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Japan kicks off digital currency experiments

Tokyo: the Bank of Japan has pressed 'go' on its CBDC experimentation | Credit: Pharaoh_EZYPT; Pixabay

The Bank of Japan (BoJ) has begun an initial one-year experiment with a potential central bank digital currency (CBDC).

The central bank wants to test the technical feasibility of the core functions and features required for a general purpose CBDC, said the BoJ, announcing that ‘proof of concept (PoC) phase one’ will run until March 2022.

Most central banks worldwide are researching or experimenting with CBDCs but few have committed to introduce them. A general purpose (or retail) CBDC is one issued for the public, while a wholesale CBDC is for financial institutions that hold reserve deposits with a central bank.

The Tokyo-headquartered BoJ will develop ‘a test environment for the CBDC system’ and experiment in areas such as issuance, distribution and redemption, according to the short statement. Japanese conglomerate Hitachi has been appointed to work with the BoJ, according to a separate announcement (Japanese language only).

The developments come three weeks after its governor, Haruhiko Kuroda, touched on a potential digital yen at the FIN/SUM Fintech Summit 2021. Kuroda told the event that “while there is no change in the bank’s stance that it currently has no plan to issue CBDC, from the viewpoint of ensuring the stability and efficiency of the overall payment and settlement systems, we consider it important to prepare thoroughly to respond to changes in circumstances in an appropriate manner.”

Roadmap to a potential pilot

Japan, which has a population of about 126 million, is frequently cited as a nation in which cash remains relatively popular. But a 19-page BoJ briefing on CBDC published last October acknowledged that ‘the expansion of cashless payments is remarkable, reflecting technological innovation in recent years’.

‘While many central banks have proceeded with consideration of general purpose CBDC recently, their motivations differ according to their circumstances. In Japan, many do not see the need to introduce general purpose CBDC for the time being, mainly because the ratio of cash in circulation to nominal GDP is high, at around 20 per cent,’ the document noted. ‘However, if cash in circulation drops sharply in the future, it might be necessary to make up for the decrease in cash by issuing CBDC. Regardless of the situation, it might be determined as appropriate to issue CBDC in order to improve Japan’s payment and settlement systems.’

The same document outlined that, after a PoC’s first phase, a second phase would see the BoJ ‘implement additional functions of CBDC in the test environment and test their feasibility’; and that ‘if the bank judges it necessary to step things up further, it will also consider a pilot programme that involves PSPs [payment service providers] and end-users’.

Japan’s international input

Although its experimentation towards a potential digital yen is just starting, the BoJ has been involved in various international and internal initiatives related to CBDC in recent years.

The central bank has, for example, previously conducted experiments exploring distributed-ledger technology (DLT), which could be used for wholesale CBDC, in a joint project with the European Central Bank (ECB) entitled ‘Project Stella’. In the context of a potential general purpose CBDC, the BoJ convened a ‘Study Group on Legal Issues regarding Central Bank Digital Currency’ in its Institute for Monetary and Economic Studies in 2018.

The BoJ is also among a small group of central banks that, together with the Bank for International Settlements, contributed to an influential joint-report entitled ‘Central Bank Digital Currencies: Foundational Principles and Core Features’ that was published in October last year.

Separately, the ECB’s president has said that a ‘digital euro’ could come into being in about four years “maybe a little more”. In an interview with Bloomberg TV on 31 March, Christine Lagarde said the ECB’s Governing Council will decide in the middle of this year whether to move forward with practical experimentation towards a potential European CBDC.

*** Thailand’s central bank is seeking public feedback by 15 June on the potential introduction of a retail CBDC. The Bank of Thailand has published a 59-page paper, ‘The Way Forward for Retail Central Bank Digital Currency in Thailand’, setting out its latest thinking.

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