The Digital Dollar Project tested the use of the U.S. retail central bank digital currency (rCBDC) for remittances to the Philippines via Western Union and BDO Unibank.
As part of the Digital Dollar Project (DDP) pilot test, several cross-border remittances were made using a simulated retail CBDC. Western Union and BDO Unibank took part in the pilot.
The transactions were conducted in a fully isolated environment, the Champion Model DDP, in which the central bank issued the CBDC and gave access to it to BDO Unibank. The intermediary bank transferred the digital currency to Western Union (WU), which used a decentralized exchange (DEX) to convert the digital dollar into digital Philippine pesos at the current exchange rate. WU then transferred the funds to the customer’s account at BDO Unibank in the Philippines.
The DDP team reported that by utilizing DLT, the transfer took seconds and occurred simultaneously with the messaging between the financial institutions involved in the process. Thus, the CBDC provides an opportunity to modernize processes and make them more efficient for private companies and their customers.
The DEX was a key feature of the study. Analysts noted that while exchanging CBDCs between different currencies on DEXs simplifies the transfer process, there are some risks involved in using decentralized exchanges. In particular, data privacy issues need to be explored and funds need to be secured.
The DDP team concluded that there are advantages to using Western Union services as part of cross-border transfers in CBDCs, including:
- reduced credit and counterparty risks;
- lower capital costs held in correspondent accounts;
- ensuring faster settlements;
- unifying local jurisdiction requirements;
- minimizing the number of failed transactions;
- building user confidence.
According to data in the DDP report, $74 billion worth of transfers were sent from the U.S. through Western Union in 2021 and $626 billion in 2022, with retail transactions averaging $200-$300.
Each money transfer from the U.S. to the Philippines is usually charged a 4.4% fee if the transaction is $200. A bank transfer of the same amount costs an average of 7.98%. Using CBDCs for such transfers will significantly reduce these costs.
The U.S. government hasn’t yet made a final decision on the issue of the digital dollar but is actively promoting technical developments and testing the capabilities of CBDCs.
