Central bank digital currency (CBDC) may be the “holy grail” of technologies that might considerably enhance cross-border payments, according to the European Central Bank (ECB). The monetary authority for the eurozone argues stablecoins, among other alternatives, are “problematic” in recent research.

Ulrich Bindseil, Director-General for Market Infrastructure and Payments at the European Central Bank, and economist George Pantelopoulos co-authored a review that looks at several strategies for achieving these goals. The experts have evaluated a number of existing options, including stablecoins, updated correspondent banking, fintech products, and digital currencies issued by central banks, or CBDCs, like bitcoin and other cryptocurrencies.

They claim that of these, bitcoin is the “least credible” and thus unlikely to be the “holy grail” of cross-border payments, bringing up three main reasons for their conclusion: a proof-of-work mechanism that is ineffective, comparative advantages resulting from regulatory gaps that will be closed by authorities as 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 price movements.

Even while stablecoins occupy a middle ground, the paper adds that because of the use of closed-loop solutions, their market strength, and fragmentation, they can be even “more problematic.” Other hazards include currency substitution and the threat to monetary sovereignty.

However, the authors agree that they can be effective as a form of payment for a number of reasons, including their steady value tied to the value of currently used fiat currencies and their potential for global adoption.

The European Central Bank argues that two other ideas combine technical viability and relative simplicity while preserving a competitive and open architecture by preventing the dominance of a small number of market players who might eventually abuse their market power.

“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.”

Development in the area of AML/CFT compliance is necessary for all of the possibilities that have been considered. As stated by the ECB, this will guarantee straight-through processing for the vast majority of international payments. The central bank questions whether financial authorities should focus all of their efforts on implementing the “holy grail” as soon as feasible or abandon one of them in favour of developing the integration of domestic payment systems and CBDCs.

The creation of a digital equivalent of the euro, the continent’s official currency, has been an initiative of the European Central Bank. According to President Christine Lagarde’s comments from last month, the inquiry phase could take another year or two. She highlighted important CBDC realisation concepts in an article she co-authored with Board Member Fabio Panetta. Then, a group of economists proposed that in order to protect the current banking system, users’ access to the forthcoming currency should be restricted.

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