Philippines to pilot wholesale CBDC later this year

June 10, 2022

The Philippines will begin a wholesale central bank digital currency (CBDC) trial in the fourth quarter of this year, according to BSP Governor Benjamin Diokno, who spoke to local television station ANCNews today. In November of last year, he unveiled his ambitions for the project.

Diokno stressed that Project CBDCph is still in its early stages and that some significant banks have already signed on, although he would not specify which ones. More banks are still being sought by the central bank. A wholesale CBDC is only for banks, not for consumers or businesses, and it is designed to speed up payments and settlement for blockchain networks.

What exactly is a CBDC?

A CBDC is a digital form of money issued by a country’s central bank that is a liability for that central bank.

CBDCs are divided into two categories: wholesale CBDCs and retail CBDCs.

Wholesale CBDCs are only available to financial institutions and are used in transactions between them and central banks. Unlike central bank money, which is only available during the central bank’s opening hours, wholesale CBDCs are available 24 hours a day, seven days a week.

Individuals, organizations, and small enterprises can utilize retail CBDCs for daily transactions, as the name implies. Retail CBDCs can be token-based or account-based; the fundamental difference is that token-based CBDCs rely on the payee to validate the transaction’s legality, whereas account-based CBDCs rely on the account holder’s identification.

What is the CBDCPh Project?

Project CBDCPh is a BSP-led exploratory research aimed at providing a comprehensive picture of the potential impact of CBDCs on the Philippine financial system. Project CBDCPh aims to identify essential CBDC characteristics and address frictions in the current national payment system, particularly in terms of security, efficiency, and dependability.

Given that the bulk of the population still uses cash, the BSP has suggested that it is unlikely to create its own Central Bank Digital Currency in the near future. BSP will continue to track CBDC developments in the United States and around the world.

Project Dunbar

In collaboration with the central banks of Australia, South Africa, and Malaysia, as well as the BIS, the Monetary Authority of Singapore launched Project Dunbar, a cross-border wholesale CBDC program. It’s a project known as a multi-CBDC (M-CBDC), in which each country has its own CBDC for cross-border payments.

Project Dunbar published a paper on its progress in March. The topic of whether central banks would allow international banks to hold their CBDCs directly or if they would require a local sponsoring bank to hold it on their behalf has been discussed.

This is a significant issue because one of the CBDC’s pledges is to eliminate intermediate or correspondent banks, which are frequently the source of high cross-border payment costs and delays.

Singapore and the Philippines established a deal in November to investigate payment interoperability and cross-border payments. Benjamin Diokno stated at the time that Singapore will be the first ASEAN country to which the Philippines’ payment system would be linked.

With such a large number of individuals working abroad, cross-border payments, particularly low-value remittances, are extremely vital to the Philippines. After India, China, and Mexico, the Philippines was the fourth largest beneficiary of inward remittances in 2021, according to the World Bank. In 2020, the figure was $35 billion.

Fast Facts

  • BSP governor Benjamin Dionko said at an annual policymakers’ roundtable that the central bank’s pilot will examine the possibility of deploying CBDCs for large-scale financial transactions “on a 24/7 basis across a restricted number of financial institutions.
  • Lessons learned from the pilot will be crucial in developing the BSP’s medium- to long-term roadmap for more advanced wholesale CBDC projects that would strengthen the Philippine payment system,” Diokno added.
  • According to the BSP, digital payment methods would account for over 20.1 percent of monthly retail transactions in the Philippines by the end of 2020, up from 10% in 2018.
  • Because of the advancement and use of existing digital payment systems, the central bank warned of “little perceived additional value” of retail CBDCs in the Philippines.
  • Wholesale CBDCs, unlike retail CBDCs, are only available through banks and other financial organizations.
  • According to Diokno, a wholesale CBDC can help with cross-border money transfers, equities securities payments, and intraday liquidity.

Financial Inclusion in the Philippines

One of the key advantages of issuing a CBDC in the Philippines is that it has the ability to improve financial inclusion. The country’s economy is still heavily focused on cash, with most establishments accepting cash as the only method of payment, which is expensive, hazardous, and encourages the black economy.

The Philippines has a substantial unbanked and underbanked population, with 66 percent of the population lacking access to traditional banking or equivalent financial institutions. By 2023, the BSP hopes to increase the number of banked people to 70%, with 50% of payments made online.

The COVID-19 pandemic drove the country’s first wave of digital transformation, with the Philippines having the highest percentage of first-time digital payment users at 37%. 15 percent was the area average. As a result, digital payments accounted for 20% of all financial transactions in the country in 2020, up from 14% in 2019. E-money transactions totaled 2.39 trillion PHP (US$46.5 million) in 2020, up 61 percent from the previous year.

CBDCs can leverage mobile technology to expand access to financial services for rural households and other groups that are currently underserved by the banking system.