European Central Bank: Fast Transfers Could Replace Bitcoin

Bitcoin, even on days of network congestion, sends funds within a few minutes, or hours. Some bank services may take days, or at least overnight to transfer. But the European Central Bank believes the advantage of Bitcoin could diminish, should banks install faster transfer options.

Banks should provide an alternative to digital tokens, believes Yves Mersch, member of the European Central Bank executive board.

"Banks need to implement instant payments as soon as possible and provide an alternative narrative to the ongoing public debate on the alleged innovation brought by virtual currency schemes," said Mersch.

At the moment, the debit and credit card system is fast, but sending funds in a peer-to-peer manner across the world sometimes faces extremely high fees, exchange rate charges and a lag of a few days.

The ECB is also worried that the presence of cryptocurrencies and the trend of tokenization may hamper the ability of a central bank to control the money supply and fine-tune inflation to a healthy level. So far, tokens and coins have only limited applications for real products, but may become more valuable in the future.

Mersch, however, believes total disruption is not in the books:

"Other adventurous applications of a more disruptive nature are simply not robust enough," he said.

One problem for decentralized digital currencies is their relatively small capacity to handle transactions. Their speed comes from the lack of a complex procedure, as is often the case with banks, but the network's capacity is still limited, from between 3 to 7 transactions per second for Bitcoin, and around 13 to 30 transactions per second for Ethereum.

At its busiest, VISA may handle up to 24,000 transactions per second, and about 2,000 per second usually. But even then, the transactions remain pending until the bank's back office works through them. Yet VISA creates the illusion of instant payment, while in fact relying on a trusted entity to verify the transfer of funds.

Bitcoin, however, transacts without the VISA-like second layer, and the acceptance of payment and the transaction's verification and mining must happen at the same time. This creates quite a bit of stress for users, especially if there is a backlog of unverified transactions.