The Digital Dollar Project (DDP) recently accomplished a groundbreaking pilot study, testing remittance payments to the Philippines using a simulated retail central bank digital currency (rCBDC). The project’s partnership with Western Union and BDO Unibank paved the way for improved settlement time, cost, and transparency in remittance transfers.
The Champion Model: A New Approach to CBDC Transactions
The project employed the DDP’s Champion Model, which utilized a simulated central bank-issued CBDC to facilitate the process. An intermediary bank granted Western Union (WU) access to the CBDC for remittance to a BDO Unibank customer in the Philippines.
To execute the transfer, WU relied on a decentralized exchange (DEX) to trade a dollar CBDC for a Philippine peso CBDC at a real-time rate determined by a third-party oracle. Once the exchange was complete, WU received payment confirmation and seamlessly transferred the amount to the bank customer’s account.
A key distinction in this pilot study was the exclusive use of central bank money throughout the entire transaction, as opposed to commercial bank money. This innovative approach introduced the potential benefits of increased competition and transparency in the remittance industry.
However, challenges remain, as most remittances to the Philippines occur during trading hours in Manila, presenting a hurdle for this system.
Emphasizing Privacy with Distributed Ledger Technology
Although the study did not address privacy issues directly, the report highlighted the advantages of distributed ledger technology in preserving privacy. This technology allows for granular control over the level of consumer data sharing, an important aspect of modern financial transactions.
By leveraging distributed ledger technology, the pilot study achieved simultaneous transfer of both the message and the value within seconds. Unlike current methods, where value transfer takes longer than message transfer, this approach minimizes counterparty and credit risks, leading to enhanced efficiency and security.
Conclusions, Implications and Significance of Remittances
The authors concluded that central bank digital currencies (CBDCs) do not aim to replace existing service providers like Western Union and BDO Unibank. Instead, it’ll offer an opportunity to modernize processes and promote efficiency for both private sector companies and their customers.
Remittances from the U.S. to the Philippines usually incurred a cost of 4.4% on a total transaction of $200, while bank transfers cost an average of 7.98%. The simulated process demonstrated potential time and cost savings, as well as improved transparency in remittance transactions.
DDP’s Ongoing Progress
Co-founded by former Commodity Futures Trading Commission Chair Christopher Giancarlo, the DDP has been making strides in its pursuit of innovation. Since its launch, the project has established a technical sandbox and received support from Accenture, further driving the development of CBDC solutions.
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