On Tuesday, the European Central Bank (ECB) released the results of a study examining the ideal model for cross-border payments. According to the paper, next to options such as Bitcoin (BTC) and stablecoins, CBDCs come out on top.
ECB Pursues the “Holy Grail”
While Bitcoin and other crypto solutions have been touted as excellent options for cross-border payments, the European Central Bank thinks otherwise. In fact, the ECB thinks a rather perfect solution would possess some particular attributes they believe the BTC does not have.
In their release, the ECB tags this prospective medium of exchange as “the Holy grail of cross-border payments.”
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,” its publication read.
The ECB is the central bank for the 19 EU member countries that use the euro as their official currency. Although the ECB does not have the single authoritative sway in influencing crypto laws, it is regardless a significant arm of the European Union.
BTC Has Its Strength
The study acknowledged BTC’s potential, highlighting the cryptocurrency’s suitable qualities. To start with, the king crypto’s global reach is a definite advantage. ECB noted that with BTC there is no need for further interlinking. Cross-border BTC payments work as efficiently as domestic payments.
Additionally, P2P exchanges also stand out as one of Bitcoin’s noteworthy merits. However, the ECB study describes the digital currency’s underlying technology as inherently expensive and wasteful, stressing the PoW layer in particular.
Bitcoin’s Unregulation is a Disadvantage
Another point the paper brought up was BTC’s lack of defined regulation. According to the ECB, the majority of cryptocurrency’s appeal arises from this issue. The bank claims that so far Bitcoin has evaded “an equal regulatory treatment in terms of KYC, AML/CFT compliance.” In time, the paper claimed, regulators will resolve this situation and lawful BTC transactions will see a rise in costs.
The value proposition of Bitcoin must not be based on a misalignment of regulation across payment solutions.”
Eventually, the ECB settled on two likely solutions, one being Central Bank Digital Currencies as more suitable for cross-border operations. The institution suggests that these assets could be more compatible with forex exchange (FX) conversions. Pairing a potential CBDC with a competitive FX conversion layer may be the best possible path toward the “holy grail.”
A CBDC Solution Could Pose Challenges
A solution based on a CBDC will combine feasibility with already existing designs and systems. This way the bank can maintain fiscal sovereignty while ensuring local currencies are not rendered obsolete. Despite this plus, the ECB acknowledged that this course could also present certain difficulties.
These include addressing accounts and providing users with the same level of legal certainty domestic payments offer. Also, adequate progress regarding AML/CFT compliance is essential to the success of a CBDC solution.
However, despite these issues, the ECB is confident a CDBC could very well be closer to the elusive “Holy Grail” than Bitcoin.