CBDCs will rule over Bitcoin

• The ECB report claims that CBDC could be the best solution for cross-border payments.
• The report also cited reasons why Bitcoin or stablecoins are not suitable alternatives for such payments.

The European Central Bank (ECB) has released a new report that says central bank digital currencies (CBDCs) may be the best solution for overseas money transfers. The study added that CBDCs outperform similar payment methods such as Bitcoin and stablecoins.

The ECB report also said that the study of other credible alternatives to CBDCs shows that Bitcoin is expensive and wasteful, and it is the least credible. The report, known as “Towards The Holy Grail Of Cross-Border Payments”, analyzed many options for these payments, otherwise known as remittances. However, it said that CBDCs are the only option that is efficient and is not slow and expensive.

The report goes on to say, “a payment solution that allows instant, universal, cheap and secure settlement is the holy grail for cross-border payments.” The ECB’s Director General for Market Infrastructure and Payments, Ulrich Bindseil, is one of the report’s authors.

Where do stablecoins stand?

As of March this year, the average cost of transfers globally was 6.09 percent. There are some transfers where the cost of one transaction can rise to 20 percent. Therefore, the report compared different options to find the best one. The study discovered that Bitcoin had several inherent flaws.

One such flaw was the proof-of-work mechanism. Therefore, the report said Bitcoin was grossly inefficient and the coin’s price is unstable, making it impractical for this type of payment. It further classifies the digital asset as the preferred method of fraudulent financial transactions. Therefore, the report concluded that Bitcoin could not be the best solution for overseas money transfers.

It also dismissed stablecoins as an alternative, stating that their closed-loop systems and fragmentation make them more problematic than Bitcoin. In its recommendation, the 59-page report said CBDC is the best option for cross-border payments. However, they must be supervised by central banks such as the European Central Bank.

Improve cross-border payments

After one of the meetings two years ago, the need for an efficient cross-border payment system became a top priority for the G20. The G20 is a forum for the world’s top 20 most prosperous economies. Since then, the Bank’s Financial Stability Board and its Committee on Payments and Market Infrastructure (CPM) have worked together.

Related: Bitcoin not in focus: G20 to create framework for stablecoins by 2022

Their first responsibility was to spot problems around the current system. Then develop a plan that addresses these issues. A 2021 analysis by the FSB states that cross-border payments are the cornerstone of international trade and financial operations. However, four factors have caused a problem for cross-border payments for a long time.

These factors are insufficient transparency, high costs, limited access and low speed. The analysis discovered that the traditional banking system is the main cause of these problems. Several costs persist within the conventional banking system that harm cross-border payments.

They include operational, currency, liquidity, network, correspondent and financial regulatory compliance costs. It is worth noting that these costs have been an issue before 2020. However, the G20 now seems to have a strong desire to find a permanent solution to them.