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All set for the age of digital currencies

With the use of digital currencies becoming more prolific, users must be re-assured of the transparency and execution of payments.

Digital currencies can enable and empower consumers. And as we see greater familiarity and satisfaction with the use of digital currencies, exploration by central banks across the globe is also on the rise.

THE advantages of digital currencies are becoming more apparent with exponential progress in efficiency, productivity, governance, and customer experience. And as we see greater familiarity and satisfaction with the use of digital currencies, exploration by central banks across the globe is also on the rise, with several already moving ahead on programmes developing digital representation of their fiat currency.

The Monetary Authority of Singapore's Central Digital Currency project code-named "Ubin" has completed its final phase. Ubin is a collaborative project with industry to explore the use of Blockchain and Distributed Ledger Technology for the clearing and settlement of payments and securities, using a digital version of the Singapore dollar. The project concluded with the key finding that an international settlement network, modelled after this payment network prototype, could enable faster and cheaper transactions compared to conventional cross-border payment channels, proving commercial potential.

Also in the process of development, the People's Bank of China's e-yuan has already been used for more than 1.1 billion yuan worth of transactions as part of a series of ongoing pilot programmes. The Digital Currency Electronic Payment would allow consumers and businesses to pay for goods with e-wallets rather than traditional banknotes.

Most recently, the European Central Bank had announced that it will start experimenting with a digital version of the euro, while holding a public consultation with targets to decide whether to launch a digital euro project towards mid-2021. ECB President Christine Lagarde was quoted saying: "The euro belongs to Europeans and we are its guardians. We should be prepared to issue a digital euro, should the need arise."

The use of digital currency is becoming more prolific and users need to be re-assured of the transparency and automatic execution of payments. To this end, the issuance of stablecoins pegged to the value of currency assists in providing a stable store of value, medium of exchange, and a programmable token with self-executing logic.

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Anticipating consumer trends

Aboitiz-led Union Bank of the Philippines (UnionBank), in anticipation of consumer trends, launched in 2019 a stablecoin dubbed PHX. UnionBank is thus the first bank in the Philippines to conduct transactions using blockchain technology. PHX's value is bank-backed and guaranteed to be at parity with the Philippine peso at all times. The stablecoin was initially rolled out to power a decentralised payment platform called i2i and connect rural banks of the Philippines and enable them to buy, transfer and redeem transactions for PHX. The rural banks are now able to conduct domestic remittances to one another using PHX, a reality that was previously not possible.

The i2i network has now grown from 3 rural banks to over 100 member institutions consisting of rural banks, savings banks, thrift banks, co-ops and pawn shops with a total collective of almost 400 branches. More recently, the Philippines' Department of Social Welfare and Development was able to leverage on the i2i network of rural banks for the distribution of the Social Amelioration Program. Providing financial support to those in need during the Covid-19 pandemic when distribution as-a-whole has been significantly impacted has proven invaluable. The applications and scalability of the stablecoin evidence the viability of inclusion and financial enablement.

Not limited to currencies

Not all countries face the challenge of having unconnected financial tentacles which slow or prevent seamless financial transactions across multiple parties. But it is worth bearing in mind that the applications of distributed ledger technology are not limited to currencies. Natural extensions of these include (to name a few) blockchain-based securities, security tokens and tokenised securities which can be atomically exchanged with digital currency and settled instantly.

UnionBank, inspired by the future and the possibilities, together with its partner PDAX (Philippine Digital Asset Exchange), proceeded to pioneer a pilot of DLT-enabled mobile application for the Bureau of the Treasury for the wider distribution of government bonds. This is the first retail treasury bond issuance to leverage on blockchain technology in Asia, and likely the world. The issuance has raised a record 516.3 billion peso, despite the Covid-19-induced recession, from the sale of five-year retail treasury bonds dubbed "Progreso bonds" to small investors. This mobile app has also enabled Filipino Overseas Foreign Workers in 24 countries to invest and participate, reaching Filipinos as far as Greenland, the Bahamas and Cuba.

The pursuit of digital currency, stablecoins and, eventually, digital assets is essential. This prescient need is not centred on hypothetical benefits but rather the potential benefit for real first-to-third world applications which have proven to enable and empower consumers. The inter-operable design allows for practical use across various platforms and wallets, not just locally but internationally as well. The accessibility, efficiency and inclusivity achieved as a result of such transactions and payments and other use cases will be further cemented by the issuance or backing of central banks of digital currencies, embedding these services with much-needed trust by lending a national stamp of approval.

Stablecoins are cryptocurrencies designed to minimise the volatility of the price of the stablecoin, relative to some "stable" asset or basket of assets. A stablecoin can be pegged to a cryptocurrency, fiat money, or to exchange-traded commodities.

  • David R Hardoon is the senior adviser for Data and Artificial Intelligence at UnionBank Philippines and former chief data officer for the Monetary Authority of Singapore.

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