Philippines Races to Launch CBDC, but Ditches Blockchain

Introduction:

Demystifying Digital Currency: CBDCs, Crypto, and Beyond

The world of digital currency can be a confusing one, rife with jargon and acronyms. Before diving into the Philippines' central bank digital currency (CBDC) plans, let's clear the air and define some key terms:

• Central Bank Digital Currency (CBDC): Imagine your cash in your wallet, but existing entirely in the digital realm. A CBDC is essentially a digital version of a country's official currency, issued and backed by its central bank. It holds the same value and legal tender status as physical cash, but with the convenience of digital transactions.
• Blockchain: This is a revolutionary technology that acts like a giant, public ledger. Transactions involving digital assets (like cryptocurrencies) are recorded chronologically and securely on this distributed ledger, making them transparent and tamper-proof.
• Cryptocurrency: Unlike a CBDC, a cryptocurrency is a decentralized digital asset built on a blockchain network like Bitcoin or Ethereum. Think of it as a completely separate digital currency, independent of any bank or government. Cryptocurrencies are not legal tender and their value can be highly volatile.

Understanding the Distinction:

It's crucial to remember that CBDC does not automatically equate to a blockchain-based currency. While some central banks might explore blockchain technology for their CBDCs, it's not a mandatory requirement. The Philippines, for example, is planning a non-blockchain CBDC initially.

Why Differentiate?

This distinction is important because CBDCs and cryptocurrencies have fundamentally different characteristics:

• Issuer: CBDCs are issued by central banks, while cryptocurrencies are decentralized (no single authority controls them).
• Regulation: CBDCs are subject to central bank regulations, while cryptocurrencies are largely self-governing.
• Stability: CBDCs are backed by the central bank, offering relative stability. Cryptocurrencies, on the other hand, can be highly volatile.

With these definitions in mind, we can delve deeper into the Philippines' approach to CBDCs and explore the potential implications for its financial landscape.

The Philippines is speeding up its plans for a central bank digital currency (CBDC), aiming to launch within the next two years. However, in a surprising twist, the Bangko Sentral ng Pilipinas (BSP) announced that the digital peso won't be built on blockchain technology.

Governor Eli Remolona Jr. of the BSP revealed this departure from the norm, stating that they'll likely leverage the existing technology powering their real-time gross settlement system for the CBDC. This decision has sparked discussions regarding the advantages and potential drawbacks of this non-blockchain approach.

A CBDC Tailored for Banks (For Now):

The initial rollout will prioritize a "wholesale" CBDC, limiting participation to banks for transactions. This approach aims to streamline interbank transfers, potentially enhancing efficiency and security. Retail use, allowing the general public access to the digital peso, may be considered in subsequent phases.

Why not in Blockchain?

Remolona cited concerns regarding the efficiency of blockchain technology and drew from the experiences of other central banks. However, this choice diverges from the global trend of exploring blockchain for CBDCs.

Advantages of a Non-Blockchain CBDC:

• Faster Development: Leveraging existing infrastructure could expedite implementation.
• Centralized Control: Maintaining complete control may simplify regulatory oversight for the BSP.
• Tailored for Banks: Initially focusing on interbank transactions streamlines the process for financial institutions.

Disadvantages of a Non-Blockchain CBDC:

• Less Transparency: The absence of a public ledger raises questions about auditability and data privacy.
• Limited Innovation: The Philippines might miss out on the potential for programmable money and new financial products associated with blockchain.
• Scalability Concerns: The existing system's capacity to handle a broader user base in the future is uncertain.

The Debate: Blockchain vs. Non-Blockchain CBDC

The global discourse on CBDCs predominantly centers on blockchain technology. Here's an examination of the pros and cons of both approaches:

Blockchain CBDC:

Pros:

• Transparency and Immutability: A public ledger ensures transparency, reducing fraud and errors.
• Programmable Money: Features like automatic payments or targeted stimulus programs are feasible.
• Decentralization: Reduces dependence on a single central authority.

Cons:

• Scalability Issues: Blockchain transactions may be slow and expensive for large volumes.
• Regulatory Challenges: The decentralized nature may pose regulatory hurdles.
• Security Risks: Blockchain networks can be vulnerable to hacking attempts.

Non-Blockchain CBDC:

Pros:

• Faster Transactions: This may offer quicker processing times compared to blockchain.
• Centralized Control: Simplifies government regulation and oversight.
• Potentially Lower Costs: Development and maintenance might be less expensive than blockchain.

Cons:

• Less Transparency: Lack of a public ledger raises concerns about data privacy and making it auditable.
• Limited Innovation: Misses potential applications of blockchain technology in finance.
• Single Point of Failure: Dependence on a central system creates a potential vulnerability.

In the ongoing debate surrounding the development of digital currencies in the Philippines, the focus has shifted beyond the binary choice between blockchain-based or non-blockchain-based CBDCs. Instead, attention has turned towards considering the viability of adopting existing cryptocurrencies (such as Bitcoin or stablecoins) versus creating a new CBDC.

This shift reflects a nuanced understanding of the advantages and drawbacks of each option. While a CBDC offers potential benefits in terms of direct central bank control and integration with existing financial infrastructure, it also raises concerns regarding centralization and government oversight.

On the other hand, adopting existing cryptocurrencies could leverage decentralization, transparency, and global adoption, but may face regulatory and interoperability challenges. Ultimately, the debate centers on striking a balance between innovation, security, and regulatory compliance to ensure the best path forward for the Philippines' digital currency landscape.

Embracing Innovation While Ensuring Security in the Philippines' CBDC: Exploring Existing Cryptocurrencies and Stablecoins

In considering the development of a central bank digital currency (CBDC) for the Philippines, it's essential to weigh the advantages and disadvantages of creating a new digital currency versus utilizing existing cryptocurrencies or stablecoins. While a CBDC offers certain benefits, such as direct control by the central bank, it also raises concerns about centralization and potential government overreach. As such, my take is to thoroughly explore the viability of leveraging established cryptocurrencies or stablecoins instead of creating a new CBDC.

Advantages of Utilizing Existing Cryptocurrencies and Stablecoins:

1. Immediate Access to Established Networks: By utilizing existing cryptocurrencies like Bitcoin or stablecoins like USDC or Tether, the Philippines can tap into well-established networks with global reach. This could expedite adoption and integration into existing financial systems.
2. Decentralization and Transparency: Many cryptocurrencies are built on decentralized blockchain networks, offering transparency and resistance to censorship. This decentralization could protect against potential government manipulation or control over the currency.
3. Global Adoption and Interoperability: Cryptocurrencies like Bitcoin have achieved widespread adoption and can be used for cross-border transactions without the need for intermediaries. Leveraging these networks could enhance financial inclusivity and facilitate international trade.
4. Innovation and Security: Established cryptocurrencies have undergone rigorous testing and development, resulting in robust security features. Additionally, the open-source nature of many cryptocurrencies encourages ongoing innovation and improvement.

Concerns Regarding a CBDC:

1. Centralized Control: A CBDC would be centrally controlled by the government or central bank, raising concerns about privacy, censorship, and potential government overreach. Individuals' financial transactions could be subject to surveillance or manipulation.
2. Human Rights Implications: A centrally controlled digital currency could potentially violate individuals' rights to financial privacy and autonomy. Government control over digital money could restrict freedom of expression and economic freedom.
3. Smart Contract Risks: If a CBDC is implemented on a blockchain with smart contract functionality, there are concerns about how these smart contracts would be programmed and controlled by the government. This could introduce vulnerabilities or biases into the system.

Conclusion:

In weighing the options for a digital currency in the Philippines, it's crucial to carefully consider the trade-offs between creating a new CBDC and leveraging existing cryptocurrencies or stablecoins. While a CBDC offers certain advantages in terms of direct control and integration with existing financial systems, it also raises significant concerns about centralization and government overreach.

Exploring the use of established cryptocurrencies or stablecoins could provide an alternative approach that prioritizes decentralization, transparency, and individual financial sovereignty. By embracing innovation while ensuring security and protecting users' rights, the Philippines can navigate the rapidly evolving landscape of digital currencies in a way that benefits its citizens and promotes economic growth.

Reference:

• PH Eyes 2026 Launch of Non-Blockchain CBDC To Rival Crypto – BSP
• Philippine central bank may issue wholesale CBDC in two years (https://www.centralbanking.com/central-banks/financial-market-infrastructure/7960822/philippine-central-bank-may-issue-wholesale-cbdc-in-two-years)
• Philippines Rules Out Blockchain for Wholesale CBDC Seen Likely by 2026: Report (https://www.coindesk.com/policy/2024/02/12/philippines-rules-out-blockchain-for-wholesale-cbdc-seen-likely-by-2026-report/)
• Philippines may launch wholesale CBDC within two years. No blockchain (https://www.ledgerinsights.com/cbdc/)

• The Bank for International Settlements (BIS): The BIS is a global forum for central bank cooperation and provides valuable resources on CBDCs. (https://www.bis.org/)
• The Atlantic Council: This think tank publishes insightful articles and research on digital currencies and central bank policy. (https://www.atlanticcouncil.org/)
• International Monetary Fund (IMF): The IMF conducts research and offers guidance on financial stability, including the implications of CBDCs. (https://www.imf.org/en/Home)
• Blockchain.info: (https://www.blockchain.com/explorer) - A popular blockchain explorer that allows you to see and understand transactions on the Bitcoin blockchain in real-time.
• ConsenSys: (https://consensys.io/) - A leading blockchain technology company that offers educational resources, developer tools, and enterprise solutions.
• CoinMarketCap: (https://coinmarketcap.com/) - A website that provides information on various cryptocurrencies and blockchain projects, including explanations of how blockchain works.