A report by the European Central Bank (ECB) has found that central bank digital currencies (CBDC) could be the “holy grail” of cross-border payments, with the potential to outperform anything else on the market — including Bitcoin and stablecoins.
Central banks are very good
The central bank report called, “Towards the holy grail of cross-border payments” looked at a number of different solutions. These payments, which are also known as remittances, remain slow, expensive, and highly inefficient.
“The holy grail of cross-border payments is a solution allowing cross-border payments to be immediate, cheap, universal, and settled in a secure settlement medium,” says the report which was co-authored by Ulrich Bindseil, the ECB’s director-general for market infrastructure and payments.
As of March 2022, the average global cost of sending money overseas was 6.09%. For some transfers, the cost of a single transaction can rise to around 20%. The report, therefore, weighed up a number of potential alternatives and considered which would provide the best solution.
In Bitcoin the report found a number of inherent flaws, describing its proof-of-work consensus mechanism as “inherently inefficient” and the coin itself as “inherently unstable in terms of its purchasing power.” Further, it pigeonholes the cryptocurrency as a “global means of illicit payment.”
Ultimately it concludes that Bitcoin is “unlikely to be the holy grail of cross-border payments,” while stablecoins are even “more problematic” than Bitcoin due to their “closed loop” systems and fragmentation.
Having carefully considered the merits of every option, the 59-page central bank report finally concludes that a CBDC, under the control of central banks such as the European Central Bank, is the best and most likely path towards the “holy grail” of efficient payments.
Why search for ‘the grail’ now?
In 2020 the G20, an intergovernmental forum comprising the world’s top 20 richest economies, declared that “improving cross-border payments” was a top priority for the group.
The Financial Stability Board (FSB) was tasked with working with the Committee on Payments and Market Infrastructures (CPMI) to identify current issues in the system and formulate a plan for improvement.
“Cross-border payments sit at the heart of international trade and economic activity,” said the FSB in its 2021 analysis. “However, for too long cross-border payments have faced four particular challenges: high costs, low speed, limited access, and insufficient transparency.”
The reasons for this center around many costs and inefficiencies inherent in the traditional banking system. Money sinks which include operational costs, financial regulatory compliance costs, network costs, correspondent costs, FX costs, and liquidity costs all persist within the framework the banking system made for itself.
While this laundry list of inefficiencies has plagued the system for years, there now seems to be a real appetite to tackle the problem head-on.
Inquisitive minds may now ask what prompted the legacy financial system to suddenly prioritize the resolution of a perennial problem that they themselves presided over, and failed to address for decades.