European Central Bank bets on CBDCs over BTC for cross-border payments

European Central Bank report highlights the scalability and speed issues of Bitcoin. Australian Central Bank Governor does not agree

By Shashank Bhardwaj

Image: Shutterstock

According to a recent study conducted by the European Central Bank (ECB) on defining the endpoint of cross-border payments, central bank digital currencies (CBDCs) outperform Bitcoin, stablecoins, and other traditional banking means such as SWIFT. The study is titled “Towards the Holy Grail of Cross-Border Payments”. It aims to assist the 19 European countries that use the Euro in identifying the best alternative cross-border payment solution. The study identified Bitcoin as the most prominent unbacked crypto asset.

According to the author, "Bitcoin has scaling and speed issues that have been acknowledged for some time. The underlying technology (and in particular its “proof-of-work” layer) is inherently expensive and wasteful. If anything, it proves that a decentralised trust-creating mechanism relying on “proof-of-work” to render stable a permission-less blockchain is more expensive and less efficient than a centralised (e.g. based on central bank money) or semi-centralised one.”

ECB being the central bank of the 19 European Union countries that have adopted the euro, took interest in identifying the best cross-border payment solution. The study emphasised Bitcoin's inherent scaling and speed problems. However, it failed to take into account recent Bitcoin network upgrades like Taproot and Layer-2 scaling solutions such as Lightning Network. These upgrades are intended to boost network performance.

The report further added, "Since the settlement in the Bitcoin network occurs only around every ten minutes, valuation effects are already materialising at the moment of settlement, making Bitcoin payments actually more complicated."

The ECB considers CBDCs to be superior to Bitcoin because they offer seamless compatibility with forex exchange or FX conversions. The preservation of monetary sovereignty and the ease of instant payments through intermediaries such as central banks are two major benefits highlighted in this regard.

However, Australian Central Bank Governor Phillip Lowe is sceptical of the ECB's reliance on CBDCs. He stated that a private solution 'will be better' for crypto assets as long as risks are mitigated through regulation. Strong regulations and state support, he believes, can help to mitigate the risks associated with crypto adoption. According to him, private companies are 'better than the central bank at innovating' in terms of fostering innovation and bringing out the best features of various crypto assets. Phillip Lowe further added:

"If these tokens are going to be used widely by the community, they are going to need to be backed by the state or regulated just as we regulate bank deposits."

The writer is the founder at yMedia. He ventured into crypto in 2013 and is an ETH maximalist. Twitter: @bhardwajshash

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