Yesterday the European Central Bank (ECB) published a paper, “Towards the holy grail of cross-border payments“. It explores six potential avenues for addressing the current inefficiencies of cross border payments, half of which use blockchain. The blockchain options include using the Bitcoin network, stablecoins, and crossborder central bank digital currency (multi-CBDC) with an FX conversion layer.
One of the biggest hurdles in addressing payment challenges is the friction of anti-money laundering (AML) processes. While the paper predicts that one of the six paths will uncover the holy grail of cross border payment, there’s a big caveat. It assumes there will be progress in addressing AML and CFT compliance inefficiencies. That’s not a trivial assumption.
Regarding what is classed as meeting the ‘holy grail’, the paper says payments should be immediate, cheap, universal and settled in a secure medium such as central bank money.
ECB considers Bitcoin as an option
Turning to specific solutions, as a paper from a central bank, it’s almost audacious to consider Bitcoin as an option. And it notes that this avenue did not make into the G20 list of potential solutions. The paper doesn’t just explore the Bitcoin network but also the layer 2 solution for micropayments, the Lightning network.
The authors outline several avenues that address Bitcoin custody risks for end users. They view the existence of one extensive network and the absence of intermediaries as key advantages.
However, they also highlight the drawbacks of Bitcoin, such as wasteful use of energy, and that much of the efficiencies can be attributed to unequal application of AML/CFT compliance. The paper concludes that Bitcoin is the least credible avenue of the six options.
Stablecoins and M-CBDC
The ECB also explores stablecoins which it sees as a viable solution with far less innovation than Bitcoin. However, it covers the usual central bank reservations about stablecoins, such as the run risk and impact on financial stability and the likelihood of a monopoly that will exploit its position.
The discussion of multi-CBDC solutions is a little lighter than the other sections. At this stage, this route is seen as one of the more far-off options, given it requires many countries to issue CBDCs, which is likely to take time.
Despite this being further in the future, multi-CBDC made it into the top two avenues to explore alongside interlinking domestic payment systems.
Meanwhile, last week the BIS published a document exploring solutions for FX settlement risk, which overlapped the ECB’s paper. Apart from the multi-CBDC Project Jura, the BIS paper outlines several new private wholesale blockchain settlement networks that arguably are neither stablecoins nor CBDCs. They include the Regulated Liability Network, Baton’s Core FX system, and Fnality, the synthetic CBDC settlement network backed by 16 financial institutions.
Additionally, the BIS recently released a paper that explores using multi-CBDC solutions to address cross border payment inefficiencies.