Several solutions can potentially improve cross-border payments significantly 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 stablecoins, among other options, are “problematic.”

‘Holy Grail’ of Cross-Border Payments in Reach Through CBDC, European Central Bank Insists

Cross-border payments should be immediate, cheap, universal, and settled in a secure medium, the European Central Bank remarks in a recently published report. For the first time, the “holy grail” of such transactions is within reach, thanks to declining data transfer costs, the birth of innovative concepts, and global collaboration aiming to enhance these payments, the regulator says in the recently published paper.

The review, co-authored by ECB’s Director-General for Market Infrastructure and Payments Ulrich Bindseil and economist George Pantelopoulos, explores various ways to achieve these objectives. The experts have assessed several alternatives that are currently available, including cryptocurrencies like bitcoin, stablecoins, modernized correspondent banking, fintech solutions, and digital currencies issued by central banks, or CBDCs.

Of these, bitcoin is the “least credible” and hence 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 be closed by authorities as they allegedly undermine anti-money laundering regulations, and the leading crypto’s unsuitability as a means of domestic payment as it’s “inherently unstable” in terms of purchasing power.

Stablecoins, although they take an intermediate spot, can be even “more problematic” due to the employment of closed-loop solutions, their market power and fragmentation, the report notes. Currency substitution and the threat to monetary sovereignty have been listed as risks, too. Nevertheless, the authors admit they can be efficient as means of payment for several reasons, including their stable value bound 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 participants who would eventually exploit their market power. The central bank believes these are:

The interlinking of domestic instant payment systems and future CBDCs, both with a competitive FX conversion layer, which may have the highest potential to deliver the holy grail for larger cross border payment corridors.

All reviewed options require that progress is made in the field of AML/CFT compliance. The ECB says this will ensure straight-through-processing for the large majority of cross-border payments. The central bank raises the question whether financial authorities should develop both the interlinking of domestic payment systems and CBDCs, or dismiss one of them and “focus 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 may take another year or so, President Christine Lagarde indicated last month. In an article co-authored with Board Member Fabio Panetta, she also marked key principles of the CBDC’s realization. Then, a group of economists suggested that limiting users’ access to the upcoming currency is 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 section below.

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