The Bangko Sentral ng Pilipinas (BSP) will not be issuing its own central bank digital currency (CBDC) in the next three or five years, according to its highest-ranking official.

DIONKO BEN NEW BSP GOV - BSP not issuing own digital currency yet
Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno. (Bloomberg file photo)

When asked if the BSP could come up with CBDCs within his term, BSP Governor Benjamin E. Diokno said: “I don’t think so.”

Diokno, the central bank’s fifth governor, will finish his term in 2023. “Most central banks say they will not issue CBDCs within the next five years. So, not within my term,” he said during his regular press chat “GBED Talks”.

The BSP has recently completed its initial exploratory study of CBDCs and tackled issues such as its impact on monetary and financial stability. Pros and cons were also reviewed such as potential risks and possible implications from the viewpoint of monetary policy, financial supervision, payments and settlement, financial inclusion, legislation and regulations. The study also looked into the CBDC forays of other central banks.

“CBDC is considered as programmable money. This means that its specific designs, features and attributes can be built into them. These design features are crucial,” said Diokno. He said the economic effects of a CBDC will significantly depend on the blueprint of these digital currencies.

A CBDC will also have an impact on the printing of banknotes. “If the BSP decides to issue a retail CBDC, this will most likely result to lower printing of banknotes. This in turn leads to lower cost of printing money for the BSP,” said Diokno. “The BSP decision on the printing of money hinges on a number of factors, primary of which is the demand for physical currency.”

For now, cash is the preferred means of payment for retail transactions in the country, he said. “The BSP is pushing for the greater adoption of digital payments. If digitalization takes root in our society, then we may see lesser demand for physical currency in the future and consequently lesser printing of currency by the BSP,” added Diokno.

Despite that there are no plans for a CBDC within his term or until 2023, Diokno said the BSP will continue to watch out for developments in this space. “For now there are three areas the BSP would like to focus on going forward with regards to CBDCs – research, capacity building and establishing networks,” he said.

In terms of research, Diokno said this could include uses for the current payment system for “possible areas for improvement” and to look more into privately-issued digital currencies in the Philippines. He warned though that CBDCs fundamentally differs from privately issued digital currencies or cryptocurrencies. “Cryptocurrencies do not have any central bank entity to back them up and cryptocurrencies cannot be considered as money. Given the volatility of their prices, cryptocurrencies cannot function either as a medium of exchange or unit of account,  and only the least risk-averse investors would consider them as a store of value.”

“By contrast, a CBDC is a digital form of central bank money that is denominated in the national unit of account and functions as both the medium of exchange and a store of value. Given these features of CBDCs, it is expected that it will be preferred than privately issued digital currencies,” said Diokno.

The BSP chief said there are a growing number of central banks that are doing what they are doing now, which is to lay some form of CBDC groundwork.

“Many of them are undertaking conceptual research—like we have—while some have progressed to proof-of-concept experiments. A smaller number of central banks have already developed and are in the pilot test stage of their CBDC. Despite these developments, very few central banks plan to issue CBDC in the next five years,” said Diokno, citing surveys conducted by the Bank for International Settlements in 2018 and 2019.

“Some central banks are also engaging in CBDC activities as part of contingency planning. This fosters readiness in the event that the payment environment necessitates the adoption of a CBDC,” said Diokno.

Central banks that have some form of CBDCs in the last two years are the Marshal Islands with its “sovereign” cryptocurrencies; the Eastern Carribean Central Bank has issued its own currency union and its on a pilot run; and the Bahamas Central Bank is also pilot testing its “Project Sand Dollar”.

The BSP study said there are benefits as well as risks to CBDCs. The potential benefits are: it addresses the decline in use of physical cash; promotes financial inclusion, as it provides another means to perform financial transactions; widens the range of options for monetary policy since aside from cash and bank deposits, CBDC adds a third form of central bank liability that may be used for monetary policy; and it encourages innovation in the payments system, as it presents another form of competition with privately-issued digital currencies.

The potential risks are the following: possible financial disintermediation; risks to consumer welfare and loss of privacy; increased costs for the banking system due to possible competition between CBDCs and bank deposits; incidence of money laundering and financing terrorism; and cybersecurity issues.

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