Many say the institutional FX market is the lifeblood of the global economy, it being the largest and most liquid financial market in the world. While FX trading has increased more than 60% since 2007, and now trades more than $5 trillion per day, the transaction process is still rife with time zone challenges, manual processes and risk.
In short, a market that is ripe for disruption. To that end, FX marketplace 9th Gear is using blockchain to leverage smart contracts and distributed ledger capabilities to enable multi-party trades in minutes using confirmed funds.
Emerging from stealth mode earlier this week, 9th Gear CEO Maryanne Morrow speaks exclusive to Forbes about how it means to disrupt and how to enable more parties to take part in FX transactions through fund first then trade, rather than the standard practice of trade then fund, which typically takes 48 hours and leaves both parties vulnerable to risk.
Monty Munford: Please tell Forbes readers what is 9th Gear and why is it important?
9th Gear is the only institutional foreign exchange (FX) marketplace with on-demand payment liquidity, enabling same day trading and settlement. We offer greater transparency, reduced risk and lower cost to significantly more participants.
Through a digital transformation of the backend, we have re-imagined the FX transaction, moving from today’s simple messaging platform-based process where a handful of global banks dominate the industry and trades take two days to settle, to a process that is open to brand new participants and can be completed in minutes.
9th Gear leverages the smart contracts and distributed ledger of a private permissioned blockchain to transform this $5.1 trillion daily industry.
To date, how have you funded the company?
Funding to date has been through bootstrapping, sweat equity and friends and family – classic start-up stuff. We recently passed the $1 million-raised milestone. Currently, we have a Series seed open and are engaged with several local Silicon Valley angel groups. We will follow that, Q2, with some early stage venture capital companies that have already expressed interest
When you first become interested in blockchain?
I first heard the word blockchain in 2009 as a quip in a business meeting; everyone laughed, but since I was unfamiliar with the concept, I attended a gathering about it.
No one was dressed in a suit like me and the conversation was a bit on the anarchist side of things; so, I quickly left and packed away any ideas about blockchain.
In early 2017, I started hearing about blockchain more among solid individuals and I re-examined the concept. Once I understood it, the lightbulb went off in my head about applications for the back office of institutional finance, which is still plagued with manual processes.
I knew I needed to harness this technology, but figuring out what to tackle first took a bit of research. After studying securities law for several weeks, alongside what could be done on-chain and what should be done off-chain, I formed a company and started deliberately moving forward into blockchain.
How big is the market you are addressing?
Two words. Very. Big.
To start, we are pursuing the spot market of institutional FX. According to BIS (Bank for International Settlements) data, the average traded daily value of this market is $1.7 trillion of the overall $5.1 trillion global FX market.
The annual transaction revenue from this market is $1.29 billion plus an additional $428 million in lending fees (Total = $1.7 billion annually). These figures do not include any interest payments.
Additionally, we intend to expand the marketplace over time to include not only the rest of the $5.1 trillion institutional FX market, but also OTC Derivatives ($500 billion outstanding), CDO’s ($111 billion market), Corporate Bonds ($8.6Y market), Commodities ($400 million AUM) and Equities ($400 billion daily settlement).
How are your 20 years in finance relevant to 9th Gear?
Understanding the inner workings of institutional finance is critical; not only for the subject matter but also for the DNA of how folks think in the institutional finance sector. Today, finance is controlled by compliance; so, it is important to have a solid knowledge of the regulations and how it applies to the business.
Furthermore, as we face up to large financial institutions, we need to have our policies and procedures in place, which is one of the foundational elements we tackled last year. There is also a fundamental shift in financial institutions migration to technology companies (first) and finance companies (as a secondary mindset); those that do not adopt this concept will lag behind.
What challenges are there in scaling?
We are not concerned about the scalability of this solution. Blockchain transactions can be notoriously slow due to the traditional use of validation through PoW (Proof of Work). 9th Gear does not use this methodology so we are not constrained in this manner.
Additionally, because we operate our entire marketplace using a cloud service provider, we have the ability of expanding computing resources as our transaction volume grows. We are constructing all of the back-end services as automated services, including testing, integration and security such that we can repeatedly manage our marketplace in a trusted, predictable manner to meet our performance SLAs.
What are your predictions for the wider trading market for the rest of 2019?
We will continue to see an increase in the utilization of AI for risk management and transaction execution. The impact of this technology will be that volumes will continue to increase and that technology banks choose to use (or not), which will become critically important to their survival and success.
Risk profiles will change dramatically over the course of this year and beyond as credit risk is diverted to non-bank lending partners. This will free up capital for banks enabling them to increase their book of business, creating an entirely new asset class for investors, and thereby enabling more entities to enter the market.
As regional banks gain direct access to the global FX marketplace, their own footing will increase as a direct player in the marketplace that ultimately has the direct line to the customer.