Bank of Japan Releases Report on Central Bank Digital Currency (CBDC) Experiment

The Bank of Japan recently published its report on the outcomes of the “Proof of Concept Phase 2” for its demonstration experiment on Central Bank Digital Currency (CBDC). While the Japanese version of the report was released last month, the English version’s release yesterday has sparked renewed interest in the global financial community. The report sheds light on the Bank of Japan’s progress in exploring the potential implementation of a digital yen but stops short of making a final decision.

The Bank of Japan’s report emphasizes the importance of continuing preparations to respond to future changes in the financial landscape. It states that although the decision to issue a CBDC in Japan has not been reached yet, it is crucial to remain proactive and ready to adapt. The completion of the proof of concept, which aims to verify the technical feasibility of a CBDC, is on track for 2022, as initially planned. Additionally, the Bank of Japan intends to conduct a pilot experiment starting in 2023.

The pilot experiment will involve several key aspects, including confirming the end-to-end processing flow, examining issues and countermeasures for connecting with external systems, and investigating ideas and necessary countermeasures identified during the proof of concept. As previously announced, the establishment of the CBDC Forum will enable the Bank of Japan to gather input and knowledge from private businesses involved in retail payments, further enriching the discussion around the potential introduction of CBDC. The Bank of Japan reiterates that public discussions will play a crucial role in determining whether to introduce a CBDC in the future.

The report also highlights the Bank of Japan’s interest in distributed ledger technology (DLT), including blockchain, for potential integration with the CBDC. It references overseas CBDC demonstration experiments, where collaborations between CBDC systems and DLT platforms have been observed, often involving the tokenization and distribution of assets on DLT platforms. The Bank of Japan envisions a similar approach, where assets to be exchanged between the CBDC and DLT platforms would be initially secured in their respective systems. If successful, the final exchange would occur after processing interlocking with asset preservation (escrow) mechanisms.

Furthermore, the report reveals that during Phase 2 of the proof of concept, the Bank of Japan verified limits on holding amounts, transaction amounts, and the number of transactions to ensure the stability of the financial system.

Globally, the adoption of CBDCs is gaining momentum. According to data from the American organization “Atlantic Council,” 18 countries and regions worldwide are currently conducting CBDC pilot tests, with 11 already having launched their digital currencies.

The Bank of Japan’s report signifies the country’s dedication to exploring the potential of a CBDC and its commitment to thoroughly assessing the technical and operational aspects before making any conclusive decisions. As the financial landscape continues to evolve, the Bank of Japan aims to stay at the forefront of innovation, preparing for a future that may include a digital yen.

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