MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) is making strides with its pilot program on a central bank digital currency or CBDC, dubbed Project Agila. But what exactly is a CBDC, and how would a digital peso change the country’s financial landscape?

A CBDC is similar to a cryptocurrency, but its value is controlled and backed by the central bank. Essentially, it’s a digital version of a country’s fiat currency. Rather than printing physical bills, a central bank can issue digital coins.

With the finance industry going increasingly digital, at least 130 countries are already exploring CBDCs, according to the Atlantic Council’s Central Bank Digital Currency Tracker. China, for instance, has already launched its digital yuan.

In the Philippines, talks of a possible digital peso began when the BSP initiated an “exploratory study” of CBDCs in 2021. Then-BSP chief Benjamin Diokno later said there were “relevant use cases of wholesale CBDCs” for the country, which could enhance the Philippines’ payment systems.

A pilot implementation – called Project CBDCPh – began in March 2022. Updates on CBDC development simmered down until a year later in September 2023, when the BSP announced renewed progress in the project, which now goes by the name Project Agila.

“By the end of Project Agila, the pilot participants are expected to have a clearer understanding of CBDC technology and assess the capability of wholesale CBDCs to foster advancements in the large-value payment system,” said BSP Governor Eli Remolona Jr. in a September 2023 statement. 

Philippines’ CBDC for large-value transactions

Although there are many possible use cases for CBDCs, the BSP is initially focusing on wholesale CBDCs, which are issued to banks and other financial institutions for large-scale transactions, like settling interbank payments and cross-border payments.

“The results of the assessment are seen to guide the BSP and the industry on a possible launch of wholesale CBDCs in the Philippines,” Remolona said in the statement. 

Using CBDCs, big inter-institutional fund transfers could go through even during off-business hours, like on evenings, weekends, or holidays. It could also enable these fund transfers when PhilPaSS Plus, the BSP’s system for large-value fund transfers between financial institutions, is unavailable.

The BSP already has a technology partner – Hyperledger Fabric – for the underlying distributed ledger technology that will power its CBDC. But the Philippines is still far from launching its own digital currency, with the central bank still developing a roadmap.

According to BSP Deputy Governor for Payments and Currency Management Sector Mamerto Tangonan, the central bank is now studying different models for a CBDC: a one-tier model where the BSP directly issues a CBDC to Filipinos, or a two-tier model where the BSP issues a CBDC to banks, which would then issue it to the public.

“It seems to be that the model that’s gaining more ground is the two-tier. Although tignan natin (let’s see). There’s no conclusion yet,” Tangonan told reporters on Wednesday, December 6.

The deputy governor also said there is no specific timeline yet for what happens after the pilot project, which will conclude by the middle of 2024.

Can you soon use a ‘digital peso’ for payments?

But even if the BSP is studying the use of CBDCs, this doesn’t mean you’ll soon get to use a CBDC to pay for goods at a store anytime soon.

Tangonan said the Philippines isn’t considering introducing CBDCs yet for the mass market since current retail payment solutions already work, especially with Filipinos adopting digital channels.

“Right now, we have open access to digital payments…. So the question in mind is what problem will it solve, kung meron man (if there are any)?” said Tangonan.

According to the deputy governor, adopting CBDCs for retail payments is “not yet that compelling.”

“Retail, we’re okay. There could be some more improvements, pero (but) generally we’re okay. This year, every month has been a record month in terms of volume of digital payments. InstaPay alone in October had 86.6 million transactions,” he added. (READ: LIST: Banks with waived PESONet and InstaPay fund transfer fees)

How else can CBDCs help with financial inclusion?

If used right, CBDCs can also be a tool for financial inclusion. For instance, the International Monetary Fund suggests that if CBDCs become used as a widespread payments mechanism – like cash – then they can serve as a gateway to broader financial inclusion, especially for the financially excluded.

To understand how a CBDC enables financial inclusion, Rappler spoke with Sabrina Tachdjian, head of fintech and payments fund at the HBAR Foundation. Tachdjian said a CBDC could act as a “financial ID” for individuals who are often left out of the wider banking and finance system. 

“Take a newborn in sub-Saharan Africa. The day that this baby is registered, imagine if, at the same time, the central bank would issue an account for that baby, and that would follow their entire life. It’s financial inclusion by design,” Tachdjian told Rappler on the sidelines of the 2023 Singapore Fintech Festival.

For the unbanked, transacting using CBDCs can also allow them to start building their creditworthiness at a much earlier age, even without opening a bank account at a physical bank branch.

CBDCs can also prove useful for overseas Filipino workers who send money back to the Philippines periodically. OFWs sometimes have to put up with high remittance fees.

“You look at the existing cost structure of doing that – either through existing cash channels or even banking channels – it’s tens of dollars over a remittance that’s maybe hundreds of dollars,” Tachdjian said. “It really disproportionately affects people like this who are not sending that much but are being charged a lot.”

To avoid those fees, some OFWs are already resorting to stable coins – or cryptocurrencies that don’t fluctuate much in value – to remit cash. Soon, Tachdjian said, CBDCs may fill that role.

“For sending money cross-border, it’s like five seconds and then just a few cents in terms of network fees. It’s kind of a flat rate. A bank would be able to add extra fees on that if they want, but it would still be much cheaper because the cost itself is lower,” she added. 

What are issues around CBDCs?

The ability to track digital payments using CBDCs helps with financial inclusion, but it also opens up other concerns, like privacy issues. For instance, Tachdjian said, central banks are figuring out how to assure consumers that CBDCs won’t be used as part of a surveillance state. 

A possible way around this could be to have a “black box” that abstracts important and sensitive information. For example, this could allow a central bank to know that an individual transacting is above legal age without revealing the exact details of their date of birth.

Another is connectivity. If CBDCs become the techy solution to financial inclusion, then they must be able to work offline. That’s especially true for a country like the Philippines, where internet connectivity tends to drop off in the regions.

But there is promise. Tachdjian said that in their preliminary testing, it’s possible for transactions to still be processed offline.

“The actual token moves once the device is back online. But in the meantime, the transaction is validated, so you can actually purchase even if there’s no internet,” she said. – Rappler.com