The Bangko Sentral ng Pilipinas (BSP) is progressing towards issuing its own central bank digital currency (CBDC), codenamed Project Agila, sooner than anticipated, with the proof-of-concept phase expected to conclude by the end of this year.
Mamerto E. Tangonan
BSP Deputy Governor Mamerto E. Tangonan confirmed that the CBDC could likely be launched in the earlier part of BSP Governor Eli M. Remolona Jr.’s six-year term, which runs from 2023 until 2029.
“The governor is very early in his term and we’re already about to conclude proof of concept,”
he stated.
Deputy Governor Tangonan 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.”
Project Agila aims to familiarise the BSP and participating financial institutions with the planned CBDC technology solutions. By the end of Project Agila, both the banks and BSP are expected to have a clearer understanding of CBDC technology and wholesale CBDCs.
The BSP has identified potential use cases for the CBDC, such as liquidity management, which allows transactions between banks even on weekends and holidays. Another potential use case is security settlement, which could become “almost instantaneous” with CBDCs, potentially stimulating capital markets.
Cross-border payments have also been identified as a use case, with Project mBridge, a multi-CBDC platform by the Bank for International Settlements (BIS), being a potential collaboration for the Philippines.
Phase one of the CBDC project was completed last year, 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 distributed ledger technology 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 BSP is assessing the programmability feature of CBDC technology, which could automate processes and streamline payment systems, reducing settlement risk by lowering counterparty risk. The findings and assessments from the sandbox test experiments on Project Agila will be reported by the end of this year.
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.
The BSP and an initial seven participating financial institutions, mostly banks, selected Hyperledger Fabric as the DLT for its wholesale CBDC pilot project. This technology allows data and transactions to be recorded, shared, and synchronised across a distributed network of participants.
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.
Featured image credit: Edited from Freepik
