The Bangko Sentral ng Pilipinas’ (BSP) wholesale central bank digital currency (CBDC) pilot implementation of Project CBDCPh will buildup its hands-on know-how on CBDCs, its potential risks and use in large-value 24×7 payment transactions for both banks and non-banks.
“The pilot is a major step for both the BSP and the Philippine financial industry towards understanding the potentials and risks of a wholesale CBDC,” said BSP Governor Benjamin E. Diokno who is still in the US for the annual spring meetings of the International Monetary Fund-World Bank Group.
During the 14th Annual Group of 24/Alliance for Financial Inclusion Policymakers’ Roundtable discussion, Diokno said that emerging digital technologies such as CBDCs “do not alter the mandates of central banks” and that these technologies help central banks to provide a safe, efficient, and inclusive payment systems.
The pilot project, for one, is a major step for both the BSP and the domestic financial sector to understand a wholesale CBDCs’ potentials and risks, and it will be the basis for the BSP’s roadmap for advanced wholesale CBDC projects.
Project CBDCPh includes the following critical operations: policy and regulatory considerations; technological infrastructure; governance and organizational requirement; legal matters; payment and settlement models; reconciliation procedures; and risk management.
Diokno said the BSP will use wholesale CBDC over retail CBDC because the former will have a more significant contribution in addressing frictions on large cross-border foreign currency transfers, settlement risk exposure from using commercial bank money in equities, and operating an intraday liquidity facility (ILF).
“The BSP identified the value of a wholesale CBDC in addressing pain points in the national payment system,” said Diokno.
Relating to frictions on large cross-border foreign currency transfers, the BSP chief said wholesale CBDCs will reduce transaction costs, shorten processing times, and enhance the transparency of such transfers.
He also said that wholesale CBDCs will address the settlement risk exposure from the use of commercial bank money in the equities market. “We intend to mitigate this risk with CBDC, being a central bank money,” said Diokno.
On ILF which the BSP has yet to automate end-to-end, Diokno said CBDCs “may play a critical role in facilitating the settlement of ILF availments and the subsequent collection of the draw-down.”
The pilot project will aid the BSP identify more fully a wholesale CBDCs’ future use in the local payment system as well as its danger points. “The learnings from the pilot are critical in constructing the BSP’s medium to long-term roadmap for more advanced wholesale CBDC projects that will further strengthen the Philippine payment system,” said Diokno.
Since 2021, the BSP has been reviewing use cases for wholesale CBDCs and it has decided that it will proceed with the planning and conduct of pilot tests to explore the operational feasibility of these CBDC use cases in the country from 2022 onwards.
Based on Bank for International Settlements (BIS) definition, CBDCs “are a form of digital money, denominated in the national unit of account, which is a direct liability of the central bank.” The BIS said CBDCs are either wholesale or for financial intermediaries only or by the wider economy such as retail CBDCs.
In its annual report released earlier this month, the BSP said financial transactions of the BSP with banks using a wholesale CBDC appear readily feasible while retail CBDCs would need a law or legislation. Retail CBDCs involve BSP directly distributing CBDC to the public.