Several solutions can potentially significantly improve cross-border payments and the central bank’s digital currency (CBDC) could be the “Holy Grail”, according to the European Central Bank (ECB). In a new report, the euro zone monetary authority also says stablecoins, among other options, are “problematic”.
The “Holy Grail” of cross-border payments at your fingertips through the CBDC, insists the European Central Bank
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 at hand, thanks to falling data transfer costs, the emergence of innovative concepts and global collaboration to improve these payments, the regulator says in the document recently. published.
The review, co-authored by ECB Director-General of Market Infrastructure and Payments Ulrich Bindseil and economist George Pantelopoulos, explores various ways to achieve these goals. Experts evaluated several alternatives currently available, including cryptocurrencies such as bitcoin, stablecoin, modern 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 gaps regulations that will be filled by the authorities as they presumably undermine anti-money laundering regulations and the inadequacy of the main cryptocurrency as a national means of payment as it is “inherently unstable” in terms of purchasing power.
While stablecoins take an intermediate place, they can 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. However, the authors concede that they can be efficient as a means of payment for several reasons, including their stable value tied to existing fiat currencies and their potential for universal reach.
Two other solutions, the European Central Bank insists, combine technical feasibility and relative simplicity while maintaining a competitive and open architecture while avoiding the dominance of a small number of market participants who would ultimately exploit their market power. The central bank believes these are:
The interconnection between domestic instant payment systems and future CBDCs, both with a competitive FX conversion layer, which could have the highest potential to provide the holy grail for wider cross-border payment corridors.
All options examined require that progress be made in the field of AML / CFT compliance. The ECB says this will ensure direct processing for the vast majority of cross-border payments. The central bank raises the question of whether financial authorities should develop both the interconnection between national payment systems and CBDCs, or fire one and “concentrate all efforts to implement 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. Its investigation phase could take another year or so, President Christine Lagarde indicated last month. In an article written in collaboration with council member Fabio Panetta, she also outlined the key principles of implementing the CBDC. Hence, a group of economists has suggested that it is necessary to restrict user access to the incoming currency to preserve the current banking system.
Do you agree with the ECB that central bank digital currencies can be the “Holy Grail” of cross-border payments? Let us know in the comments section below.
Image credits: Shutterstock, Pixabay, Wiki Commons