliminates fees for exchanges and clearing, reducing transaction costs.
- Costs are reduced even more as a result of efficiencies created by the electronic marketplace. OTC trades require no middlemen, which means that traders deal directly with market makers.
- Compliance and AML (anti-money laundering) concerns are mitigated, as counterparties know exactly who they are trading with. OTC trades make it much easier for licenced players to trade digital currency with each other, rather than using unregulated or offshore crypto exchanges.
OTC trades out of reach?
The main reason that centralised exchanges are still popular is that the OTC market is not accessible to everyone. OTC rates are widely accepted to be the best available, yet only institutional investors, high-net-worth individuals or large corporation have access. Further barriers to OTC trades are prohibitively large minimum order sizes — usually in the region of $250k — and the fact that access to OTC rates conflicts with the business models of many major exchanges.
Democratising the OTC market: a first step towards mass adoption
At Wirex, we think it’s unfair that retail customers and SMEs (small and medium enterprises) can’t trade on OTC market. That’s why we made OTC rates available to everyone as part of Wirex 3.0, our most ambitious update so far. We are very excited to be the first company in the world to democratise access to OTC and interbank rates. It’s now possible to exchange up to 18 digital and traditional currencies at the OTC or interbank rate on the Wirex platform, regardless of currency pair or order size — something you can’t do anywhere else.
There is no reason why digital and traditional currencies should be traded differently. In fact, one of the first steps to mass adoption is treating both types of money equally. It’s a core tenant of Wirex, and something we’re constantly striving towards.