The paper, titled ‘Towards the holy grail of cross-border payments’ addresses the issue that one of the biggest obstacles in addressing payment challenges is the friction of anti-money laundering (AML) processes. While the paper predicts that one of the six paths it suggests has the potential of closing in on the dream outcome (the so-intitled ‘holy grail), which is that payments should be immediate, cheap, universal and settled in a secure medium such as central bank money.
The ECB paper indicated that Bitcoin was a topic that made it to the G20 list of potential solutions. The paper doesn’t just explore the Bitcoin network but also the layer two solutions for micropayments, the Lightning network. In addressing Bitcoin custody risks for end users, the authors view the existence of one extensive network and the absence of intermediaries as relevant advantages.
Bitcoin is considered, however, a credible solution in spite of its drawbacks: high energy consumption and unequal application of AML/CFT compliance. Not to mention, as the ECB paper cited, that ‘its price volatility makes it unsuitable as unit of account and also undermines its suitability of means of payment – both for domestic and cross-border`.
However, they also highlight the drawbacks of Bitcoin, such as wasteful use of energy, and that much of the efficiencies can be attributed to unequal application of AML/CFT compliance. The paper concludes that Bitcoin is the least credible avenue of the six options.
The paper sees multi-CBDC solutions as one of the more theoretical solutions considering the disparity of country-wide CBDC pilots across Europe and the fact that a proliferation of digital currencies is far from being exhaustive at a EU-level. Nevertheless, multi-CBDC made it into the top two avenues to explore alongside interlinking domestic payment systems.
Addressability of accounts cross-border - addressing accounts via a proxy (e.g. a unique email address or a unique phone number) would be very advantageous, but would require a global proxy-look up solution.
The two or more instant payment systems need to be interlinked through a connecting layer that transmits payment orders from one domestic system to the other and more generally routes payment process information in both directions.
An instantaneous and cost-efficient currency conversion layer: This layer would effectively decompose the (pseudo-) cross-border payment into two domestic instant payments.
AML/CFT compliance checks should be made automated and instantaneous by relying on positive ex ante criteria.
Political support for the alignment of legal, regulatory and oversight frameworks is required for an interlinked European instant payments rail to succeed.
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