Bank of Japan issues latest report on ‘digital yen’ CBDC investigation

Japan continues its exploration of a “digital yen” central bank digital currency (CBDC) and what form it should take. A regular update published this month by the Bank of Japan (BoJ) Payment Services Department looks at what additional functions a digital national currency could (or should) have. Its findings come from consultations with potential users in the business world and concern what form it should take, how it might interoperate with existing payment systems, and privacy/scalability issues.

The process overall is called a “pilot project,” which recently has involved the BoJ and over 60 stakeholders from the business and financial worlds. So far, it has looked at what sort of ledger should be used, how that data is shared between a central coordinator and intermediary services, and end-user wallets and applications.

To date, regular updates from the project have lacked details on specific findings or decisions. Readers know only which issues have been discussed and that any findings will be used to form an experimental system at some future point. The BoJ has stressed that it has not yet made a final decision to introduce a digital currency and would do so only after an extensive research process to determine its merits.

Every additional functionality a CBDC can potentially perform raises concerns over what (and how much) extra data is associated with the purchase—and the parties involved. The BoJ is interested in ways this additional data might be kept separate from the transaction/payment data itself, how this information might remain private, and whether users should have the option to consent to metadata being shared should any external party provide an incentive.

Five working groups have been in the BoJ’s research process so far. They’ve explored ideas such as interactions with external infrastructure and how to redeem or issue the digital tokens (WG1); an “API sandbox,” common standards, and extra functionality like programmability (WG2); KYC, security, and potential risks (WG3); the technological platform and whether to use accounts (like Ethereum), UTXOs (like Bitcoin), or another kind of database (WG4); and the end-user experience (WG5).

Otherwise, basic findings so far suggest the Japanese CBDC should have a central shared ledger and be based on a platform capable of processing hundreds of thousands of transactions per second.

The BoJ has been investigating the concept of a CBDC-type asset for the last decade. In November 2020, former Bank of Japan executive Hiromi Yamaoka cautioned the process would take a number of years, though hinted there was a degree of international pressure on central banks to go digital.

Neighboring China and central banks worldwide went through similar investigative processes; however, China is the largest economy that has actually issued a token. The Chinese “digital yuan” token has seen limited-scope trials in the real world. However, the country’s central bank (like Japan’s) has stressed that digital national currencies should run alongside existing ones and not be designed to replace them.

CBDC proponents in Japan would definitely like to see a digital yen sooner rather than later. Last December, a BoJ-convened panel of academics, researchers, and industry representatives called for the country to introduce a digital yen “without delay.”

However, educating the public and providing reasons to actually use a digital currency matter. An asset that simply “runs alongside” the existing currency system would be considered a novelty token only, with users likely preferring the real thing for most use cases.

Japan has a reputation for being an early adopter of new technologies, but it is also cautious as to which ones get chosen and slow to abandon them even when superior technologies exist. The still-widespread use of fax machines in the country is one example of this, as is the tendency of Japanese people to spend 20 minutes at ATMs paying bills.

Likewise, there’s still a strong preference for formal-looking paper documents and physical cash, although digital consumer payments have become much more popular in recent years. Tap-and-pay debit/credit cards and payment apps like PayPay (similar to CashApp) are near-ubiquitous in 2024, but then so is the traditional gift envelope containing crisp new and perfectly-oriented paper notes.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

Watch: Finding ways to use CBDC outside of digital currencies