IMF Cautions Against CBDC Risk Posed to Banks in the Philippinesby Johanan Devanesan August 22, 2023
Felipe M Medalla, former Governor of Bangko Sentral ng Pilipinas (BSP), earlier this year stated that the central bank of the Philippines had started a pilot wholesale central bank digital currency (CBDC) project, a major capacity-building exercise for both the BSP and the nation’s financial industry.
An initiative known as Project CBDCPh for the development of a wholesale CBDC in the Philippines had been mooted the previous year, with the country studying the feasibility for a prototype by first reviewing and studying technologies for alternative payment instruments.
16 months after the launch of the pilot project in March 2022, the BSP appears to be nearing completion of ascertaining its target use cases and “proof-of-concept” phase for the first CBDC pilot in the Philippines, with enough knowledge gathered to enter a prototype phase this year.
Testing of a limited amount of wholesale CBDC fund transfers between financial institutions in the Philippines in 2023 and 2024 will serve as a litmus test of working use cases of a digital currency for the Philippines.
The project has the stated objectives of obtaining first-hand usage of CBDCs and establishing a firm baseline to pursue other CBDC initiatives that possess the potential to address prevalent pain points in payments across the Philippines.
Overcoming Hurdles to CBDC Implementation in the Philippines
Both wholesale and retail CBDC deployments have been hailed for their advantages in fostering financial inclusion in fast-growing economies like the Philippines.
The central bank appears to be taking a cautious and measured ‘test and see’ approach before making any steadfast decisions, but recently Tommaso Mancini-Griffoli, deputy division chief in the Monetary and Capital Markets Department at the International Monetary Fund (IMF), warned that the BSP needs to be adequately prepared to deploy CBDCs as such alternative digital currencies might pose risks to incumbent banks.
“We keep our money in the bank because it helps us make payments and because it stores money safely for us. If there is an alternative that allows us to make payments perhaps even more easily, and that is perhaps even safer as a store of value, we might switch to that,”
Tommaso told the BusinessWorld podcast Side B, elaborating that “CBDCs might well be that form of money that is just as liquid and convenient for me to make payments, perhaps more so [than storing in banks].”
“So, if that’s the case, people may move their money out of the banks into CBDC. That would cut back on bank funding, and will cut back on the bank’s ability to provide credit to the economy, and that is a problem,”
he went on, highlighting how lack of proper preparation could inadvertently and ironically harm financial inclusion efforts to provide greater access to financial services, rather than add to them.
CBDCs Can Drive Access to Financial Systems
Tommaso did acknowledge the benefits of a central bank-issued digital currency, stating the IMF is aware of the “multiple benefits to society” it can engender, including “facilitate resilience of the [local] payment system” and market discipline.
By “market discipline”, he meant that “payment systems are increasingly in the hands of the private sector, often large companies, sometimes foreign companies, And these companies can interrupt services” such as by abruptly leaving the country, or cyberattacks or other such events could take place that might interrupt services.
“So it’s important for the public sector to put out an alternative. Alternative rails to make payments and CBDC could serve that purpose — also by offering high-quality and low cost services,”
Tommaso explained, thereby disciplining the rest of the market to offer equivalent quality and price.
Commenting on wholesale CBDC pilots like the one in the Philippines, the deputy division chief in the IMF’s Monetary and Capital Markets Department was optimistic, saying,
“I think we’re at a stage that is more exploratory right now, but we can imagine CBDC playing an important role in a digital world of tomorrow where assets might be tokenised or put on blockchains, where money may be tokenised [and] put on the blockchain.”
“Banks may issue tokenised versions of their deposits, and in this world there may be the need for a settlement asset that is also native to these new technologies, and that settlement asset could be CBDC,”
he added, pointing out that while the impending benefits could be many, the BSP still needs to be conscious of accounting for the challenges as well.
“It’s important that central banks are attentive to this and manage these risks carefully. [They] can set limits on how much people can hold in their CBDC wallets or [they] can have fees on wallet transactions if [a person] holds above a certain level,”
Philippines Goes Wholesale CBDC Route Over Retail
In 2021, the BSP declared that it would opt for a wholesale CBDC over a retail CBDC because the former offers a greater potential to address inefficiencies in large cross-border foreign currency transfers, mitigate settlement risk from utilising commercial bank money in equities, and manage an intraday liquidity facility.
In essence, a wholesale CBDC will cut transaction costs, reduce processing durations, and bolster the transparency of such transfers.
The BSP stated that financial dealings with banks using wholesale CBDCs seem immediately achievable, whereas retail CBDCs would necessitate legal or legislative measures. Retail CBDCs entail the BSP directly providing CBDC to the general public.
Grasping the Risks
In a surveillance report from November 2022 regarding the Philippines, the IMF noted that the amended BSP charter of 2019 does sanction the issuance of wholesale CBDC. However, the existing regulatory framework “might warrant a re-examination to guarantee that governance and financial stability risks are adequately addressed.”
The IMF further emphasised at the time the importance of an extended phase of proof-of-concept development, coupled with a comprehensive assessment of the potential implications of CBDC on policies.
Now as the proof of concept phase draws to a close, Tommaso wants to remind them of the risks involved in adopting or building applications of emerging new technologies for wider societal impact.
“Central banks that are serious about doing deploying and testing CBDCs need to understand these challenges and need to tool up in order to deliver,”
“That’s a little complicated to do, but certainly not beyond the reach of central banks.”