Several solutions could potentially significantly improve cross-border payments, and central bank digital currency (CBDC) could be the “holy grail”, according to the European Central Bank (ECB). In a new report, the eurozone’s monetary authority also claims that stablecoins, among other options, are “problematic”.
‘Holy Grail’ of cross-border payments within reach through CBDC, European Central Bank insists
Cross-border payments should be immediate, cheap, universal and settled in a secure medium, notes the European Central Bank in a recently published report. For the first time, the “holy grail” of such transactions is within reach, thanks to falling data transfer costs, the birth of innovative concepts and global cooperation aimed at improving these payments, the regulator says in the recently published article.
The review, co-authored by the ECB’s director-general for market infrastructure and payments Ulrich Bindseil and economist George Pantelopoulos, explores different ways to achieve these goals. The experts have considered several options currently available, including cryptocurrencies such as bitcoin, stablecoins, modernized correspondent banking, fintech solutions and digital currencies issued by central banks, or CBDCs.
Of these, bitcoin is the “least credible” and therefore unlikely to be the “holy grail” of cross-border payments, they say, pointing to three main reasons for their conclusion: an inefficient proof-of-work mechanism, comparative advantages resulting from this. from regulatory loopholes that will be closed by the authorities as they allegedly undermine anti-money laundering regulations, and the leading crypto’s unsuitability as a domestic means of payment as it is “inherently unstable” in terms of purchasing power.
Stablecoins, even if they occupy an intermediate position, may be even “more problematic” due to the use of closed-loop solutions, their market power and fragmentation, the report notes. Currency substitution and the threat to monetary sovereignty have also been listed as risks. Still, the authors admit that they could be effective as a means of payment for several reasons, including their stable value tied to existing fiat currencies and their potential to have universal reach.
Two other solutions, the European Central Bank insists, combine technical feasibility and relative simplicity while maintaining a competitive and open architecture by avoiding the dominance of a small number of market players who will eventually exploit their market power. The Central Bank believes these are:
The interconnection of domestic instant payment systems and future CBDCs, both with a competitive FX conversion layer, may have the highest potential to deliver the holy grail for larger cross-border payment corridors.
All options reviewed require progress to be made in AML/CFT compliance. The ECB says this will ensure straight-through processing for the vast majority of cross-border payments. The central bank raises the question of whether the financial authorities should develop both the interconnection of domestic payment systems and CBDCs, or reject one of them and “focus all efforts on implementing the Holy Grail as soon as possible.”
The European Central Bank has been working on a project to issue a digital version of the common European currency, the euro. The investigative phase could take another year or so, President Christine Lagarde said last month. In an article written together with board member Fabio Panetta, she also highlighted key principles for CBDC’s realization. Subsequently, a group of economists suggested that it is necessary to limit users’ access to the upcoming currency in order to preserve the current banking system.
Do you agree with the ECB that central banks’ digital currencies could be the “holy grail” for cross-border payments? Let us know in the comments section below.
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