Central Bank Digital Currencies (CBDCs) could be the answer to the thousand-year search for the holy grail of cross-border payments, according to a new paper from the European Central Bank (ECB).
The concept covers a system that is “cheap, universal, and settled in a secure settlement medium,” says the paper.
The search for such a solution is as “old as international commerce and the implied need to pay,” but could be found within the next 10 years.
The ECB explores several options for achieving this, including correspondent banking, emerging fintech services, bitcoin, stablecoins, the interlinking of domestic payment systems, and CBDCs.
The paper concludes that interlinking domestic systems and CBDCs, both interlinked cross-border through an FX conversion layer, are the most promising avenues.
Listing the benefits, the authors write: “(i) technical feasibility; (ii) relative simplicity in their architecture; and (iii) maintaining a competitive and open architecture by avoiding the dominance of a small number of market participants who would eventually exploit their market power
“Moreover, (iv) monetary sovereignty is preserved, and (v) 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).”
There are 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,” says the paper.
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