ECB claims the 'holy grail' of cross-border payments is close at hand

A policy paper published by the European Central Bank (ECB) explores six potential routes for tackling inefficiencies of cross-border payments, bitcoin and stablecoins don't make the cut. 

On Monday, the ECB's Towards the holy grail of cross-border payments report assessed whether six avenues of payment systems passed the test of being: immediate, cheap, universal and settled in a secure settlement medium. 

According to the ECB paper, "after more than a thousand years the holy grail of cross-border payments can be found within the next ten years".  The six avenues investigated include bitcoin, stablecoins, modernised correspondent banking, cross-border Fintechs, central bank digital currencies (CBDC) and domestic instant payment systems. 

This suggests that the central bank believes that one of the six above-mentioned payment systems, or a derivation of the existing offering, could very well be the salvation of cross-border payments. 

The "least credible" option according to the paper is bitcoin, with the other unbacked crypto-assets considered to be equally unsuitable. Bitcoin and its unbacked peers lack three main properties to be seriously considered as the 'holy grail'. 

Firstly, the ECB notes that bitcoin's proof-of-work consensus mechanism is inefficient, referring to the high energy costs and processing capabilities. 

The environmental aspect is a particular concern for the ECB, with other reports suggesting that the energy cost of crypto mining was on part with electricity consumption in Spain, the Netherlands and Austria. 

Second, regulatory gaps particularly in regard to the effective bitcoin AML/CFT framework are non-existent and have been"supported" bitcoin as an illicit means of payment. This too has been a widely debated issue, with AML/CFT investigations differing across jurisdictions and length. 

Lastly, bitcoin is deemed "not even suitable as a domestic payment system", with the paper pointing out the volatility experienced in El Salvador which became the first country to adopt bitcoin as a legal tender 

Stablecoins fare a little better than bitcoin, as they are deemed to have "potentially high technological efficiency". However, their undoing comes at the hands of financial stability issues. 

Over the past month, stablecoins have depegged, no matter if they are fully-backed by hard cash and short-term obligations, fractionally-backed or algorithmic stablecoins. The collapse of Luna, depegging of USDC and Tether are testament to that. 

The report finished by concluding that the only two viable options at present can be achieved via interlinking domestic instant payment systems and future CBDCs, both of which would need a "competitive conversion layer". 

By using CBDCs to solve cross-border payment issues, monetary sovereignty can be preserved and it is "simpler" to interlink them on instant payment systems. 

For the past three years, central banks have dedicated a considerable amount of time to investigating CBDC's, with the Bank of England in particular publishing their research on the matter quite frequently.