According to the European Central Bank (ECB), several solutions have the potential to significantly improve cross-border payments, and a central bank digital currency (CBDC) could be the “Holy Grail”. In a new report, the Eurozone Monetary Authority also claims that stablecoins, among other things, are “problematic”.
European Central Bank insists ‘Holy Grail’ of cross-border payments is available via CBDC
International payments must be immediate, cheap, universal and secure, the European Central Bank says in a recent report. report. For the first time, the “Holy Grail” of such transactions is within reach, thanks to lower data transfer costs, the birth of innovative concepts, and global collaboration to improve the efficiency of these payments, the regulator said in a recent paper.
The review, co-authored by ECB CEO Market Infrastructure and Payments Ulrich Bindsale and economist George Pantelopoulos, explores different ways to achieve these goals. The experts evaluated several alternatives currently available, including cryptocurrencies such as bitcoin, stablecoins, modernized correspondent banking, fintech solutions, and digital currencies issued by central banks, or CBDC.
Of these, bitcoin is the “least trustworthy” 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 regulatory gaps that will closed by the authorities because they allegedly undermine anti-money laundering regulations, and the leading cryptocurrency’s unsuitability as a means of domestic payment because it is “inherently unstable” in terms of purchasing power.
The report notes that stablecoins, while in the middle, may be even “more problematic” due to the use of closed solutions, their market power and fragmentation. Currency substitution and threats to monetary sovereignty were also listed as risks. However, the authors acknowledge that they can be effective as means of payment for several reasons, including their stable value pegged to existing fiat currencies and their potential for universal coverage.
The other two solutions, the European Central Bank insists, combine technical feasibility and relative simplicity, while maintaining a competitive and open architecture, avoiding the dominance of a small number of market participants who will eventually exercise their bargaining power. The Central Bank believes that it is:
Linking domestic instant payment systems and future CBDCs with a competitive level of FX conversion that may have the greatest potential to provide the holy grail for larger cross-border payment corridors.
All of the options considered require progress in AML/CFT agreement. The ECB says this will ensure that the vast majority of cross-border payments will be processed straight through. The central bank is raising the question of whether financial authorities should develop the interconnection of domestic payment systems and CBDCs or fire one of them and “direct all efforts towards realizing the holy grail as soon as possible.”
The European Central Bank is working on a project to issue a digital version of the single European currency, the euro. The investigation phase could take another year or so, President Christine Lagarde said last month. In an article co-written with board member Fabio Panetta, she also outlined the key principles behind the implementation of the CBDC. A group of economists then suggested that limiting user access to the future currency was necessary 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 below.
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