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October 26, 2017

The Past, the Present, and the Future of the Evolving Forex Market


Chinese traders, during the ninth century, made use of “flying money.” It came in the form of paper vouchers that they used as proofs of payments, essentially safeguarding themselves against thieves. This is as far back as recorded history takes us when it comes to foreign exchange of currency. Trading in currencies, since then, has come a long way.

Wire Transfers Cross-border remittances took a significant leap toward the end of the 19th century, when the use of wire transfers entered the mainstream. This period saw the arrival of several nonbanking entities that started offering this service. Western Union, one of the pioneers of this field, remains in operation even now.

Institutions relied on mail as their primary mode of communication until the early 1990s, although international money orders started finding an increasing number of takers by that time. Other than this, not much changed until the early 20th century.

Special Drawing Right (SDR)

The International Monetary Fund (IMF) created the SDR in 1968, with the aim of supplementing official reserves of its member countries. By September 2017, it had created and allocated 204.2 billion SDRs, equivalent to around $291 billion, to its members. Its value depends on a basket of five major currencies that include the U.S. dollar, the British pound, the euro, the Japanese yen, and the Chinese renminbi.

Some experts are of the opinion that SDRs may well become a successor to the USD reserve currency because of factors such as IMF’s support for SDRs, Saudi Arabia looking for a new benchmark for oil, as well as China and Russia’s support for gold.

Electronic Transfers

There was a significant paradigm shift in the overseas money transfer market toward the end of the 20th century, with the internet giving banks and nonbanking institutions easy means to make cross-border payments. However, banks have consistently lost out on their share of the pie in this sector to several FinTech companies that offer quicker and more cost-effective alternatives.

Western Union is among a few leading companies that gives recipients the option to collect transferred money from physical locations, and other examples include WorldRemit, Azimo, MoneyGram, and Ria. Some of the top companies that let their customers transfer money directly to overseas bank accounts include OFX, World First, TransferWise, TorFX, and Currencies Direct.

Businesses may benefit by using specialist money transfer companies that provide free receiving accounts in multiple currencies, and some let clients hold funds in a range of currencies. Now, hedging options give individuals and businesses the ability to make the most of fluctuations in the forex market.

Exotic Currencies and the Use of Second Generation Mobile Phones

Several markets in South America, Africa, and Asia still rely on the use of second generation mobile phones. Mobile phone network providers are already looking at leveraging their customer bases by offering international remittance services. An example in case is Digicel, a company that has its operations in more than 30 markets across the Caribbean, Central America, and Oceania. It may serve existing overseas money transfer companies well to explore this arena before there is another disruption.

The Rise of Crypto Currencies

Virtual crypto currency platforms such as Bitcoin, Litecoin, and Ethereum may further simplify how people transfer funds from one country to another. The recent past has witnessed an upward trend in the use of crypto currencies when it comes to transferring money across borders, and there is a strong likelihood that this will continue. However, this medium might not yet be the best when it comes to trading in exotic currencies, given its existing depth of market across different regions.

Conclusion

The evolution of the forex market and how we carry out overseas money transfers is clear to see. Further developments in technology will only give the end-user better options from which to choose. The future of this sector, without doubt, is bright.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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