The European Central Bank regards Bitcoin as an expensive system. The report’s explanation
In pursuit of the Holy Grail: Bitcoin and stablecoins under ECB scrutiny
The ECB does not consider Bitcoin to be an optimum payment method.
The European Central Bank has published a 59-page study on the hunt for the “Holy Grail of cross-border payments,” authored by Ulrich Bindseil, the ECB’s Director General of Market Infrastructure and Payments, and George Pantelopoulos, a Lecturer in Economics at Newcastle University.
The study investigates many options for improving the efficiency of cross-border payments. According to the ECB, the best one must have four characteristics:
It must be immediate, inexpensive, ubiquitous, and usable everywhere in the globe; and it must be paid in a safe settlement medium, such as central bank money.
Furthermore, the paper indicates that a more current and up-to-date solution should be an open system: one example offered, albeit problematic, is that interbank transfers include several suppliers, as opposed to the usage of a stablecoin issued by a single counterparty.
Of course, the Holy Grail must not jeopardize monetary sovereignty.
In search of the so-called Holy Grail for centuries (the paper even references to the Middle Ages), the report details how Bitcoin, stablecoins, and state digital currencies function in order to determine if they are acceptable technologies.
Indeed, at a time when globalization and technology are flourishing, the ECB is becoming increasingly concerned with developing quicker and cheaper ways to make cross-border payments.
According to an ECB projection, these issues will be resolved during the next decade.
The study claims that “the holy grail of cross-border payments may be reached within the next 10 years.”
The history of the quest for the ideal payment mechanism
Bitcoin, stablecoins, and CBDC are all being examined for cross-border payments.
A lengthy digression is given to historical efforts to discover the ideal means of conducting cross-border payments.
The promissory note, which developed in the Arab world at the start of the Islamic period, was the first financial instrument used for this purpose. It is a written order from the issuer directing a counterparty to remit funds promptly or by a certain date. If the drawee does not pay, the drawer has the right to sue for reimbursement in court.
Then, in the mid-nineteenth century, electronic transfers of direct deposits through correspondent banking arrangements became possible, thanks to the installation of the first transatlantic cable.
However, the issue of security and automation persisted, prompting 239 institutions from 15 countries to establish the Society for Worldwide Interbank Financial Telecommunication (SWIFT) in order to develop an universal message standard.
SWIFT, on the other hand, does not address all of the issues connected with a massive ongoing flow of cross-border payments.
In 2018, the multinational strategy consulting firm McKinsey estimated that a financial institution facilitating a cross-border payment could earn up to $20 in fees from a single transaction, while a 2021 study conducted by Oliver Wyman and JP Morgan revealed that global costs total around $120 billion per year.
Furthermore, the expenses rise as a result of KYC and AML processes, as well as being connected to the time zone of the financial institutions involved.
In any event, banks continue to be the point of reference for these payments (however costly and delayed, according to the ECB), thus an alternate solution must be found.
Bitcoin was rejected as the ideal payment mechanism.
The paper, beginning on page 25, emphasizes that Bitcoin cannot be regarded a replacement to payment methods, yet it is explored for at least ten pages to explain why:
“The FSB does not even consider unbacked crypto-assets like Bitcoin to be eligible for cross-border payments.”
Citing Bitcoin’s whitepaper and several cases of BTC being utilized as a payment mechanism, such as in El Salvador, the queen of cryptocurrencies is nearly characterized as a religious cult in each case. The report even goes on to say:
“There have also been several accounts concerning Bitcoin supporters’ quasi-religious idea that Bitcoin is a “new messiah.”
The paper also discusses the Lighting Network, acknowledging it as a solution for rapid and low-cost transactions, but the ECB’s objection seems to be Proof of Work (PoW), which is described as both costly and ineffective. Furthermore, because to its high volatility and insufficient scalability, BTC is deemed inappropriate for payment.
The ECB goes so far as to say in another section of the study that Bitcoin is only appealing to consumers because it is inadequately regulated.
It clarifies in this regard:
“A large part of its apparent attraction for cross-border payments arises from the fact that it has (so far) avoided equivalent regulatory treatment in terms of compliance […].” As a result, Bitcoin is being widely used for illicit activities.”
Bitcoin is tested for the ECB’s primary critical criteria.
The European Central Bank explains fintech.
It begins on page 17 with a discussion of payment methods offered by fintech businesses such as Revolut or Wise, or even MoneyTransfer or Western Union, which are described as “closed-loop solutions” and quite costly, with costs ranging from 0.74 to 4.12 euros.
PayPal has also been chastised:
“It has not been very aggressive in terms of developing low-cost cross-border retail payment services.”
The European Central Bank favors stablecoins.
As previously stated, the paper discusses not just Bitcoin, but also stablecoins and CBDCs, or so-called state cryptocurrencies, as well as Facebook’s Libra/Diem.
Regarding stablecoins, it is noted that they have appealing qualities for potential use, but for reasons of financial stability, the ECB’s focus should be on secured stablecoins that are pegged 1-to-1 with a fiat currency (the DAI stablecoin is immediately removed from the picture, as it is algorithmic):
“Stablecoins have the potential to offer an effective means of cross-border payment for a variety of reasons due to their flexibility and non-ideological quest for an efficient global means of payment.”
In any event, stablecoins are not deemed fully fit for this purpose since they would be controlled by BigTech businesses, threatening monetary sovereignty.
So, with stablecoins removed from the list of alternatives, the only thing left are CBDCs, but the study emphasizes that we are still in the early stages and that many concerns have to be overcome, such as the fact that they must become ubiquitous and that everyone must be able to use them.