Several solutions can potentially improve cross-border payments significantly and central bank digital currency (CBDC) could be the “holy grail,” according to the European Central Bank (ECB).

In its recent report, the ECB stated that a CBDC offers a solution that is immediate, cheap, universal in terms of reach, and settled in a secure settlement medium. 

The report titled “Towards the holy grail of cross-border payments” is co-authored by ECB’s Director-General for Market Infrastructure and Payments, Ulrich Bindseil, and economist George Pantelopoulos.

The report highlights that for the first time, the “holy grail” of such transactions is within reach, thanks to declining data transfer costs, the birth of innovative concepts, and global collaboration aiming to enhance these payments. It also states that the interlinking of domestic payment systems and the future interoperability of CBDCs are the most promising avenues.

The experts have examined a number of existing options, including stablecoins, updated correspondent banking, fintech products, and digital currencies issued by central banks, or CBDCs, like bitcoin and other cryptocurrencies.

The paper also underlines that stablecoins, despite occupying a middle ground, can provide even greater challenges because of the use of closed-loop solutions, their market dominance, and their fragmentation. Other hazards include currency substitution and the threat to monetary sovereignty. However, the authors acknowledge that they can be effective as a form of payment for a number of reasons, including their steady value tied to the value of currently used fiat currencies and their potential for global adoption.

Two alternative approaches, according to the experts, combine technical viability and relative simplicity while preserving a competitive and open architecture by preventing the dominance of a small number of market players who might eventually abuse their market position.

The experts believe these are,

“The interlinking of domestic instant payment systems and future CBDCs, both with a competitive FX conversion layer, which may have the highest potential to deliver the holy grail for larger cross border payment corridors.”

Furthermore, the central bank questions whether financial authorities should develop both the interlinking of domestic payment systems and CBDCs, or dismiss one of them and focus all efforts to implement the holy grail as soon as possible.

The European Central Bank has been working on a project to issue a digital version of the common European currency, the Euro. Its investigation phase may take another year or so, President Christine Lagarde indicated last month.

In an article co-authored with Board Member Fabio Panetta, she also marked key principles of the CBDC’s realization. Then, a group of economists suggested that limiting users’ access to the upcoming currency is necessary to preserve the current banking system.