Our experts have found that currency baskets (portfolios made of selected currencies with different weightings) can be the best solution for a variety of needs and situations… the problem? It was only reserved for big institutions and banks. But that’s about to change.

Why do Central Banks use currency baskets?

In a globalised world, a national currency does not always represents the wealth of their citizens, it’s just convenient for accounting or payment purposes. This is probably the reason for the growing trend among Central Banks to build up their own currency baskets or to peg their national currency to a basket.

Central Banks usually use this approach to link their national currency to a set of currencies that, combined in certain proportions, fit within the fixed exchange systems. This technique eliminates the negative effects of abrupt changes when you have only one single reference currency.

For example, the value of the Yuan is made up primarily of the Yen, the Dollar, the Euro and the South Korean Won, according the Chinese Central Bank (although the specific weight of each currency has not been revealed to the public). Usually, central banks establish the weightings of each currency according to their importance for foreign trade.

Why couldn’t WE use currency baskets before?

The currency basket concept was previously reserved for large clients; No retail bank or broker currently offers such a basket to individuals, and public institutions such as Central Banks manage the issue by themselves. The main reason is the Foreign Exchange Market structure. They are dealing with a minimum size of several million units per currency. Very few people would have access to the network necessary to construct such an offer themselves, and the associated cost of doing this would be very difficult to cover.

The Blockchain revolution

The Blockchain allows the creation of smart contracts using a Distributed Ledger system, which is a database of transactions updated independently by individual participants in a large network. This unique distribution is not communicated to participants by a central authority (like a central bank for example), but instead the record is being independently constructed by each of the contributors.

The decentralisation brought by the Blockchain Technology now makes it now possible to offer the currency basket concept to the public, enabling GLOBCOIN to provide solutions that were formerly reserved to a few privileged market participants.

The GLOBCOIN solution

Currency baskets are commonly used to minimise the risk of currency fluctuations. The selected currencies inside the basket and their weighting depend on its purpose.

The first currency basket to be presented by GLOBCOIN intents to reflect the world economy by combining the best aspects of cryptocurrencies and the best aspects of fiat (or traditional) currencies. The plan is to link a digital coin called GLX to a basket of currencies from the 15 largest world economies and 5 % Gold.

While we still need an entity such a bank or brokers to securely hold fiat currencies, the Blockchain allows the ‘tokenisation’ of our currency basket and makes it tradable on a peer-to-peer basis. Tokens can be exchanged on platforms, at a fraction of the cost, and the amounts can be as small as 1 USD.

Isn’t it a revolution that anyone, easily and at very reasonable costs, can behave like a central bank, managing currency risk?

Written by: Eva — GLOBCOIN Community Manager