The International Monetary Fund (IMF) is recommending several phases and “extensive” pilot projects for the country’s central bank digital currency (CBDC) especially in cybersecurity issues, laws and regulations that will cover implementation.
In a November surveillance report on the Philippines, the IMF said that while the Bangko Sentral ng Pilipinas (BSP) charter, amended in 2019, does allow for the issuance of wholesale CBDC, the regulatory framework “may need to be revisited to ensure governance and financial stability risks are addressed.”
“An extensive period of developing proof-of-concept and learning from pilots could be a means to understand the technology, the implications of CBDC on policies, and build capacity,” said the IMF.
It assessed that while many Asian countries have already done countless research and development on CBDCs – “no country in the Asia-Pacific region has launched a CBDC to-date (because) the issuance of a CBDC is complex (and) most countries at an advanced stage of development have opted to launch pilots to gain practical experience.”
“The implementation of pilots does not imply near-term adoption but, more importantly, they can help understand the technology and gain a better understanding of policy implications while building capacity,” said the IMF, noting the CBDC pilots in Australia, China, India, Japan, Korea, and Thailand.
The BSP has already communicated to the public that it is leaning towards wholesale CBDC rather than retail. It is currently conducting its Project CBDCPh which studies the potential risks and use in large-value 24x7 payment transactions of CBDCs for both banks and non-banks.
The recommended extensive pilots will give BSP a better understanding of the technology, policy implications, and to build capacity, said the IMF, in particular the cyber-related isues.
“Addressing cybersecurity concerns will be essential to reap the potential benefits of a CBDC, and adequate safeguards will need to be in place to ensure the safety of transactions and deter illegal transactions that could exacerbate de-risking pressures,” said IMF.
It cited as example the Anti-Money Laundering or AML laws, rules and regulations which “should be strengthened and effectively implemented to address possible concerns arising from CBDC transactions, given the high ML/TF (money laundering/terrorist financing) threats in the country and the reputational risks arising from the current FATF listing,” said the IMF. Since mid-2021, the Philippines is one of the gray-listed countries under the Financial Action Task Force, the global watchdog for the AML. This means the country is under close monitoring for AML actions that needs to be improved upon.
“Laws on data privacy, secrecy of deposits, counterfeiting of currency, as well as rules on foreclosure will also need to be considered. In addition, as noted by the BSP, allowing for a greater role of the central bank in financial intermediation might also reduce interbank activity and the price discovery role of market participants. This would detract rather than promote capital market deepening in the Philippines,” said the IMF.
Meantime, the IMF tracked the BSP’s CBDC studies, started in 2020. “A wholesale CBDC could help enhance the safety and efficiency of the national payment system. Studies by the BSP found that a wholesale CBDC could address three main issues in the Philippines’ national payment system (such as): frictions on cross border foreign currency transfers; settlement risk exposure arising from the use of commercial bank money in the equities market; and current challenges in operating the automated intraday liquidity facility,” said the IMF.
The BSP has said that financial transactions 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.
Project CBDCPh is a major step for both the BSP and the domestic financial sector to understand a wholesale CBDCs.
The BSP has announced previously that it 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.
Basically, a wholesale CBDC will reduce transaction costs, shorten processing times, and enhance the transparency of such transfers.