A central bank digital currency (CBDC) could be the “holy grail” for cross-border payments, offering a solution that is “immediate, cheap, universal in terms of reach, and settled in a secure settlement medium,” the European Central Bank (ECB) said in a recent report on identifying the ultimate cross-border payment medium.
“… the interlinking of domestic payment systems and the future interoperability of CBDCs are the most promising avenues,” according to the report, which also concluded that “… Bitcoin is least credible.”
The report points to the greater compatibility CBDCs have with forex exchange (FX) conversions, the upholding of monetary sovereignty, and easy instant payments via intermediaries such as central banks, the report indicated.
See also: Some Central Bankers Signal Support for Private Sector Digital Currencies Over CBDCs
The Bank for International Settlements (BIS) wrote to the G20 in its July report suggesting that CBDCs could be a key component in facilitating cross-border payments but said it’s “not a silver bullet,” PYMNTS reported.
Some central bankers from the G20, however, have hinted that digital currencies issued by the private sector may have more utility than those issued by central banks. Australian central bank Governor Philip Lowe said at a panel discussion that he’s in favor of a private sector solution over the central bank.
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The promise of using CBDCs for cross-border payments depends on the progress made regarding anti-money laundering and counter-terrorist financing compliance measures to ensure straight-through-processing (STP) for the large majority of cross-border payments, according to the report.
Several challenges also have to be addressed, including the “organization of an efficient competitive FX conversion layer conducive to narrow bid-ask spreads applying to the FX conversion,” per the report.
The global addressability of accounts is another area of concern, as well as ensuring the same degree of legal certainty for interlinked cross-currency payments as for domestic payments, including when a party defaults.
