BSP to pilot own digital currency project soon

The Bangko Sentral ng Pilipinas (BSP) has taken the next steps of initiating a pilot central bank digital currency (CBDC) in the near term after two years of study, research and pre-testing.

BSP Governor Benjamin E. Diokno, during a recent BSP-Alliance for Financial Inclusion (AFI) Virtual Knowledge Exchange Program-3 (KX3), announced plans to launch “Project CBDCPh” which is the conclusion of its exploratory study since 2020.

BSP Governor Benjamin E. Diokno

“The BSP targets to roll-out in the near term, a pilot CBDC implementation which we call Project CBDCPh. The project aims to build organizational capacity and hands-on knowledge of key aspects of CBDC that are relevant for a use case around addressing frictions in the national payment system,” said Diokno.

“We can say that CBDC may be an idea whose time has come, but certainly it has many aspects that need to be better understood,” he emphasized during the BSP-AFI’s Knowledge Exchange Program on CBDC which was aimed at exploring and evaluating potential use cases of the CBDC technology. The BSP is a founding member of AFI, a global network of 100 members from 89 countries composed of central banks and regulatory financial institutions.

Last month, Diokno said the BSP is testing three use cases for CBDCs for cross-border payments, such as settlement of equity securities, and intraday liquidity facility. The BSP has started to analyze these use cases in the fourth quarter of 2021.

Diokno noted during the KX3 that CBDC projects globally are increasing. Citing a December 2021 analytical note by the ASEAN+3 Macroeconomic Research Office (AMRO), so far there are three central banks with CBDCs for commercial use while 14 countries have completed pilot testing. Another 16 countries are in various stages of CBDC development or proof-of-concept stage and about 40 countries are currently undertaking research on CBDCs including the Philippines.

“Even global and regional multilateral institutions are also looking into CBDCs ranging from the International Monetary Fund, the Bank for International Settlements, the Asian Development Bank. These institutions are coming up with various deep-dive research and initiating policy discussions that aim to contribute to the emerging framework for adoption of a CBDC, as a potentially game-changer of the international monetary system,” said Diokno.

As for the Philippines’ own Project CBDCPh, the BSP formed what it called a “more collaborative and comprehensive investigation of CBDC’s nature and implications for the whole financial system” with an assessment of the country’s national payment system to identify use cases for a wholesale CDBC.

“Beyond payment system efficiencies, the policy motivations for CBDC initiatives among central banks are many. This further suggests the potential magnitude and scale of impact of CBDCs in an economy. Certainly, financial inclusion has been highlighted as a potential benefit of CBDC,” noted Diokno.

The BSP is keen on exploring account-based distribution of financial assistance. “Universally accessible CBDCs can support efficient implementation of wide-scale targeted government cash assistance programs,” said Diokno.

He also added that cross-border money transfers is another financial inclusion space for CBDCs. “Interoperability of CBDC between jurisdictions could provide substantial benefits for remittance-receiving economies, such as the Philippines, by reducing reliance on costly correspondent banking networks,” said Diokno.

CBDCs present several financial inclusion benefits but the BSP is aware that CBDC issuance “does not necessarily address the root causes of financial exclusion.”

“Barriers to financial inclusion are multi-dimensional, involving infrastructure, socio-economic, cultural, and behavioral factors that require cross-cutting and well-coordinated policy interventions,” said Diokno.

The BSP has been studying the legal issues of CBDCs. Diokno noted that the financial transactions of the BSP with banks using a wholesale CBDC “appear readily feasible” but the issuance of retail CBDCs would need a law or legislation. Retail CBDCs involve BSP directly distributing CBDC to the public, he added, “which is not contemplated in the existing BSP charter.”

Diokno also pointed out that central banks and regulators will have to “build the requisite skills and technological capacity” in order to “effectively implement and manage the risks of CBDC issuance.”

Diokno said in 2020, when he first openly discussed the eventuality of a CBDC, that the ongoing research, collaboration and testing being conducted by the BSP technical working group (TWG) on CBDCs will not likely result to a CDBC issuance in the next three to five years since a lot more has to be done, including shifting at least 50 percent of all payment transactions into digital.

The BSP’s TWG is currently consulting with other central banks particularly the Hong Kong Monetary Authority and the Monetary Authority of Singapore, and have collaborative experimentation with other central banks and financial institutions.

The BSP said it will take some time before the Philippines is ready for a CBDC since several issues need to be settled and addressed first, such as payments safety and efficiency.

It said in a paper, “Central Bank Digital Currency for the BSP” published in March last year, that it “needs to identify its primary motivation (or motivations) to explore the issuance of a CBDC. Once it has set down the motivation for issuing a CBDC, the BSP will decide which form of digital money it will adopt such as wholesale CBDC or retail CBDC and if it will be token-based or account-based.

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