According to the European Central Bank (ECB), some solutions could significantly improve cross-border payments and central bank digital currencies (CBDCs) could become the “Holy Grail” It is. In a new report, eurozone monetary authorities also argue that stablecoin, among other options, “is the problem.”
Reaching the “Holy Grail” of cross-border payments through CBDCs, claims the European Central Bank
In its recently released report, the European Central Bank says cross-border payments should be settled in a medium that is immediate, cheap, universal and secure. The “Holy Grail” of such transactions is within reach for the first time due to lower data transfer costs, the birth of innovative concepts, and global cooperation to enhance these payments, the regulator said in a recently released document.
The review, co-authored by ECB Director of Markets Infrastructure and Settlements Ulrich Bindseil and economist George Pantelopoulos, examines various ways to achieve these goals. The experts evaluated several alternatives currently available, including cryptocurrencies such as Bitcoin, stable coins, modernized correspondent banks, fintech solutions, digital currencies issued by central banks, orCBDC.
Of these, bitcoin is “the least reliable” and therefore unlikely to become the “holy grail” of cross-border payments, and the main reasons for this conclusion are inefficient proof-of-work mechanisms, regulatory gap comparative advantage, and the inadequacy of leading crypto as a domestic payment method because it is “inherently unstable” in terms of purchasing power.
Stablecoin is positioned in the middle, but may be even more “problematic” due to its adoption of closed-loop solutions, its market power and fragmentation, the report noted. Currency substitution and threats to currency sovereignty are also cited as risks. Nevertheless, the report acknowledges that it is an efficient means of payment for several reasons, including the stable value bound by existing fiat currencies and the potential for universal adoption.
The other two solutions advocated by the European Central Bank, while technically feasible and relatively simple, preserve a competitive and open architecture by avoiding the dominance of a few market participants who ultimately exploit their market power. Central banks consider these as follows.
interconnection of domestic immediate settlement systems and future CBDCs. Both have competitive FX conversion layers and may have the best potential to provide the Holy Grail for large cross-border settlement corridors.
All options considered require progress in the area ofAML/CFTcompliance; progress in the area of AML/CFTcompliance; the ECB has stated that this would allow for straight through processing in the majority of cross-border payments. The central bank raises the question of whether monetary authorities should develop both interconnected national payment systems and CBDC, or whether they should reject one or the other and “devote every effort to achieving the Holy Grail as quickly as possible.”
The European Central Bank is working on a project to issue a digital version of the common European currency, the euro. That research phase may take another year or so, Governor Christine Lagarde suggested last month. She also marked the main principles for the realization of the CBDC in a book she co-authored with board member Fabio Panetta. And a group of economists suggested that limiting users’ access to the upcoming currency is necessary to preserve the current banking system.
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