The Bangko Sentral ng Pilipinas (BSP) is on track to issuing its own central bank digital currency (CBDC) sooner than anticipated after announcing the conclusion of the proof-of-concept phase by the end of this year.
When asked if he can reconfirm if the BSP will be able to launch the CBDC within BSP Governor Eli M. Remolona Jr.’s six-year term which is 2023 until 2029, BSP Deputy Governor Mamerto E. Tangonan said “yes, the governor is very early in his term and we’re already about to conclude proof of concept.”
“This is an innovative payment instrument. But nonetheless, when we launch something, we need to make sure there is an uptake, that there are users. The banks and the BSP have to know how to use it, how to manage it, how to operate it safely,” he said in a press briefing.
Called Project Agila, the CBDC project is aimed at familiarizing both the BSP and participating financial institutions on the planned CBDC technology solutions. Remolona said earlier that by the end of Project Agila, both the banks and BSP are expected to have a clearer understanding of CBDC technology and wholesale CBDCs.
Tangonan said the businesses must be able to identify the use cases and so far, the BSP has identified potential ones such as liquidity management.
“Sometimes customers or banks have a need to transact with other banks even on weekends and holidays. Right now we cannot do that. But with wholesale CBDCs that becomes possible,” he said.
Another use case is security settlement and with CBDC, this can become “almost instantaneous” and “that efficiency will hopefully be also offered to the investors so we can help stimulate our capital markets,” said the BSP official.
Tangonan also identified cross-border payments as use case for the CBDC. He said Project mBridge, a multi-CBDC platform by the Bank for International Settlements (BIS), is a collaboration that the Philippines can participate later on.
BSP Director Atty. Bridget Rose M. Mesina-Romero of the Payments Policy and Development Department, said phase one of the CBDC project has been completed last year with the selection of distributed ledger technology (DLT) or HyperLedger Fabric platform for BSP’s sandbox experiments.
“Currently we are conducting two test runs of our sandbox experiments. From May to June (this year), in a matter of seven weeks we were able to complete the first step of the test run and we have tested the distributed ledger technology as well as the tokenization of wholesale CBDC,” said Mesina-Romero.
In testing these technologies, “we want to determine if there is business use case viability of these technologies (to be) able to make our payments system more efficient and safer.”
And in doing so, the BSP can assess the use of CBDC technology against four criteria such as functionality, performance, security, and end-to-end testing among BSP and financial institutions.
“Moving forward, we will be assessing the programmability feature of CBDC technology. The significance of the programmability feature is that we will be able to automate our processes,” said Mesina-Romero.
A programmable CBDC is not only efficient but can also “streamline even the number of institutions that are intermediating right now and the backoffice arrangements of our payment systems and as a result, reduce settlement risk by the reduction of counterparty risk,” she said.
This will minimize the cause of liquidity in the national payment systems.
“At the end of this project which is towards the end of this year, we’ll be issuing our report containing all of our findings and assessment with respect to our sandbox test experiments on Project Agila,” said Mesina-Romero.
The BSP has collaborated with multilateral organizations such as the International Monetary Fund and the BIS Innovation Hub, on the technical, risk management, and governance aspects of the pilot CBDC project.
As described by the BSP, CBDCs are a form of digital money denominated in the national unit of account and are direct liabilities of the central bank. Wholesale CBDCs may be issued to commercial banks and other financial institutions to settle interbank payments, securities transactions, and cross-border payments, among others.
Both the BSP and an initial seven participating financial institutions which are mostly banks, selected the Hyperledger Fabric as DLT for its wholesale CBDC pilot project. This particular DLT or technology allows data and transactions to be recorded, shared, and synchronized across a distributed network of different participants.
Participating financial institutions in this project include: BDO Unibank Inc.; China Banking Corp.; Land Bank of the Philippines; Rizal Commercial Banking Corporation; Union Bank of the Philippines; and Maya Philippines Inc.
Some financial institutions will be included for “succeeding stages” such as Citibank N. A. Manila, China Bank Savings, Wealth Development Bank Corporation, and SeaBank Philippines Inc., said the BSP previously.
Last year, Remolona said the BSP has been studying the e-krona of Sweden as prototype CDBC on a wholesale level. Sweden has made some advances in the wholesale CBDC space.
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 in the Philippines while retail CBDCs would need a law or legislation. Retail CBDCs involve BSP directly distributing CBDCs to the public.
As early as 2021, the BSP has made it known that they prefer wholesale CBDC over retail CBDC because the former will have a more significant contribution in addressing frictions on large cross-border foreign currency transfers. It will also help in the settlement of risk exposure from using commercial bank money in equities, and it allows an intraday liquidity facility.
Meanwhile, CBDCs can be an alternative payment instrument versus privately-issued cryptocurrency assets that may be used for money laundering, cybercrimes, and other unlawful activities, a BSP report said.