Why should average Filipinos care about CBDCs?

Cash has long been the cornerstone of Filipino financial transactions, but a digital wind is blowing and it carries with it the promise and peril of Central Bank Digital Currencies (CBDCs).

At a glance, the concept of CBDCs feels straight out of a science fiction novel. Imagine money, but not as we know it – digital, swift and without the inconvenient need for physical wallets. Unlike the cryptocurrency fever that gripped the world, CBDCs come with a government’s seal of approval, providing an added layer of trust.

According to the ‌Atlantic Council data, a total of 131 countries, or 98 percent of the global economy, have already explored, researched, developed, piloted or even launched digital versions of their currency.

The Bangko Sentral ng Pilipinas (BSP) officially began its CBDC pilot at the end of 2022, primarily aimed at enhancing the country’s large-value payment system. Now known as Project Agila, the BSP is ramping up the testing of its wholesale CBDC, which will be issued to commercial banks and other financial institutions to help reduce friction in cross-border money transfers, equity securities payments and intraday liquidity facilities.

For clarity, the drive behind creating wholesale CBDCs centers on improving the efficiency and security of payment systems, especially for international transactions, and on lowering associated costs. On the other hand, the interest in retail CBDCs comes from central banks’ ambition to meet the growing appetite for digital currency or electronic payments and to offer a substitute for privately held crypto assets.

In recent weeks, the BSP has onboarded to the project some of the country’s largest banks, including BDO Unibank, Land Bank of the Philippines and Union Bank of the Philippines, to test the applicability and efficiency of wholesale CBDC technology in a controlled, sandbox environment.

The question for the common Filipino is: Why should you care about CBDCs?

About 34.3 million, or 44 percent of adult Filipinos, remain unbanked based on the data released in 2021. This figure marks a noticeable improvement from the 51.2 million in 2019. While this is a noticeable improvement from the 51.2 million in 2019, the numbers still underscore a substantial untapped potential. CBDCs present an avenue for the government to bring these unbanked individuals into the fold of the digital economy, ensuring every Filipino is represented with a bank account.

Adding to these statistics, the Philippines is among the top five countries in terms of remittances received worldwide, reaching a record high of $36.14 billion last year. With many Filipinos relying on remittances, the BSP looks at CBDC to streamline cross-border payments that are often plagued by delays and intermediaries, leading to reduced costs and shorter transaction times.

Other countries testing their own CBDCs have also established promising use cases that the BSP can potentially explore.

For instance, a year after the Bahamas introduced the world’s first CBDC, the Sand Dollar, local firms began using it for payroll. Employees of the on-demand delivery service Bahama Eats receive their salaries in this digital currency using a digital wallet. Meanwhile, in China, which has aggressively pursued its CBDC ambitions, thousands of workers in a specific city are now being compensated entirely in the digital yuan.

Additionally, CBDCs are seen to bridge the glaring disparities in access to financial services like loans and credits. In Brazil, for example, payments giant Visa has unveiled a CBDC project to help farmers gain access to global funding by creating tokenized contracts on Ethereum for investors to invest in their local operations.

These kinds of real-world use cases highlight CBDCs as a stimulus in times of crisis. The government can speed up aid distribution in economic downturns, directly reaching those affected Filipinos without bureaucratic delays.

Arising concerns

Even with significant backing from local organizations and the government, the local crypto community remains hesitant about embracing CBDCs, citing concerns over increased government oversight and potential breaches of privacy.

Unlike physical cash transactions, digital currencies can leave behind an electronic trail of every transaction. This intensifies worries that the government and central bank could monitor individuals’ financial activities, eroding the basic right to financial confidentiality.

Cybersecurity is another notable concern. The digital nature of CBDCs makes them vulnerable to hacks, with potential breaches jeopardizing trust in both digital currencies and financial institutions.

CBDCs are not immune to such risks, and we need to be ahead of potential threats. Cyber security measures, including robust encryption protocols and vigilant monitoring facilitated through regular security audits by the central bank, could counter cyber threats and unauthorized access attempts, thereby fortifying the overall stability and trustworthiness of the financial sector.

Additionally, there should be ensured integration of privacy principles, such as zero-knowledge proof and opt-in features, to allow secure and private transactions without compromising user privacy. Striking a balance between technological advancement and safeguarding individuals’ financial autonomy is crucial.

The success of CBDCs crucially depends on well-informed acceptance. For this, it’s vital that businesses, individuals and policymakers have a comprehensive grasp of CBDCs’ features, advantages and potential consequences. This understanding can foster trust and promote wise use of the digital currency.

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Arlone “Paul” Abello, also known as Coach Miranda Miner, is founder and CEO of Global Miranda Miner Group and Web3 learning platform Elite University and FEASTGold.