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The ECB noted that CBDCs provide a more credible alternative compared to unbacked digital assets.
Research published by the European Central Bank (ECB) has concluded that Bitcoin is the least credible alternative for cross-border payments.
The study tagged “Towards The Holy Grail of Cross-border Payments” aimed to identify the potentials and drawbacks of existing international payment methods. Consequently, it considered several methods, including correspondent banking, fintech in multiple countries, crypto assets, stablecoins, interlinked instant payment systems, and CBDCs.
The idea of the research was to identify the payment system that was immediate, cheap, had global reach and could guarantee secure settlement. The paper concluded that interlinked instant payment systems and CBDCs are better alternatives.
Volatile Bitcoin Unsuitable for Cross-border Payments
In its paper, the ECB considered Bitcoin (BTC), Ethereum, and other unbacked assets similarly. It noted the assertions of bitcoin enthusiasts like Nayyib Bukele, president of El Salvador, who accepted Bitcoin as legal tender.
According to the FSB, Bitcoin does not qualify as a suitable payment method for cross-border transactions. The ECB towed a softer line identifying the lack of intermediaries and the singularity of the blockchain as a plus. However, the report queried the settlement mechanism behind Bitcoin.
Also, it noted that the blockchain system is ‘inherently expensive and wasteful.’ According to the Bank of Italy Chair, Hossein Nabilou, “Bitcoin goes a long way to create extreme inefficiencies by introducing a distributed ledger that should be maintained, updated and validated by all fully validating nodes.” Further, the report noted that the cryptocurrency was highly volatile, making it unsuitable for cross-border payments.
Bitcoin has been particularly volatile since the year started. From its all-time high of $69,000 in November 2021, Bitcoin crashed to $17500 in June. It enjoyed its best month of 2022 in July, ending the month above $23000.
CBDCs Are Better Alternatives
Compared to unbacked digital assets, the ECB noted that CBDCs provide a credible alternative. Likewise, it reported interlinked instant payment systems with FX conversion layers as equally good.
CBDCs boast two advantages; preserving money sovereignty and guaranteeing simple and seamless transactions. However, the ECB notes that successful domestic adoption must precede the use of CBDCs for cross-border payments.
According to the Atlantic Council, only ten countries have fully launched a CBDC. Of these, China has gained the most adoption locally.