CBDCs to reign over Bitcoin

• The ECB report claims that CBDCs could be the best solution for cross-border payments.
• The report also cited reasons Bitcoin or stablecoins aren’t suitable options for such payments.

The European Central Bank (ECB) has released a new report stating that Central Bank Digital Currencies (CBDCs) could be the best solution to overseas remittances. The study added that CBDCs outperform similar payment methods such as Bitcoin and stablecoins.

The ECB report also said that its study of other credible alternatives to CBDCs shows that Bitcoin is expensive and wasteful and it’s the least credible. The report, known as “Towards The Holy Grail Of Cross-Border Payments”, analyzed many options for these payments, otherwise known as remittances. However, it said that CBDCs are the only option that is efficient and isn’t slow and expensive.

The report further reads, “a payment solution that allows immediate, universal, cheap, and secure settlement is the holy grail of cross-border payments.” The ECB’s director-general for market infrastructure and payments, Ulrich Bindseil, is one of the report’s authors.

Where do stablecoins stand?

As of March this year, the average cost for remittances globally was 6.09 percent. There are some remittances where the cost of one transaction can rise to 20 percent. Therefore, the report compared various options to determine the best one. The study discovered that Bitcoin had multiple inherent flaws.

One such flaw was its proof-of-work mechanism. Hence, the report said Bitcoin was grossly inefficient, and the coin’s price is unstable, making it impractical for this kind of payment. It further classifies the digital asset as the favorite method for fraudulent financial transactions. Hence, the report concluded that Bitcoin couldn’t be the best solution for overseas remittances.

It also discarded stablecoins as an option, stating that their closed-loop systems and fragmentation make them they are more problematic than Bitcoin. In its recommendation, the 59-page report said the CBDC is the best option for cross-border payments. However, they must be under the supervision of central banks like the European central bank.

Improving cross-border payments

After one of its meetings two years ago, the need for an efficient cross-border payment system became a top priority for the G20. The G20 is a forum for the world’s top 20 most prosperous economies. Since then, the bank’s financial stability board and its committee on payments and market infrastructures (CPM) have been working together.

Related: Bitcoin not in focus: G20 to create a framework for stablecoins by 2022

Their first responsibility was to discover issues surrounding the current system. Then, develop a plan that solves these issues. A 2021 analysis by the FSB states that cross-border payments are the cornerstone of international trade and economic operations. However, four factors have been causing an issue for cross-border payments for a long time.

Those factors are insufficient transparency, high costs, limited access, and low speed. The analysis discovered that the traditional banking system is the leading cause of these issues. Multiple costs persist within the conventional banking system that hurts cross-border payments.

They include operational, FX, liquidity, network, correspondent, and financial regulatory compliance costs. It is worth noting these costs have been an issue before 2020. However, the G20 now seems to have a strong desire to find a permanent solution to them.