Bank of Japan to begin testing CBDC

The Bank of Japan will begin technical testing of a digital yen, becoming the latest to experiment with central bank digital currency (CBDC).

The BoJ will commence a proof-of-concept process to study the feasibility of the digital yen, the central bank says in a research paper published on July 2. It has not revealed a timetable.

The announcement came as a surprise to many, after BoJ governor Haruhiko Kuroda said the Japanese public had little interest in CBDC in a speech last December.

“In Japan, the amount of cash outstanding is still increasing, and it does not seem that there is a demand for CBDC from the public at present,” Kuroda said at the time.

While banknote circulation showed no sign of declining in Japan, the BoJ has already conducted some technical and legal research to stand ready when the need for CBDC may arise in the future, Kuroda said.

In the next phase, the BoJ will conduct research to prepare for a digital version of yen as a substitute for cash, the report says. The BoJ will also collaborate with other central banks and relevant institutions to explore the use of CBDC.

Technical hurdles

The report highlights two major hurdles for CBDC – universal access and resilience.

The report says a CBDC should have a cash-equivalent function. “It must be a method that anyone can use securely at anytime and anywhere.”

To ensure universal access, the report says terminals used to make transactions or fund transfers cannot be confined to mobile phones, as there are people who do not own such devices. Designs of such terminals should consider special groups such as young children or seniors, the report said. The digital yen will be used both in retail payments and peer-to-peer fund transfers. It will also be available to foreign tourists.

Resilience represents another technological hurdle that central banks must address before issuing CBDC, the report says. Current mobile payment methods require users to have internet connections to make transactions or transfers, making them vulnerable to power outages or poor connections. CBDCs should address this issue by supporting offline transactions, the report says.

Pandemic sparks CBDC interest

The BoJ is the latest to announce a plan to conduct proof-of-concept tests of CBDC, as the Covid-19 pandemic prompts more central banks to look into cash alternatives.

The Covid-19 pandemic has fanned public concerns that the coronavirus could be transmitted by cash, despite scientific evidence suggesting that the probability of transmission via banknotes is relatively low.

Beyond virus transmission concerns, the pandemic has highlighted the importance of resilient and accessible central bank-operated payment infrastructures. Many central banks believe CBDC, among other options, could increase resilience during events such as pandemics and cyber attacks.

In April, the People’s Bank of China confirmed that it would test CBDC in a number of districts. It also planned to roll out CBDC at the Winter Olympics in 2022.

The Bank of Korea also announced in April that it had started a 22-month pilot CBDC test to prepare for future demand. In June, the Bank of Thailand said it would develop a new prototype payment system as part of its trial CBDC scheme

The Banque de France said in April that it was testing a digital euro to explore the potential of the technology, while the Bank of England published a detailed assessment on design principles for a retail CBDC in March.