Why ECB thinks Bitcoin is Unlikely to be the Holy Grail of Cross Border Payments

Why ECB thinks Bitcoin is Unlikely to be the Holy Grail of Cross Border Payments

The ECB believes Bitcoin is not a suitable means of cross-border payments, citing its PoW mechanism, lack of regulation, and volatility.
Neither the author, Ruholamin Haqshanas, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

The European Central Bank (ECB) believes Bitcoin and other crypto assets are not suitable means of cross-border payments. Instead, the central bank claimed that central bank digital currencies (CBDCs) can evolve to be the “holy grail of cross-border payments,” or a solution allowing payments to be immediate, cheap, universal, and settled in a secure settlement medium.

ECB on Quest to Find the “Holy Grail of Cross-Border Payments”

The ECB has recently published a research paper titled “Towards the holy grail of cross-border payments,” which strives to identify the best cross-border payment solution. The paper claims that the search for such a solution is as old as international commerce, and argues that this holy grail can be found within the next ten years.

“The holy grail of cross-border payments is a solution allowing cross-border payments to be immediate, cheap, universal, and settled in a secure settlement medium,” the ECB defined this sought-after payment solution. The central bank said the search for such a solution has been amplified in recent years.  

For instance, the G20 recognized improving cross-border payments as a key priority in 2020. At the time, the forum asked the Financial Stability Board (FSB) to work with the Committee on Payments and Market Infrastructures (CPMI) and other standard-setting bodies and co-ordinate and continue their search for a faster, cheaper, more transparent, and more inclusive cross-border payment solution. 

Mentioning this, the ECB claimed “it is time again for forceful measures to improve crossborder payments” and to find the holy grail of payments. In this quest, the central bank explored several candidates, which included banking, cross-border FinTech solutions, Bitcoin, stablecoins, and CBDCs, among others.

The paper concluded that “the interlinking of domestic payment systems and the future interoperability of CBDCs are the most promising avenues,” but claimed that these solutions require strong progress to comply with AML/CFT regulations. As reported, SWIFT is also exploring interlinking multiple CBDC networks for faster and cheaper cross-border transactions.

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Why Does ECB Believe Bitcoin is Not a Suitable Payment Solution?

While speaking about Bitcoin, the ECB claimed that one major downside to Bitcoin is its settlement mechanism. Bitcoin transactions generally take anywhere from 10 minutes to 1 hour. That is because a Bitcoin transaction is confirmed when it is combined in a block, and a new block is added approximately every 10 minutes. 

When a transaction requires more confirmations, it will take more time. For instance, Coinbase requires three block confirmations before considering a BTC transaction final. Since each confirmation takes around 10 minutes, it takes around 30 minutes for a BTC transaction to be considered final on Coinbase. The ECB said:

“Since the settlement in the Bitcoin network occurs only around every ten minutes, valuation effects are already materializing at the moment of settlement, making Bitcoin payments actually more complicated.”

The central bank added that Bitcoin’s underlying technology, or its proof-of-work mechanism, “is inherently expensive and wasteful.” However, it failed to rightly consider layer 2 solutions like the Lightning Network that improve network performance while reducing costs. Other noted downsides were a lack of regulatory oversight and price volatility.

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What is the holy grail of cross-border payments in your opinion? Let us know in the comments below. 

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