The Bangko Sentral ng Pilipinas (BSP) is taking its time expanding its target use cases and “proof-of-concept” phase under its central bank digital currency (CBDC) pilot project to ensure an extensive knowledge for a prototype later.

Known as Project CBDCPh for the development of a wholesale CBDC in the country, its main use is to review and study technologies for alternative payment instruments.

“The proof-of-concept on different CBDC technologies is underway. Soon after, the conduct of prototype testing is expected to run for several months,” said the BSP as an update of the pilot project, 16 months after its launch in March 2022.

The BSP in a report said it is expanding its CBDC technology testing and emerging use case evaluation to improve the safety and efficiency of the national payment system.

The same report noted that target use cases will enable fund transfers across a limited number of financial institutions, potentially even during off-business hours or on a 24/7 basis.

After fully establishing the feasibility of a wholesale CBDC for inter-institutional fund transfers, the BSP stated that it will conduct pilot experiments on the relevant use cases for easing payment system gaps.

“Ultimately, the learnings from the project shall serve as critical inputs in crafting the BSP’s roadmap to wholesale CBDC, which will address pain points in the payments space,” it added.

Basically, the main objectives of the pilot project are: to have hands-on knowledge of the functionality, architecture, technology, and operational and organizational requirements of a CBDC; and to leverage methods to enhance existing payment systems.

Meanwhile, the BSP said one of the relevance of CBDCs is that it could reduce or discourage the adoption of privately-issued currencies.

“CBDCs are viewed by several central banks as a response to the proliferation of cryptocurrencies, such as Bitcoin and Ethereum. Aside from the inherent volatilities of their value, these privately-issued digital tokens do not represent a claim to the central bank and do not qualify as legal tender—making them an incomparable substitute for money that is used to pay for goods and services,” said the BSP.

CBDCs can be an alternative payment instrument versus privately-issued cryptocurrency assets that may be used for money laundering, cybercrimes, and other unlawful activities, the report added.

In a previous interview with Bloomberg TV, BSP Governor Eli M. Remolona, who took the helm only last July 3 as BSP’s seventh governor, expressed worry on keeping a safer digitalized financial system.

“The digital world is presenting some challenges. It’s causing losses in cryptocurrencies. So far, this hasn’t directly affected the banking system but there are signs that things may become dicier in the next year or so,” he said last July 17.

The International Monetary Fund (IMF) has already recommended for BSP to conduct several phases and “extensive” pilot projects for CBDCs especially in cybersecurity issues.

In a November 2022 surveillance report on the Philippines, the IMF said that while the 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.”

The IMF said an extensive period of developing proof-of-concept should be done as well as a thorough review of the implications of CBDC on policies.

Many Asian countries have already done countless research and development on CBDCs but “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,” said the IMF.

There are notable CBDC pilots in Australia, China, India, Japan, Korea, and Thailand.

The BSP has announced in 2021 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.

The BSP said financial transactions with banks using a wholesale CBDCs appear readily feasible while retail CBDCs would need a law or legislation. Retail CBDCs involve BSP directly distributing CBDC to the public.