Bank of Japan joins the central bank digital currency bandwagon

• Japan took the first step in a year-long study of a digital yen and if by next March the bank is convinced a CBDC makes sense, it’ll pilot one
• Although regional rival China has more concrete plans, Japan prefers cautioun
• BoJ will trial basic functions such as issuance, distribution, and redemption

Joining multiple other Asian countries, the Bank of Japan (BoJ) on Monday kickstarted its central bank digital currency (CBDC) trials, with an aim to explore the technical feasibility of a digital yen in its first phase Proof of Concept (PoC) which will last for a year to March 2022. Although it is undecided if the central bank wants to proceed with a CBDC, Asian countries are so far leading in terms of developing and experimenting with forms of national digital currencies.

Six months ago, the central bank published a CBDC document in which it outlined three stages of trials, including two phases for the PoC followed by a pilot. Base on a short statement this week, BoJ said it would trial basic functions such as issuance, distribution, and redemption. “BoJ has been undertaking preparations to begin experiments on CBDC in the early fiscal year 2021, to test the technical feasibility of the core functions and features required for CBDC,” the bank said.

As necessary preparations are now complete, the bank said the first phase of the PoC, Phase 1, had begun on Monday. In that initial phase, “the Bank plans to develop a test environment for the CBDC system and conduct experiments on the basic functions that are core to CBDC as a payment instrument such as issuance, distribution, and redemption. This phase will be carried out through March 2022, for a duration of one year,” it added.

In March this year, BoJ Governor Haruhiko Kuroda also spoke about some of the drivers. Japan’s objectives are a little different from most countries because of the heavy use of cash in retail payments and the 2011 earthquake and tsunami, which caused widespread disruption. Hence there is a greater emphasis on the ability to execute payments offline.

Last year, when the Bank outlined three potential motivations for a CBDC, among them were because retail payments in Japan are still dominated by cash. Bearing any drastic changes, the Bank wants to be ready to provide a CBDC as an option. Another reason would be if it was required to improve the stability and efficiency of settlement systems.

On this point, there are several private Japanese initiatives, particularly from banks looking to offer digital yen. The third CBDC driver is the potential need for a digital yen to support a digital society. For now, there’s quite a push by Japanese institutions to use blockchain and a wholesale CBDC would be useful for on-chain settlement.

Asia leads in central bank digital currencies

Japan’s main economic rival, China, has piloted a digital yuan, known as digital currency electronic payment (DCEP), and tested the system in four major cities. In fact, China is leading and dominating the digital payments scene with Ant Financial. Beyond China, the outlook, in Asia, on central bank digital currency seems to be more optimistic than the rest parts of the world.

In Southeast Asia, Cambodia has been investigating the development of a central bank digital currency since 2017, having relied heavily on the US dollar for decades. After a series of pilot tests, Cambodia officially announced the launch of Bakong, it’s a central bank-backed digital currency that supports transactions in the dollar and riel, the Cambodian currency. Bakong could allow Cambodians the opportunity to bypass card-based payments altogether and leapfrog straight to a cashless digital system.

Meanwhile, a joint project between the Bank of Thailand and the Hong Kong Monetary Authority (HKMA) saw the successful trialing of a Distributed Ledger Technology (DLT) for cross-border fund transfers, under Project InthanonLionRock.

Aside from China, Cambodia, Thailand, and Hong Kong, multiple other Asian countries are exploring developing and experimenting with forms of national digital currencies, including India, Indonesia, Vietnam, the Philippines, and Korea. Countries like Singapore and Malaysia said they do not have any immediate plans to issue CBDC but instead are focussing on their rollout of digital bank licenses.

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