Since the advent of digital currencies, various institutions have been exploring their potential. Various institutions, including central banks, have supported using these nascent technologies for payment.
This is due to the ease of usage, speed, and financial inclusion it offers even to unbanked citizens. Meanwhile, central banks and other financial institutions are exploring the usage of digital assets for international payment.
ECB Researches On The Best Medium For Cross-border Payment
Recently, the ECB (European Central Bank) carried out a study to identify the best payment tool for cross-border payment. The ECB’s study crowned CBDCs as the best payment medium.
Other payment methods the central bank considered include Bitcoin, stablecoins, and banking. Besides, the central bank’s interest in cross-border payment is not without reason.
The ECB is the central bank of nineteen countries in the EU that are using the Euro. Meanwhile, the study tagged BTC as the most unbacked cryptocurrency asset.
Also, the ECB had a bad opinion about using BTC for cross-border payments. This has to do majorly with its settlement mechanism, the PoW (proof-of-work) mechanism.
According to the ECB, settlement using BTC takes place every ten minutes. As a result, effects of valuation may have occurred at the time of settlement.
This means the price of BTC when the person made the payment must have changed when it was finalized. The ECB says this makes BTC very complicated for payment.
However, the ECB was unfair in its judgment. It concluded that the underlying technology of Bitcoin was wasteful and expensive.
The ECB Did Not Consider The New Upgrades To Bitcoin’s Network
The institution failed to take into consideration the upgrades to the BTC network. These upgrades are the Lightning Network and Taproot. They improve the performance of BTC’s network.
Furthermore, the European Central Bank stated that CBDCs were better for payment across borders because it is compatible with FX (foreign exchange) conversions. The report highlighted two major merits of CBDCs over other payment methods.
One is that CBDCs preserve the financial sovereignty of a country. Another merit is that CBDCs support instant payments through Intermediaries like central banks.
However, Phillip Lowe, the governor of Australia’s central bank, does not agree with the idea of the ECB. Lowe believes that a privately issued digital currency (stablecoins) is better than the CBDC.
According to Lowe, these private digital currencies are better as long as they are regulated. Strong regulations would help to reduce the issue of risks and increase crypto adoption.
Also, the governor believes regulation is necessary if the community must use it for payment. In his view, private firms are better at creating a cryptocurrency with good features than central banks.