Eurodollar-based Digital Synthetic Forex System
There are many types of stablecoins in the market and new ones are being introduced. Although they are all pegged to one dollar, the exchange rates and interest rates on deposits and loans vary, hence there is always a possibility that they may be under unfavorable trading conditions.
Create an integrated stablecoin that can be exchanged 1:1 with all existing stablecoins. By owning just the integrated stablecoins, traders can enjoy the best exchange rates and deposit/loan rates in all of the current stablecoin markets.
Changer will embed a real-time automated system that enables integrated stablecoins to be exchanged to other stablecoins under the most favorable trading conditions (most favorable exchange rates and staking/ lending rates).
For example, let’s assume that Changer keeps monitoring the market rates and the annual lending interest rate for USDT is 4%, TUSD is 3%, and USDC is 2%. If a person who holds Changer’s integrated stablecoins wishes to lend them to another person for profit, Changer will immediately exchange all of his/her integrated stablecoins to USDT (highest rate in the current market) for them to be lent out. When the repayment is due, Changer will convert the entire amount of the collected USDT back to the integrated stablecoins and return them to the lender.
In the process of integrated stablecoins being converted to USDT and vice versa, Changer plans to ensure the 1:1 exchange does not inflict a loss on its customers due to spread or slippage. That way, holding Changer’s integrated stablecoins will be the key to being able to trade anytime on the market with the best trading conditions than holding other stablecoins.
To do so, Changer will first partner up with all the stablecoin issuers so that it can deposit or withdraw dollars to mint or redeem stablecoins. Since Changer can convert any stablecoins to the fiat currency (USD) of face value, it will then be able to treat all the stablecoins with different trading conditions as the same currency.
With the ability to handle all the stablecoins as the same currency, Changer can compare the bid and ask prices of different stablecoins and provide integrated stablecoin traders the exchange rates of those with the narrowest spread (most liquid) in the current market. When borrowing stablecoins, they will be offered trad ing conditions for the stablecoin with the lowest interest rate. For lending, ones for the stablecoin with the highest interest rate will be offered. As soon as a customer requests for a transaction, Changer will process it by conducting 1:1 stable coin exchange with the conditions as described above.
While the user is using just one type of stablecoin – the integrated stablecoin – different stablecoins are being cherry-picked and traded in the back end for the best FX and deposit/loan rates. The most optimal trading conditions will be offered to the users by searching for the best interest rates and spreads after comparing all the conditions in the CeFi, DeFi, and OTC markets, just as it is done for Changer.io’s DFX Gateway.
This idea will be more than feasible if Changer can work directly with the different stablecoin issuers and exchange these stablecoins 1:1 with the dollar. From an operational perspective, Changer would not incur any losses while at the same time maximize users’ profits. By increasing the interchangeability of different stable coins, Changer can help expand the entire stable coin market.
In the field of blockchain-based decentralized finance, called DeFi (Decentralized Finance), a service called Curve provides a 1:1 instant exchange of various stablecoins (coined as “instant swap”). However, due to the nature of the DeFi service, users are charged a gas fee each time they do an exchange, and they cannot accurately predict the length of time to complete the exchange. Moreover, the gas fee fluctuates (for details, refer to Section 5 (Settlement Profit) of Chapter 5 (Business Model)).
Changer will therefore develop a 1:1 instant exchange protocol between stablecoins and integrated stable coins1 with the optimal trading conditions in the field of centralized cryptocurrency finance (CeFi). Once introduced in the market, users will no longer have to pay fees on the blockchain and wait for a coin exchange to be completed as the waiting time will be almost zero. This will be much more practical and convenient for users.
Current Market Challenge 2
There are many USD-based stablecoins in the cryptocurrency market, but few linked to other fiat currencies. Even if there are stablecoins based on non-reserve currencies2, they cannot be traded with assurance as few are willing to trade them, resulting in a lack of liquidity.
Solution by Changer
Changer aims to solve the above problem by developing a stablecoin system that also tracks exchange rates of non-reserve currencies. Whenever a stablecoin transaction occurs, the system will automatically hedge the fiat currency in the FX market, enabling customers to withdraw fiat money (or other fiat-equivalent currency or cryptocurrency) whenever they wish to do so.
The key to gaining customer trust in stablecoins is making sure users are able to convert their stablecoins into fiat money (or any equivalent alternatives that are liquid) whenever they want to through the stablecoin issuer. To ensure user trust in stablecoins linked to non-reserve currencies, Changer will implement real-time hedging algorithms that automatically trade the equivalent amount of fiat money in the FX market whenever non-reserve currency-based stablecoins are traded.
In addition, Changer will stream in real time the base exchange rate of stablecoins linked to non-reserve currencies and will always exchange at this base rate. If the rate differs from other exchanges, Changer will induce its rate to incorporate the activities of arbitrage traders (stablecoins linked to non-reserve currencies traded on different exchanges at different exchange rates can be traded on the Changer exchange at its base exchange rate, creating opportunities to profit from the spread).
For the past several years, many digital asset exchanges around the world have tried to directly handle fiat currency, list stablecoins indexed to fiat currency, or create them on their own. As of August 2020, there are stable coins that follow the price of at least eight major fiat currencies (USD, EUR, GBP, AUD, CAD, HKD, KRW, and IDR) and many more types of fiat currencies that can be directly exchanged for digital assets.
There will be more fiat currencies that can be used to purchase cryptocurrencies in the future. With more trading of particular fiat currencies and cryptocurrencies, the demand for stablecoins tracking the corresponding fiat currency will naturally increase just as it did for USD and USD-linked stablecoins.
For example, it is anticipated that more trading of cryptocurrencies that can be exchanged to and from the Indonesian Rupiah (IDR) will increase the demand for stablecoins linked to IDR 1:1 with easier cross-border trade, arbitrage trading opportunities, and the like.
In the FX market, a market called NDF has existed for a long time. The currencies of financial hubs such as USD, HKD, and SGD, are relatively easier to send and receive anywhere in the world. On the other hand, currencies of emerging countries like KRW, CNY, THB, IDR, and RUB are harder to move out of the country.
Nevertheless, there is always a need to trade these currencies overseas. A conglomerate like Samsung Electronics, for example, makes profits in various currencies around the clock. Korea’s foreign exchange market, however, operates only between 9 am and 3 pm, Monday to Friday. The company will need to keep operating, pay their employees’ salaries, and the like, and this means they need to exchange their foreign currencies into KRW any time outside of Korea’s FX market hours.
In addition, overseas traders who want to generate profit from the value of KRW in the FX market become hesitant to participate as it is difficult to take the KRW they earn out of the country. Speculative traders’ activities are not necessarily bad because they can add to the liquidity of a currency. The abundance of liquidity means a lot of transactions are taking place and it benefits all traders as there is always someone who is willing to buy or sell.
The NDF (Non-Deliverable Forward) market satisfies the 24-hour demand for the trading of such emerging market currencies difficult to be moved out of the country. Traded in this market are trading pairs like USD/CNY, USD/RUB, USD/KRW that are traded in their respective countries’ FX markets. Overseas traders, however, only wish to bet on the exchange rates and they normally do not want to own the actual currencies (they would not want to go through the trouble of making bank accounts in several different countries). Hence, they settle their profits or losses from their transactions in USD. For example, if they earn 3 million KRW in a transaction, they receive 2,631.58 USD (assuming 1,140 KRW per dollar), instead of being able to withdraw 3 million KRW.
As people trade various non-reserve currencies and settle their profits or losses in USD, which is always liquid and easy to exchange, settlement becomes easier and it makes much more sense to trade non-reserve currencies. This is what the NDF market offers to traders. The closing price in the NDF market affects the starting price in the Korean FX market when it opens the next day at 9 am. As such, the global FX market works in ways that various markets influence each other’s prices around the clock.
Changer intends to establish a cryptocurrency-based digital NDF market that trades foreign currencies around the world. While non-reserve currencies cannot be directly deposited or withdrawn in the NDF market, it is made possible with cryptocurrency. In addition to trading, cryptocurrencies indexed to non-reserve currencies can be used for settlement and payment, and can be withdrawn from or re-deposited into Changer.
The NDF market engages in forward trading. The market Changer seeks to establish is a spot trading market. Changer’s goal is to create cryptocurrencies indexed to various non-reserve currency prices, and create a digital, crypto version of the FX market where these cryptocurrencies are traded 24/7 and settled directly in each corresponding country’s cryptocurrency. Changer will establish a DFX gateway and corresponding DFX currencies.
Once implemented, people around the world will be able to hedge transactions between multiple fiat currencies and cryptocurrencies through Changer. If online/offline payment gateways start to support cryptocurrency payments in the future (this is an international trend and almost all payment gateways are expected to join this trend within the next five years), they will wish to position in USD as soon as payments come in so that they are not exposed to cryptocurrency volatility. This is because settlements are made in the local currency at their local affiliates. In this case, they can use Changer to sell their cryptocurrency and buy the stablecoin that tracks the local currency, which can be automated 24/7.
Cross-border payments used often for overseas direct purchases and duty-free shops, hotels, and casinos worldwide that aim to attract overseas VIP customers will also come to prefer cryptocurrency payments as they are free from card limits and high fees. If ATMs, banks, and online/offline exchange offices start to accept cryptocurrencies, not just fiat money, they will inevitably need Changer’s real-time hedging infrastructure for non-reserve currencies to make sure they are not exposed to high cryptocurrency volatility.
Current Market Challenge 3
As for stablecoins, a particular financial institution (bank or trust company) in the country where the stable coin issuer is domiciled takes charge of the fiat currency trust. Most of the popular stablecoins are USD-linked and their juristic personality lies in the U.S., and hence their fiat currency trust is managed by mostly financial institutions in the U.S. This poses great restrictions for the fiat currency to be traded freely with countries else where that have high demand for USD.
Solution by Changer
To solve this problem, Changer proposes a new stablecoin system where its integrated stablecoin is indexed to the value of eurodollars, which are US dollars outside the United States.
Although the value of eurodollar is equivalent to that of the US dollar in the United States, Changer intends to use multiple fiat currency trustees with legal status and qualifications outside the U.S. like Europe and Asia so that users around the world can deposit and withdraw fiat currency more conveniently than other stablecoins with a single trust company in the U.S.
Eurodollars refer to US dollar deposits made by non-American depositors outside the United States. The deposits are known as money without nationality as they are outside the jurisdiction of the United States. The eurodollar-market dates back to the period after World War II when the U.S. provided a substantial amount of dollar funds to help rebuild the defeated countries, Germany and Japan (the Marshall Plan), and prevent the expansion of Soviet influence.
While much of Europe was destroyed after World War II, the United States, which was little affected, held the Bretton Woods conference with major countries to reshape the post-war world economy. As a result, the dollar became convertible to gold at 35 USD per ounce, while all other currencies had fixed, but adjustable, exchange rates to the dollar.
This system remained for the next 20 years until the global economy saw an unprecedented boom in the 1950s and 60s that led to the economic recovery of Europe and the rising of Germany and Japan as emerging industrial countries, which resulted in serious trade imbalances.
As the U.S. saw continued deficits while other economies enjoyed high trade surpluses, the exchange rate set 20 years ago could not be retained any longer. Despite efforts to stabilize the exchange rate by the U.S. and major countries well into the late 60s, the risk of serious outflow of gold eventually led the U.S. to swiftly declare the end of the convertibility of U.S. dollars into gold (35 USD per ounce of gold) in 1971.
As all currencies were already fixed to the dollar, countries were left with no alternatives to the dollar. After a temporary plummet of the dollar, the U.S. and OPEC nations agreed to pricing their oil in dollars, driving central banks worldwide to accumulate dollar reserves.
The important role of the US dollar has remained for roughly 50 years to this day. Numerous countries have their own currency pegged to the US dollar. Meanwhile, US dollars can be newly issued any time by the Fed.
When the U.S. issues additional dollars, the relative value of the dollar drops and the currency value of other countries increases. This means that businesses that exported products for $10 dollars yesterday, for example, would now need to receive $12 dollars, losing their export competitiveness. Hence, it is unavoidable for those countries to print more money in the amount equivalent to the newly issued dollars. This demonstrates the ripple effect of depreciated dollars on other countries around the world. Other countries have to work and compete to earn dollars while the U.S. has the ability to print them.
Dollars that the U.S. printed which have flowed out of the continental U.S. are called eurodollars. Eurodollars initially referred to US dollars deposited in banks in Europe as a result of the Marshall Plan, but its meaning has broadened to US dollars deposited in banks in and outside the US by non-American individuals or businesses. The criteria for defining eurodollars hence depends on who owns the dollar-deposits (American or non-American).
For example, the dollar deposits held by Chinese at commercial banks in China are eurodollars. US dollars deposited by Americans in German banks are not, while dollars deposited by Japanese in US banks are considered eurodollars.
The amount of eurodollars is so significant that even the U.S. Treasury Department does not have accurate statistics. In 1985, JP Morgan Guaranty Bank estimated the size to be 1.668 trillion USD, and Nedbank in 2016 estimated it at 13.833 trillion USD.
Although eurodollars are issued by the U.S., they are considered “stateless currency” as the owners of the money are not American and most of the money is deposited at banks outside the U.S. Strictly speaking, eurodollars are not US money. In nature, they are closer to key currency reserves compiled by corporations, governments, and individuals around the world, similar to gold.
Changer is currently preparing a global, integrated stablecoin based on the eurodollar. As almost all banks and trust companies in the world accept US dollars, there is no need to only use banks in the US to receive and withdraw US dollars to mint or redeem Changer’s stablecoins upon customer requests. There may actually be more people outside the U.S. who wish to trade US dollar-based stablecoins; there is always a demand for a key currency globally.
Changer will hence have trust partners in several countries that have the legal status to safely manage customer assets. This will have significantly lower deposit/withdrawal costs for customers than having a single trust company in the U.S. For example, if a customer needs to make an overseas remittance to a single trust company in the U.S. through the SWIFT network and convert the stablecoin into fiat currency, the customer has to pay a high 10.89% cross-border remittance fee for each exchange (world average bank fee reported by the World Bank Q3 2020).
If customers can exchange the stablecoins they own with fiat currency through their local bank or trust company, they can significantly reduce costs related to cross-border remittances. Although in some countries remittances to the United States are more affordable and faster, there are still many countries and banks experiencing the opposite.
It will thus be extremely convenient for traders to have multiple exchange channels for their countries’ fiat currencies based on US dollar deposits abroad. In respect of this, Changer will ensure to work only with select partners with legal status and licenses to manage customer assets and strict Know Your Customer (KYC) and Anti Money Laundering (AML) policies in place.
US dollars deposited outside of the U.S. are extremely abundant in liquidity. With the effects of COVID-19, the size of the monetary base in the U.S. increased by 45.3% in five months since January 1, 2020. In addition, M1, which includes demand deposits of commercial banks and highly liquid cash equivalents such as traveler’s cheques, increased 31.07% during the same period.
Such figures mean that in just five months, the U.S. issued nearly half the amount of all dollars printed since 1792. The increased amount of dollars will then be bound to move out of the mainland, substantially increasing the amount of US dollars abroad.
With this shift, Changer believes that its platform can significantly improve user convenience by offering eurodollar-based stablecoins, which will be supported by sufficient demand, liquidity, and multiple exchange partners responsible for trusts and withdrawals in the most number of countries.
By issuing cryptocurrencies that can be exchanged 1:1 with the US dollar around the world outside the US, and creating a crypto-version of the FX market that has the same exchange rates as those between USD and other fiat currencies, Changer can fully digitize the FX market that sees 6.6 trillion USD of trade per day.
Below is the structural diagram that explains eUSD (euroUSD), the integrated eurodollar-based stablecoin that Changer is working on and the new crypto-version FX system that uses the eUSD as the key currency.
The CNG Gateway in the yellow box in the center serves the key role as a platform for cryptocurrency-crypto currency exchange as well as the exchange between cryptocurrency and stablecoin (CNG currency) that tracks the prices of various fiat currencies against eUSD).
On the CNG Gateway, different cryptocurrencies and CNG currencies can be traded interchangeably 24/7/365.
The exchange rates of all the trading pairs are offered based on the quotations of major global banks (upper right corner) for CNG currencies, and the quotations of major global OTC companies (lower right corner) for cryptocurrencies.
As explained previously for cryptocurrency, the CNG Gateway will connect all the OTC, CeFi, and DeFi markets and find the best trade prices and quantities for customers. As for CNG currencies, they will be gradually linked to Forex Broker, ECN, or Forex Aggregator so that Changer can compare the prices offered by major banks around the world and provide the optimal ones to customers in real time.
Unlike at retail cryptocurrency exchanges where the exact price can only be found out after the transaction is finalized, traders on the CNG Gateway can find out the price prior to trading just as it would be done at banks for exchange.
On the CNG Gateway, eUSD, which is the stablecoin indexed to the eurodollar 1:1, will be used as the key currency, and stablecoins indexed to other fiat currencies 1:1 (ex. eEUR, eJPY, eCNY, eKRW, etc.) will be traded.
Settlement on the CNG Gateway will take place once a day between traders and Changer through netting. This means that if a customer traded the BTC/eKRW pairs 300 times in a day, the BTC and eKRW will not be paid and received 300 times and the transaction fee charged every time. Instead, the system will aggregate and offset all the amounts the traders owe and receive, and finalize the settlement just once a day at a set time. This net settlement method makes trading much more efficient.
On the left side of the diagram above is Changer’s plan to provide a 1:1 swap protocol for a number of existing (and future) stablecoins that were covered earlier. Using this automated swap service, CNG system users will be able to easily convert their CNG currency into their desired stablecoin and vice versa.
Changer will also apply automatic carry trade algorithms to the 1:1 swap protocol between stablecoins so that customers with eUSD can lend them at the highest stablecoin rate or borrow cryptocurrency at the lowest stablecoin rate in the market.
In the lower left of the diagram are partners who will help with fiat currency deposits and withdrawals. They will mainly be banks and trust companies outside the U.S., cryptocurrency exchanges, online/offline currency ex changes, and ATM operators (as one of multiple trust companies, a bank in the U.S.may also become a partner) with the appropriate license and qualifications. Changer currently does not plan to acquire licenses to handle fiat currency directly in each country; but instead Changer plans to support trading of DFX currencies and fiat currency by partnering with companies that have the legal rights to do so and manage customer assets.
By doing so, Changer will provide traditional financial institutions around the world with new business opportunities in the digital currency exchange market, and work together with them to foster the eUSD ecosystem as partners.
Changer does not handle fiat currency in any direct ways, nor any other foreign currencies. Changer will only trade stablecoins that track a variety of foreign currency prices. Although Changer uses and takes reference of the FX market exchange rates, it does not guarantee the stablecoins to be exchanged 1:1 with the indexed foreign currency.
If this system is implemented, it will satisfy both the high demand for hedge and arbitrage trading as it mirrors and enables traditional FX transactions that could not easily be processed due to technical and regulatory issues in the cryptocurrency market. While the traditional FX market has a high entry barrier and requires a high margin, the cryptocurrency market has a high regulatory barrier for trading fiat currency.
For example, Korean financial authorities and banks only granted the first four cryptocurrency exchanges that started operating the legal rights to handle fiat currency as of August 2020, leaving out hundreds of latecomer exchanges. The crypto-based FX market created by Changer — even if not perfect — can be a suitable alternative for those without the legal rights to handle fiat.
There may be momentary differences in price at the exchanges approved to handle fiat currencies and the price of Changer’s stablecoins tracking the same fiat currency. Based on the law of one price, this can create arbitrage opportunities. Since the DFX system can provide sufficient liquidity through 1:1 exchange of stable coins and the partners handling fiat currency for deposits and withdrawals, it is expected that there will be considerable arbitrage opportunities.
Lastly, all CNG currencies (stablecoins linked to foreign currencies) and cryptocurrencies tradable within the CNG system will be able to be deposited into and withdrawn from blockchain wallets and cryptocurrency exchanges. As mentioned previously, the problem with the NDF market in FX trading was that the traded currencies could not be directly withdrawn. The purpose of the NDF market in the first place was to enable overseas trading of currencies that were difficult to be withdrawn outside of one’s own country. Hence, while the trade is based on the currency exchange rate in each country, settlement and withdrawal of the accrued profit or loss is made in US dollars.
Since the cryptocurrencies in the CNG system are not the actual foreign currencies, but only stablecoins that follow their prices, withdrawals from and re-deposits into Changer’s platform will fully be allowed. This means that without having to directly transact currencies that are difficult to send abroad such as CNY, KRW, RUB, and the like, stablecoins can freely move around, anywhere in the world, only indexed to the price of those currencies.
While this does not violate in any way the regulations of the countries’ financial authorities to control the outflow of their own currency, it achieves similar effects for users, offering convenience to the existing NDF market traders and the people of countries that use the currency actively traded in the NDF market. Should any regulations be implemented by the authorities on the trading of stablecoins, Changer and its partners will ensure to remain strictly compliant.