On Thursday, the Digital Dollar Project (DDP) announced the successful completion of a cross-border central bank digital currency (CBDC) trial in the Philippines, which it developed with Western Union.
The pilot study assessed the potential advantages of using CBDCs for international remittances, leveraging a distributed ledger technology (DLT) platform to simulate the transfer of digital dollars and Philippine pesos. It highlighted key benefits such as reduced risks, lower costs, and enhanced transaction visibility.
DDP’s CBDC trials
The Digital Dollar Project is a non-profit research initiative founded by Accenture and J. Cristopher Giancarlo, the former head of the US Commodity Futures Trading Commission (CFTC). It seeks to promote public discussions on the opportunities and challenges of a US CBDC and help organizations prepare for a potential digital currency future.
In 2021, the organization launched a series of exploratory pilots to test a range of real-world use cases. Yesterday, it published the results of its first study with Western Union, the international money transfer platform. Additional partners in the trial included Accenture and BDO Bank.
The pilot explored how a CBDC could improve cross-border remittances in the US-Philippine corridor, one of the busiest in the world.
The Philippines received $36 billion in remittance payments in 2022, representing 8.9% of its GDP. However, the cost of sending money from the US can sometimes exceed 4% of the total transaction value, posing a significant burden on disadvantaged individuals. Nearly three in four Filipino consumers receive money at least once a month, so the challenge is paramount.
Against this backdrop, retail CBDCs promise to enhance cross-border payments’ speed and efficiency without displacing the service offerings of established cross-border remittance providers, such as money transfer operators (MTOs).
Looking at remittance costs, one of the factors that most impacts charges is the use of cash. A $200 bank to bank payment via Western Union’s website costs 1.5% and takes 3-5 days according to World Bank data. If the payment uses cash both sides rather than bank accounts, the charges rise to more than 5%. A retail CBDC would provide a digital form of cash, cutting the cost of remittances for the unbanked.
Most importantly, the study demonstrated the benefit of atomic settlements, which significantly reduces counterparty and credit risk and improve liquidity in the overall system. Sending money digitally is also much cheaper for both customers and their financial institutions, alleviating the cost of capital held in pre-funded accounts. Lastly, the pilot points to a generally enhanced customer experience thanks to the increased accessibility and portability of CBDCs.