CBDCs could be the ‘holy grail’ of cross-border payments, claims ECB

A new paper by the European Central Bank (ECB) has said CBDCs could be the answer to a ‘thousand-year search for the holy grail of cross-border payments’.

According to Finextra, the paper highlighted that the concept covers a system that is ‘cheap, universal and settled in a secure settlement medium’, with the search for such a solution described as ‘old as international commerce and the implied need to pay’. However, the paper stated it believed this holy grail could be found within the next 10 years.

The ECB is currently exploring several options for achieving this, including correspondent banking, emerging FinTech services, stablecoins, CBDCs, Bitcoin and the interlinking of domestic payment systems.

The most promising avenues, the bank believes, is the interlinking of domestic systems and CBDCs, both interlinked cross-border through an FX conversion layer.

The authors of the paper listed benefits including technical feasibility, relative simplicity in their architecture, 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 paper said, “Moreover, monetary sovereignty is preserved, and the crowding out of local currencies is avoided due to a FX conversion layer at the border (which does not hold for Bitcoin and global stablecoins).”

ECB also stated key challenges, including AML/CFT compliance to ensure STP, creating an efficient competitive FX conversion layer, and the global addressability of accounts.

“None of these challenges are unresolvable and for large cross-border payment corridors with significant volumes and sufficient political will, both interlinking solutions should be feasible and efficient”, the paper added.

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