Bringing the forex market on-chain is far more complex than simply swapping stablecoins—it's a trillion-dollar market that is widely misunderstood.

2025-12-07 05:37:17

Author | Spinach Spinach Talks Web3

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In 2024, while participating in a Monetary Authority of Singapore (MAS) pilot project, I began to frequently interact with the foreign exchange (FX) sector and discuss with many people due to an on-chain swap between the Singapore dollar stablecoin and an African CBDC. At the time, many people gave the same feedback: FX is one of the world’s largest financial markets—even capturing a small share could be lucrative. My thinking was straightforward: since stablecoins can circulate globally, moving the FX exchange scenario onto chain with AMMs should have huge potential, right? Yet, after trying many complex technical directions, we found the logic behind it was far more complicated than imagined, and ultimately, we couldn’t find PMF.

Recently, I happened to read independent researcher Borja Neira’s report, “On-Chain FX Is About Dollar Funding, Not Stablecoin Swaps,” which clarified several key misunderstandings I’d had. The FX market is not the “currency exchange market” I thought it was. More accurately, in that enormous $7.5 trillion daily trading volume, most activity is not “currency exchange”—it’s a massive, invisible global dollar lending network.

This article simply organizes Borja Neira’s report to discuss the underlying logic of FX market integration with blockchain.

Key Points

The true structure of the FX market:

Global daily FX trading volume is $7.5 trillion, but only 28% is spot “currency exchange”; 51% is FX swaps—essentially dollar funding
Over $80 trillion in “hidden debt” is off-balance-sheet in derivatives, forming a shadow Eurodollar system
About 75% of FX swaps have maturities less than 7 days, most only 1 day—this is a dynamic, daily rolling funding network

Why AMMs are not suitable:

AMMs solve permissionless trading and liquidity aggregation; institutions need credit management, regulatory compliance, and settlement security—there’s almost no overlap between these needs
Institutional spot FX is mainly done via RFQ (request-for-quote); privacy is crucial, while AMMs’ on-chain transparency is exactly what institutions don’t want
Retail FX exchange scenarios truly suitable for AMMs may only account for 1–2% of the global FX market

Where the real opportunity for on-chain FX lies:

Goal 1: Turn $80 trillion in hidden debt into programmable, traceable on-chain contracts
Goal 2: Build PvP settlement rails for fringe currencies not covered by CLS
Goal 3: Provide treasurers and regulators with real-time risk views These are institutional-level ventures, not retail products, and may be widely used on permissioned chains in the future.

Table of Contents

I. Quick Overview of the FX Market II. The Truth: This Is a Synthetic Dollar Funding Engine III. The Real Key Infrastructure: CLS, PvP Settlement, and Dealer Books IV. Why AMMs Are Not the Answer V. What Blockchain Should Do: Three Real Goals VI. Tokenized Collateral: Why These Three Goals Will Become More Urgent VII. About Spot FX: Even That 28% Isn’t AMM’s Turf VIII. Conclusion

I. Quick Overview of the FX Market

Let’s establish some basics: the FX market is one of the world’s largest financial markets, with a daily average trading volume of $7.5 trillion. Many people’s understanding of FX exchange stops at “airport currency exchange”—swapping one currency for another. Naturally, this leads to thinking of the AMM model: swapping USDC for JPYC is just FX, right?

FX transaction types: a distribution that upends assumptions

According to BIS surveys, FX transactions fall into three categories:

Spot: 28%
- This is the “currency exchange” we understand—swapping euros for dollars, T+2 settlement, $2.1 trillion daily.
FX Swaps: 51%
- Here’s where it gets interesting. An FX swap involves two legs:
  - Near leg: Today, I give you dollars, you give me yen
  - Far leg: In three months, we swap back at an agreed rate
- It looks like “swap and swap back,” but economically, it’s: I use yen as collateral to borrow dollars for three months.
- $3.8 trillion daily.
Other Derivatives: 21%
- Includes forwards (15%), currency swaps (2%), and options (4%).

This was the root of my earlier mistake—I only saw that 28% and thought that was the whole market. Retail FX exchange scenarios truly suitable for AMMs may only account for 1–1.5% of the global FX market.

In other words, over half of “FX transactions” are not currency exchanges, but loans.

II. The Truth: This Is a Synthetic Dollar Funding Engine

Neira’s report gets right to the point: “On-chain ‘FX’ is ultimately about a synthetic dollar funding engine based on FX swaps, not retail spot trades.”

This made me re-examine the entire market. Let me use a case from the report to explain “synthetic dollar funding”:

Scenario: You’re the CFO of a Japanese life insurer Income: Yen premiums Goal: Invest in US corporate bonds (higher yield than Japanese government bonds) Problem: Directly exchanging yen for dollars to buy US bonds exposes you to unmanageable FX risk Traditional Solution: FX Swap

Enter a USD/JPY FX swap today
Near leg: Receive dollars, pay equivalent yen
Use dollars to buy US corporate bonds
Far leg: Swap back at a fixed rate in 3 months

This isn’t “currency exchange,” it’s “borrowing dollars.” You use yen and your balance sheet as collateral to synthetically create a dollar liability. When 3 months are up? Roll it over—borrow again, and repeat.

You become a dollar debtor, but you don’t see this liability on your balance sheet.

Why isn’t it on the balance sheet? This is an “accounting loophole”:

Scenario A: Borrowing dollars directly (on-balance-sheet) Balance Sheet Assets: US corporate bonds +$1 billion Liabilities: Dollar loan +$1 billion ← clear

Scenario B: “Borrowing” dollars via FX swap (off-balance-sheet) Balance Sheet Assets: US corporate bonds +$1 billion Liabilities: Policyholder liabilities ( yen ) 140 billion Dollar loan 0 ← invisible! Footnote: “Outstanding FX derivatives notional principal of XX billion”

The reason is that accounting standards define FX swaps as “derivatives” not “debt.” Even if the economic substance is 100% lending, the legal form is “two offsetting FX transactions.”

According to the BIS, over $80 trillion in “hidden debt” is buried in FX swaps, forwards, and currency swaps, forming a shadow Eurodollar system that rolls over every few days and is entirely invisible in debt statistics.

III. The Real Key Infrastructure: CLS, PvP Settlement, and Dealer FX Swap Books

Neira’s second core point: “The key infrastructure is CLS/PvP and dealers’ FX swap books, where over $80 trillion in dollar debt is hidden—not AMMs and wallets.”

Before discussing “what blockchain can do for FX,” we must first understand what the current system does—and its limitations.

What is CLS? CLS (Continuous Linked Settlement) is the core settlement infrastructure for the global FX market. Established in 2002, it addresses a simple but critical issue: settlement risk, also known as Herstatt risk.

In 1974, Germany’s Herstatt Bank collapsed after receiving marks from a counterparty but before paying out dollars. The counterparty paid but received nothing. This event made the industry realize: FX transactions involve two currencies, two payment systems, possibly in different time zones—if one party pays but the other defaults, the loss could be the full principal.

CLS’s solution is payment versus payment (PvP): both sides’ currency transfers happen simultaneously, or not at all. It now covers 18 major currencies, with over 70 direct settlement members and tens of thousands of third-party participants.

Dealers’ FX swap books: the real plumbing

If CLS is the FX market’s “settlement highway,” then large dealer banks’ FX swap books are the “fleet operation centers” on this highway.

Every major investment bank maintains huge FX swap books:

Thousands of counterparties
Tens of thousands of outstanding contracts
Tens to hundreds of billions of dollars rolled daily

More importantly, the maturity structure: about 75% of swaps mature in less than 7 days, most in just 1 day.

What does this mean? It’s not a “sign a contract and wait 3 months” market, but a dynamic funding network that rolls, renews, and closes positions at scale every day.

Imagine: a dozen top global dealers, each managing tens of thousands of overnight or short-term swaps, deciding each morning which to roll, close, or adjust—this is the real “plumbing” of the FX market. The complexity of this system is far beyond what an AMM pool can touch.

Those overnight rolling swaps are especially fragile—the shorter the tenor, the higher the roll frequency, and every roll is a potential credit event window.

This has been a focus for regulators for years, and is exactly where blockchain could create real value—but not through AMMs.

Why is this important? Where is blockchain’s value?

Because during stress, settlement risk amplifies liquidity crises. The market turmoil in 2008 and March 2020 proved this: when everyone needs dollars at once, any “paid but did not receive” risk makes participants even more conservative, further tightening liquidity.

This has been a focus for regulators for years, and is exactly where blockchain could create real value—but not through AMMs.

IV. Why AMMs Are Not the Answer

Now it’s clearer why “using AMMs for on-chain FX” is the wrong direction.

Constraints are entirely mismatched

For a dealer bank, the constraints are:

ISDA/CSA terms: International Swaps and Derivatives Association master agreements and credit support annexes, defining legal frameworks for margin, netting, and defaults
Margin schedules: calculation and payment of variation margin (VM) and initial margin (IM)
Eligible collateral: what assets qualify as margin
Credit lines: exposure limits for each counterparty
Regulatory capital: risk-weighted assets, leverage ratios, and liquidity coverage under Basel III/IV

What do AMMs solve? Permissionless instant trading, liquidity aggregation, price discovery.

There’s almost no overlap between these two sets of needs.

In Neira’s words: “Swapping USDC for EURC in an AMM, or using stablecoin rails for remittances, does solve some cross-border payment problems. But for a dealer bank rolling $10 billion+ daily short-term FX swaps to finance client portfolios, it’s basically irrelevant.”

What AMMs lack

An FX swap isn’t just a buy/sell—it’s a stateful, term-based, actively managed credit contract. It needs:

Term structure: maturity date, roll arrangements
Margining: intraday or end-of-day variation margin calls
Netting: netting exposures across multiple trades and counterparties
Legal finality: enforceable close-out procedures in default
Regulatory compliance: must be recognized by bank risk systems as compliant netting sets

AMMs’ constant product formula doesn’t include any of these concepts. You can swap any amount of USDC for EURC on Uniswap, but you can’t use it for a 3-month synthetic dollar loan—because the smart contract has no “maturity date” field.

Participant needs are different

FX swap market participants are central banks, sovereign wealth funds, global systemically important banks, multinational insurers, and pension funds.

They don’t need “permissionless”—on the contrary, they need strict access control and credit assessments. They don’t seek “24/7 trading”—they want operational efficiency improvements compatible with existing regulatory frameworks. They don’t care about “decentralization”—they care about transparent exposures, settlement safety, and capital compliance.

So, don’t use retail logic to fit institutional needs. In FX, spot currency exchange is just a small piece, and what fits AMM is even smaller.

V. What Blockchain Should Do: Three Real Goals

Neira’s third core point: “Only when on-chain FX turns these swaps into explicit, collateralized, netting-settled, programmable contracts does it add value.”

If you take the underlying logic of the FX market seriously, “on-chain FX” has three reasonable goals; the rest is just noise.

Goal 1: Make the funding layer explicit and programmable

This is the core value proposition.

Current state: $80 trillion in dollar obligations are hidden in off-balance-sheet derivatives, managed bilaterally via PDFs and spreadsheets. Each institution has its own ledger; regulators must piece together delayed reports to see the big picture.

What can blockchain do? Express FX swaps and forwards as stateful smart contracts—essentially an on-chain ISDA/CSA—where notional, term, margining, and close-out logic are all coded.

The right infrastructure isn’t AMMs, but Margining Hubs:

Bank A and Bank B’s FX swap is a legally supported, economically clear object on-chain
Variation margin flows execute automatically on-chain
Initial margin and eligible collateral sets parameterized per CSA
Cross-counterparty netting is automated
Each on-chain contract maps 1:1 to an off-chain legal agreement

The selling point isn’t “your stablecoin earns yield,” but: your short-term FX funding becomes operationally lighter, more transparent, and easier to access central bank liquidity in stress, because exposures are clear and well-defined.

This is what institutions really care about.

Goal 2: Extend PvP to the fringes

CLS covers 18 major currencies, but there are over 180 currencies in circulation globally. Of the $2.2 trillion in daily non-PvP trades, much involves emerging market currencies and niche corridors.

The opportunity is in building permissioned PvP rails:

For non-CLS currencies and tokenized fiat
Participating banks and local central banks lock in claims on both currencies
Multilateral net exposures
Atomic final settlement
Legal finality anchored in the underlying RTGS system

The value is compressing multi-hop correspondent chains and intraday overdrafts into a single PvP cycle. This is also the regulatory preference—directly addressing years of settlement risk guidance.

This isn’t about “disrupting” CLS, but supplementing areas CLS can’t cover.

Goal 3: Provide treasurers and regulators with real-time risk views

Current state: no one can see a real-time global picture of FX funding risk.

Institutions’ systems may know their own exposures, but not counterparties’ counterparties
Regulators only see reports with weeks of delay
In stress, everyone is flying blind

What can blockchain provide? A canonical, timestamped record: who owes whom dollars, with what tenor, under what margin agreement, and with what collateral.

This does not need to be fully public—it can be permissioned, encrypted, visible only to relevant parties and regulators. The key is a shared state machine, not a bunch of isolated databases.

VI. Tokenized Collateral: Why These Three Goals Are Becoming More Urgent

Neira’s report also mentions an important trend: the rise of tokenized securities and 24/7 collateral.

When government bonds, money market fund shares, and even credit instruments are tokenized and can be margin-calculated continuously, you can easily move collateral across time zones and venues. The asset side becomes a high-frequency, always-on market.

But if the underlying FX funding layer is still tied to:

Weekday cutoffs
Opaque bilateral swaps
Delayed data reporting

You create a structural mismatch: a modern asset market built on outdated funding pipes.

In that world, on-chain FX funding and PvP stacks aren’t “nice to have”—they’re necessary adjustments to maintain monetary hierarchy consistency. In the future, we’ll need a Tokenized CLS system.

VII. About Spot FX: Even That 28% Isn’t AMM’s Turf

At this point, some readers may ask: Sure, that 51% in FX swaps isn’t suitable for AMMs, but what about the remaining 28% spot trades? Isn’t that real “currency exchange”? Swapping USDC for EURC—isn’t that what AMMs do best?

The answer is still: most is not suitable.

How institutional spot FX really trades

Here’s a surprising fact: even in 2025, the world’s largest FX dealers still use phone quotes for large trades.

This isn’t because they’re behind the times—it’s because for large trades, this is optimal.

Imagine you’re a trader at a large asset manager, needing to swap $500 million for euros to buy European stocks. What do you do?

Option A: Place an order on a public market

Problem: A $500 million buy order on the book tells the whole market someone’s buying a lot of euros.

Option B: Call several dealers

You contact JPMorgan, Citi, UBS, and ask, “What’s your price for $500 million into euros?” They each quote, you pick the best. The rest of the market doesn’t even know the trade happened.

This is the Request for Quote (RFQ) model—the mainstream for institutional FX.

Why is privacy so important?

In FX, information is money.

If the market knows you’re buying €500 million, market makers will pre-buy euros to sell to you (front-running)
If the market knows a central bank is intervening, everyone will pile in
If the market knows a hedge fund is unwinding, others will exploit it

Institutional clients pay a premium for privacy. AMMs’ transparency—all trades visible on-chain—is exactly what institutions least want.

AMM’s liquidity model isn’t fit for large trades

AMMs work by having liquidity providers (LPs) pre-lock funds in pools, waiting for traders. This model has fundamental issues:

Extremely low capital efficiency

To support a $500 million trade with controllable slippage, you might need pool depth in the billions. That capital sits idle, earning tiny fees.
Traditional market makers don’t need to hold $500 million in euros to quote. They can fill the trade, then hedge in the interbank market, or use inventory. Funds move after the trade, not pre-locked.

Price curve punishes large trades

AMMs’ constant product formula (x × y = k) means bigger trades incur bigger slippage. Fine for retail trading a few thousand dollars, but disastrous for institutions.
A $100 million trade on a Uniswap-style pool could face 1–2% slippage. In traditional markets, the spread might be just 0.01–0.02%.

Settlement mode mismatch

Traditional spot FX is T+2 settlement—trade today, settle two business days later. Institutions trade on credit lines, not pre-funding everything.
AMMs are atomic—must have funds up front to swap. This seems “safer,” but greatly increases institutions’ capital costs.

Fundamental differences in market structure

The FX market is a dealer market, not an exchange market. Around 10–15 top global banks control most of FX liquidity. Their model:

Take client orders
Internally match (Client A wants to buy euros, Client B wants to sell—net internally)
Remaining exposure is handled in the interbank market

This internalization lets big dealers handle huge orders without impacting market price. Clients get good prices, dealers earn the spread, the market stays stable.

AMMs are totally different—every trade hits the same pool, no internalization, no relationship pricing, no privacy.

What spot exchange scenarios fit on-chain?

After all this “not suitable,” let’s be fair and talk about what is:

Retail cross-border remittance: small amounts ($100s to tens of thousands), not sensitive to slippage, needs 24/7, traditional channels are expensive
Crypto-native fund flows: stablecoin swaps, DeFi protocol rebalancing, on-chain treasury management
Small FX in emerging markets: regions with weak bank coverage or poor traditional FX access

Combined, these scenarios may account for less than 5% of spot FX. But for a $2.1 trillion daily market, 5% is a $100+ billion opportunity—just be clear about the boundary.

VIII. Conclusion

Back to that 2024 experience in Singapore.

At the time, our thinking was a seemingly perfect logic chain: stablecoins can circulate globally → FX market is huge → AMMs can do FX → trillion-dollar opportunity.

Looking back, the reasoning broke at step two—we never figured out what the “FX market” really is.

I thought the FX market was a giant “currency exchange market,” so naturally wanted to use AMMs to solve it. But actually, the FX market’s core is a synthetic dollar funding engine—51% is FX swaps, essentially lending; 28% is spot, but mostly large institutional RFQ trades; retail FX scenarios suitable for AMMs may not even reach 2%.

More importantly, the market constraints are completely different from DeFi. Institutions don’t want “permissionless,” they want credit management; not “24/7 trading,” but regulatory compliance; not “decentralization,” but exposure transparency and settlement safety. Using retail tools for the institutional wholesale market was the wrong direction from the start.

So is there still opportunity for on-chain FX? Absolutely. But not in AMMs.

Neira’s report points out three truly valuable directions:

Turn $80 trillion in hidden dollar debt into programmable, traceable on-chain contracts;
Build PvP settlement rails for fringe currencies outside CLS coverage;
Provide treasurers and regulators with real-time risk views;

These are not sexy or products to excite retail, nor will they go viral on Twitter—but they are institutional-level business tracks.

To end with Neira’s words: “If you’re building on-chain FX products, and your design doesn’t start from these pressure points—hidden dollar debt, post-CLS settlement risk, the rise of tokenized collateral—you’re not designing for the system we actually have, you’re designing for a cartoon.”

Understand the real market structure, identify the true pain points, design solutions that meet institutional needs—that’s the right way to find PMF.

The opportunity for on-chain FX is real, but its trillion-dollar market currently remains institutional, and may never be on public chains, but on permissioned ones.

I am not an FX professional. Please excuse any errors.

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