Recently, the European Central Bank released a document called “Towards the holy grail of cross-border payments” that tries to explain how the traditional system has been looking for centuries for a new and more efficient monetary network. The current financial system works properly but it is very expensive in terms of the time needed to process transactions and the number of intermediaries involved.
The dream for this holy grail cross-border payments is based on an immediate, cheap, universal and secure settlement medium.
In 2020, improving cross-border payments was set as a key priority by the G20. In talks with the Financial Stability Board (FSB), the Committee on Payments and Market Infrastructures (CPMI) and other bodies are coordinating a roadmap to achieve that goal.
While the internet has brought the transmission of quasi cost-free information around the globe, it did not cause the same improvement for cross-border payments.
The ECB working paper argues that “after more than thousand years of search, the holy grail can be found within the next ten years”. This is not small thing because it shows us we are on the verge of an historic moment.
Cross-border payments consist of transactions where payer and payee (and their financial institutions) are located in different jurisdictions, being them more complex than domestic payments as they involve different legal and regulatory frameworks, different currencies, different time zones, etc.
The referred paper exposes the pros and cons from the different solutions considered when analyzing the best possible approach for the next monetary system. Let´s resume how they see them:
- Modernized correspondent banking
- It is already a well-tested method for the settlement of cross-border payments.
- It avoids the drawbacks of cross-border payments being completed through a single provider in a closed-loop system.
- Monetary sovereignty would not be undermined.
- It has universal reach.
- It needs multiple intermediaries.
- Multiplicity of “IOUs”.
- Existing claims and liabilities will continue to be denominated in commercial bank money.
- It will remain concentrated amongst a few participants (Oligopoly).
- Fintech companies
- Specialization to a few related financial services.
- Improved use of new technologies (internet, remote user identification, no branches).
- Some actual Fintech companies’ strategies to achieve maximum number of customers are not sustainable on the long run, thus they will end up losing important advantages against other solutions.
- They are non-interoperable closed loop solutions and rely on a larger extent of existing providers and infrastructures.
- Global Stablecoins (e.g., LIBRA)
- Potentially high technology efficiency (technology agnostic).
- Economies of scale (i.e. Facebook can bring a direct and instant solution to millions of people around the globe).
- Value stability by binding their value to existing fiat currencies or to related to baskets like the SDR.
- Creating monopolies where issuers can exploit their privilege position in one way or another (i.e., Privacy problems).
- Unclear about who will be the lender-of- last resort.
- Possible financial instability if the due reserves are not managed correctly.
- Risk of currencies substitutions and related macro-economic destabilization.
- Threat to monetary sovereignty and possible political pressures to the issuer.
- Possible fragmentation if provider try to avoid interoperability because of self-interest business goals.
- Possible AML/CFT issues since the data is manage by the provider.
- Interlinked instant payment with FX conversion layer
- It is efficient as it re-utilizes the domestic instant payment infrastructure and the associated services of banks.
- It avoids market fragmentation and monopolies.
- It allows better architecture than corresponding banking. More efficient and competitive.
- Monetary sovereignty is preserved.
- Strong need for coordination among network service provider (e.g., SWIFT), legislators and central banks.
- Potential challenges related to technicalities and high costs of interlinking currency conversion layer.
- Interoperable CBDC with FX conversion layer
- Monetary sovereignty is preserved.
- Reduce intermediation since money is settle directly with the central bank.
- Simpler than the interlinking on instant payment system.
- 24/7 operability.
- Important challenges ahead since the CDBC are not yet in the market (technical, legal, regulation such AML, interoperability, etc.)
- Challenges with commercial banks that will have to change their role from account providers to FX conversion providers.
- Bitcoin Network
- One single system can be used “as is” for the entire world.
- The absence of intermediaries suggests a high potential for efficiency.
- Wallet providers (CASPs) have developed relatively efficient on and offloading services from domestic currencies into Bitcoin.
- Proof-of-work is expensive and wasteful.
- It escapes from AML/CFT compliance.
- Governance of the network is hard. It is a challenge in a very changing environment where quick changes could be needed.
- Price volatility is a problem as a unit of account.
Although we are already seeing clear signs of central banks recognizing the huge potential of Bitcoin, it is still soon for them to publicly recognize that There Is Not Alternative (T.I.N.A.).
Bitcoin technology is orders of magnitude better than the rest of proposals and the actual monetary system. It fullfills all the requeriments they are looking for: immediate, cheap, universal and secure settlement medium.
The Bitcoin Network cons explained on the document bring old arguments that have already been disproved.
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As the Bitcoin network open and permissionless, it will bring the tools for each central bank to implement their own business logic (including AML/CFT if needed) while maintaining the advantages of a peer-to- peer network without intermediaries and instant settlement.
Bitcoin currency (btc) can be seeing in this phase as a commodity that works similarly to oil to keep the network running, while CBDCs can be issued by tokenization.
We are in the verge of a historic moment where the holy-grail for global payments is found after many centuries of research.
As I explained here. You can be part of this revolution just by holding btc on your wallet.
It is the greatest opportunity of our lifetime. Just take it.