Stablecoins vs. FX: key FX terms, market players, and how stablecoins fit in (Part 2)

In Part 2 of Stablecoins vs. FX, Mirela Ciobanu, Lead Editor at The Paypers, breaks down key FX terms, market players, and risks, and explores how stablecoins connect to the global foreign exchange market.

This article is part of a series that examines the role of stablecoins in cross-border payments, liquidity management, and currency conversion based on research, expert discussions, personal observations, and insights from AI tools like ChatGPT. You can read Part 1 here.

What exactly is the Foreign Exchange (FX or Forex) market

The foreign exchange market, or FX, is the global marketplace where currencies are bought and sold. It is the largest and most liquid financial market in the world, operating 24/5. The FX ecosystem is made up of:

• Participants – central banks, commercial banks, corporations, investment managers, hedge funds, retail traders, FX brokers, electronic trading platforms, and market makers.
• Market segments – spot, forward, futures, options, and swaps.
• Instruments – currency pairs such as EUR/USD, USD/JPY, and GBP/USD, which are classified as major, minor, or exotic pairs.

Since the FX market is essentially about exchanging, trading, and settling money, it is important to understand the forms that money can take - from central bank reserves and commercial bank deposits to newer digital instruments like stablecoins.

What are central bank and commercial bank money (in accounts), and how do they differ from stablecoins

Central bank money (or base money) is created and managed by the central bank and refers to the physical currency and reserves held by commercial banks at the central bank. Central banks use this money to implement monetary policy, influencing interest rates and the overall money supply.

Commercial bank money (or inside money) is created by the commercial banks through lending activities, which are deposits held by individuals and businesses.

A key difference between central bank money and commercial money is the fact that commercial banks are profit-driven institutions, while central banks focus on maintaining price stability and financial system stability. This is an important difference to keep in mind when we apply it to the use of stablecoins in moving money globally - as of now, stablecoins are not issued by public institutions (like central banks).

Instead, they are primarily issued by private entities (like commercial bank money).

In the context of foreign exchange and international payments, this means that trust, compliance, and interoperability of stablecoins currently depend on private governance frameworks. If public institutions eventually issue their own tokenized money or wholesale CBDCs, it could reshape the infrastructure of global settlements and redefine the role of stablecoins in cross-border finance. Another notable difference is that central banks facilitate interbank payments and settlements by managing reserve accounts. Thus, when payments and settlements are conducted in stablecoin, we need to make sure we have plenty of reserves to manage, as it can happen that we don't have enough funds. When interbank settlements are conducted using stablecoins instead of central bank money, the responsibility for ensuring liquidity and trust shifts from public institutions to private issuers.

Unlike central banks, which guarantee the availability of reserves and provide real-time settlement infrastructure, stablecoin issuers must hold sufficient high-quality, liquid assets to back their coins 1:1. This introduces significant risk: if reserves are inadequate, poorly managed, or not easily accessible, it could lead to delays in redemption or even loss of value, particularly during times of market stress.  Without strict oversight and regulatory requirements, the use of stablecoins in high-value payment systems raises concerns about systemic stability, transparency, and counterparty risk.

Why major, minor, and exotic currencies matter in this discussion

When we talk about money in the FX market, it is not just about who issues it (central banks, commercial banks, or even private issuers like stablecoin companies); it’s also about how widely it’s traded. This is where the idea of major, minor, and exotic currencies comes in.

Major currencies are the most actively traded in the world, usually tied to large, stable economies. Examples include: USD (US Dollar), EUR (Euro), JPY (Japanese Yen), GBP (British Pound), CHF (Swiss Franc), CAD (Canadian Dollar), AUD (Australian Dollar), and NZD (New Zealand Dollar).

Minor currencies are pairs that do not include the US dollar but still involve one of the majors (for example, EUR/GBP, GBP/JPY, EUR/JPY).

Exotic currencies combine a major with the currency of a smaller, less liquid, or emerging market economy (for instance, USD/THB (Thai Baht), EUR/NGN (Nigerian Naira), or GBP/TRY (Turkish Lira)).

Trading and settlement processes vary across these categories. Major pairs like EUR/USD are traded on deep, liquid electronic platforms such as Bloomberg and 360T, and often settled via CLS Bank’s payment-versus-payment (PvP) system* in central bank money; virtually removing settlement risk (Herstatt risk) **.

By contrast, minor and exotic pairs tend to have thinner liquidity. Quotes are often negotiated directly between parties or through niche specialists (e.g., StoneX). Because most of these currencies are not covered by CLS, settlement often relies on bilateral PvP or newer blockchain-based smart contract platforms (like OSTTRA, Baton, or Partior), which aim to replicate PvP logic on-chain.

What are stablecoins, and where do they fit in?

Stablecoins are digital assets issued by private companies that are designed to hold a steady value, usually pegged 1:1 to a fiat currency such as USD (USDC), EUR (EURC), or even certain emerging market currencies. They operate on blockchains, enabling value to move instantly across borders without going through traditional correspondent banks or clearinghouses.

Stablecoins can be exchanged 24/7 on both centralised exchanges and decentralised exchanges (DEXs), allowing near-instant and transparent currency swaps.

• For major currencies, stablecoin FX offers speed and flexibility, but competes with the already efficient CLS infrastructure.
• For minor and exotic currencies, the impact could be far greater, providing ready liquidity and atomic PvP settlement in places where it does not currently exist.

Example: A Brazilian business could convert BRL into USDC, swap it for EURC on-chain, and pay a Turkish supplier in seconds, skipping the multi-day, multi-bank chain of traditional FX.

Of course, stablecoins come with their own risks: blockchain network fees and congestion can raise costs, their backing depends on private reserves, and they introduce new regulatory considerations. Additionally, faster on-chain price discovery could advantage the best-informed traders.

Still, by combining pricing, execution, and settlement in one programmable layer, stablecoins could remove long-standing frictions in FX, especially in minor and exotic currency corridors.

Understanding stablecoins in the FX context inevitably leads to decentralised exchanges (DEXs) and Automated Market Makers (AMMs). That’s because stablecoins don’t just sit in wallets; they are actively traded, swapped, and settled on-chain. And the primary infrastructure enabling this activity isn’t traditional bank rails, but rather DEXs powered by AMM technology. Together, these tools turn stablecoins from static digital cash into liquid, programmable FX instruments that can move instantly between currencies, jurisdictions, and payment systems.

What are Decentralised Exchanges (DEXs) and Automated Market Makers (AMMs)?

Stablecoins are a key building block of Decentralised Finance (DeFi). DeFi is a blockchain-based ecosystem designed to replace or complement parts of the traditional financial system with open, permissionless alternatives. While centralised intermediaries like banks have long been the backbone of payments and FX, they also bring costs, delays, and barriers to access. DeFi aims to solve these pain points by enabling direct peer-to-peer financial activity without middlemen.

Within DeFi, decentralised exchanges (DEXs) are the marketplaces where stablecoins and other digital assets are traded. Unlike centralised exchanges or banks, DEXs allow users to swap currencies instantly without creating an account or depositing funds into a third party. All trades are executed and settled on-chain via smart contracts, making them transparent, borderless, and available 24/7. Popular examples for stablecoin trading include Uniswap, Curve, Balancer, and SushiSwap.

DEXs generally work in two ways:

1. Order Book DEXs mimic traditional exchanges, recording buy/sell orders (on-chain or partially off-chain) and matching them when prices align.
2. Liquidity Pool DEXs let traders swap directly against a pool of pre-funded tokens, with prices set by algorithms rather than human negotiation.

The most common pricing engine for liquidity pool DEXs is the Automated Market Maker (AMM). AMMs replace the traditional ‘buyer meets seller’ model with a formula-based approach, ensuring instant pricing and execution. This model has clear FX advantages: it eliminates settlement delays, requires funds to be pre-available (removing Herstatt risk), and enables atomic, programmable currency conversion inside payment flows.

In FX terms, DEXs and AMMs act like always-open, fully transparent currency markets, especially powerful for minor or exotic currency corridors where liquidity is scarce and settlement infrastructure is limited. Combined with stablecoins, they represent a new way to think about global money movement: one where trading, conversion, and settlement collapse into a single, programmable transaction.

AMMs and the future of FX

AMMs represent a fresh approach to foreign exchange (FX), especially in cross-border payments. Unlike traditional FX systems that rely on deferred net settlement (where trades are agreed first and settled later), AMMs require pre-funded liquidity, thus assets must be available in smart contract-based pools before a trade is executed.

This eliminates settlement risk and enables instant, on-chain execution. It also simplifies the FX layer by allowing real-time currency conversion within the payment flow, reducing reliance on intermediaries and complex infrastructure.

Such a model shows strong potential for retail remittances, stablecoin payments, and CBDC corridors. However, challenges remain, including liquidity management, regulatory compliance, and the ability to support high transaction volumes.

Having explored the terminology and mechanics of stablecoins, decentralized exchanges, and automated market makers, it becomes essential to examine how these technologies perform in real-world or experimental settings.

From Project Mariana’s pilot of AMM-driven cross-border FX settlement to empirical research on EURC and USDC trading on Uniswap, the next article (Part 3)  illustrates both the promise and practical challenges of integrating blockchain-based instruments into the foreign exchange ecosystem.

Stay tuned!

*PvP (Payment vs. Payment): A settlement method that only completes a payment if the counterpayment is also completed, reducing default risk.
**Herstatt Risk: The risk that one party to a currency trade pays their side of the deal, but the counterparty doesn't. This happened in 1974 when Bank Herstatt defaulted, hence the name.

 

About author

Mirela Ciobanu is Lead Editor at The Paypers, specialising in the Banking and Fintech domain. With a keen eye for industry trends, she is constantly on the lookout for the latest developments in digital assets, regtech, payment innovation, and fraud prevention. Mirela is particularly passionate about crypto, blockchain, DeFi, and fincrime investigations, and is a strong advocate for online data privacy and protection. As a skilled writer, Mirela strives to deliver accurate and informative insights to her readers, always in pursuit of the most compelling version of the truth. Connect with Mirela on LinkedIn or reach out via email at mirelac@thepaypers.com.