ECB Cautions Against Quixotic Quests on Path to CBDC ‘Holy Grail’

Holy Grail? Maybe.

But: For cross-border payments, there may be a few paths to that Grail.

The recent paper put forth by the European Central Bank, titled “Towards the Holy Grail of Cross Border Payments,” spotlighted here, takes note of the potential for central bank digital currencies (CBDCs) to solve the frictions inherent in payments that span two or more currencies, that cross time zones, and are anything but efficient.

But CBDCs are but one tool in the proverbial toolbox.

 In fact, the aspiration is pretty straightforward, as the ECB posits that the goal/the Grail is one that allows cross-border transactions “to be immediate, cheap, universal, and settled in a secure settlement medium.”

It’s no easy endeavor, as the ECB writes, too, that “the search for such a solution is as old as international commerce and the implied need to pay.” In fact, the search has dragged on for centuries, the paper contends.

Certainly, the issue has garnered attention well into the 21^st century. The  G20 has asked the Financial Stability Board and a range of committees and regulators to explore how to fix cross-border payments.

There’s some cause for optimism, said the paper — and the Grail may be claimed within the next decade.

Identifying the Problems 

The ECB identifies a number of pain points extant today. Among the problems: AML/CFT and other compliance checks “have been perceived as heavy by banks, also as their implementation across jurisdictions is heterogeneous, creating high costs and legal risks.”

In addition, “payment systems may follow old standards and that are costly to modernize because they would require to be completely redone because of outdated standards or programming.” Inefficiencies also demand higher liquidity (which can be expensive) and there is always, of course, the specter of financial crime and cyber risk.

Beyond the possible use of CBDCs in addressing the above issues, the ECB states that modernizing the correspondent banking system may be a key salve. The system has been in place for centuries, and the paper argues that “the use of correspondent banks avoids the drawbacks of cross-border payments being completed through a single provider in a closed-loop system.” Monetary sovereignty would remain intact and “reducing legal risks through a better coordinated and implemented set of AML/CFT rules could attract banks to return to offering correspondent banking services and enhance the competitiveness of this activity.”  The correspondent banking system is also universal, said the paper.

There’s also the potential for FinTechs with a presence in several countries to be part of the Holy Grail of cross-border transactions, according to the ECB. At least at present, the FinTechs “have added competition and as a consequence have contributed to an overall decline in cross-border payment fees in the segments they serve,” the ECB said.

These are avenues to improvement but not catch-all solutions. And while the ECB has identified CBDCs as a more efficient option toward cementing a digital, modern payment, cross-border ecosystem interoperable with current practices. Bitcoin is apparently not viable, in part due to the time it takes to make bitcoin, to get it out in the field and to scale. Blockchain, then, has its place, but it’s interesting to note that there is still seemingly also a place for the age-old, tried and true method of correspondent banking underneath it all, complete with modernization and collaboration across nations.

Read also: As Remote Work Goes Global, Paying Workers Gets Complex