The Bangko Sentral ng Pilipinas (BSP) is advancing towards the issuance of its own central bank digital currency (CBDC), codenamed Project Agila, sooner than initially anticipated. The proof-of-concept phase is expected to conclude by the end of this year, setting the stage for an earlier launch during the term of BSP Governor Eli M. Remolona Jr., which runs from 2023 to 2029. Reports from FinTech News suggest that the launch could occur early in the Governor’s tenure.
Deputy Governor Mamerto E. Tangonan confirmed the accelerated timeline, stating, “The governor is very early in his term and we’re already about to conclude proof of concept.” He emphasised the importance of ensuring the usability and management of the CBDC by both banks and the BSP, highlighting that “when we launch something, we need to make sure there is an uptake, that there are users.”
The ongoing trials are crucial for helping both the central bank and ten participating commercial banks to climb the learning curve. These trials aim to familiarise the BSP and participating financial institutions with the planned CBDC technology solutions, ensuring that the system is robust and beneficial for all stakeholders involved.
Project Agila has identified three primary use cases for the wCBDC. The foremost priority is to enable interbank settlement during weekends and holidays, a period when traditional banking operations are typically unavailable. Additionally, the wCBDC will be used for the settlement of securities and cross-border payments. Notably, the BSP is an observer of the mBridge project, which involves the Bank for International Settlements (BIS) and the central banks of China, Hong Kong, Thailand, the UAE, and Saudi Arabia.
Phase one of the CBDC project, completed last year, involved selecting Hyperledger Fabric’s distributed ledger technology (DLT) for BSP’s sandbox experiments. BSP Director Atty. Bridget Rose M. Mesina-Romero noted that two test runs of sandbox experiments are currently being conducted. In a span of seven weeks, the first step of the test run was completed, testing the DLT and the tokenisation of wholesale CBDC. These tests aim to determine the business use case viability of these technologies to make the payment system more efficient and safer.
The second sandbox tests will explore programmable payments, which could automate processes and streamline payment systems, reducing settlement risk by lowering counterparty risk. By the end of the year, the central bank expects to release a report on its findings from these sandbox test experiments.
“This is an entirely new endeavour, and we must ensure that we can offer, maintain, and operate it safely. Additionally, it is crucial that the participating banks can do the same and that they have a viable business use case for it,” stated Deputy Governor Tangonan, as reported by PhilStar.
The BSP has collaborated with multilateral organisations such as the International Monetary Fund and the BIS Innovation Hub on the technical, risk management, and governance aspects of the pilot CBDC project. According to 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.
Participating financial institutions 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. Additional institutions will be included in succeeding stages, such as Citibank N. A. Manila, China Bank Savings, Wealth Development Bank Corporation, and SeaBank Philippines Inc.
Last year, Governor Remolona mentioned that the BSP has been studying Sweden’s e-krona as a prototype for wholesale CBDCs, noting that Sweden has made advances in this area. Wholesale CBDCs are expected to reduce transaction costs, shorten processing times, and enhance the transparency of transfers.
While financial transactions with banks using wholesale CBDCs appear feasible in the Philippines, retail CBDCs would require legislation. Retail CBDCs involve the BSP directly distributing CBDCs to the public.
As early as 2021, the BSP expressed a preference for wholesale CBDCs over retail CBDCs due to their potential to address frictions in large cross-border foreign currency transfers, settle risk exposure from using commercial bank money in equities, and provide an intraday liquidity facility. CBDCs could also serve as an alternative payment instrument to privately-issued cryptocurrency assets, which may be used for money laundering, cybercrimes, and other unlawful activities.
The launch of a wholesale CBDC represents a significant step forward for the Philippines in the realm of digital finance. It promises to enhance the efficiency of financial transactions, provide greater security, and facilitate smoother cross-border payments. As the BSP progresses with Project Agila, it will be closely watched by both domestic and international financial communities, eager to see the potential transformation of the Philippines’ financial landscape.