The Bank of Japan CBDC initiative is moving into its next stage as the central bank continues exploring how a digital currency could function within Japan’s payments system. After completing the first phase of its proof-of-concept testing, which focused on core functions such as issuance, distribution, and redemption, the Bank of Japan is preparing to examine additional technical capabilities.
Japan is one of many countries evaluating central bank digital currencies as payment systems become increasingly digital. With central banks around the world conducting research, pilots, and cross-border experiments, these projects could significantly reshape the payments landscape. The Bank of Japan’s work also comes as private-sector organizations in Japan pursue their own digital currency initiatives.
This brief posting at Ledger Insights simply announces that the Bank of Japan (BoJ) has completed some testing of a CBDC and will be moving into the next phase. Of course, we have been tracking progress across the globe with all sorts of alternative payment systems, including various methods of cryptocurrency. Since a predominance of central banks are piloting, testing, or studying the use of CBDCs, it becomes more easily expected that this landscape will be different in less than five years. The BoJ effort seems a similar path to the U.S. Fed, which recently released its phase I results of the Boston Fed and MIT collaboration on CBDCs, which is moving into phase II.
‘Today, the Bank of Japan (BoJ) announced that it has completed the first phase of its Central Bank Digital Currency (CBDC) Proof of Concept (PoC) on schedule and will begin its second phase in April…
The BoJ first published a paper on its approach to CBDC in October 2020, and it began the first phase of its PoC testing in April 2021. The initial stage targeted exploring the basic functions of a CBDC – namely, issuance, distribution and redemption.’
The article indicates that the BoJ is primarily testing consumer use cases, but also says that wholesale scenarios are being reviewed as well. This is similar in nature to other x-border experiments that we have been following recently, including the recent BIS release of their efforts with several central banks in this space. One interesting thing is that the article indicates that a commercialized version of the Japan CBDC is expected in 2023, so there is a timeline associated with the testing efforts reaching some conclusion.
‘While this PoC experiment focuses on a general purpose CBDC for consumer usage, the BoJ has also conducted experiments for a wholesale CBDC limited to financial institutions. For example, starting in 2016, a joint project with the European Central Bank explored distributed ledger technology (DLT), including for cross border payments…
Japan’s digital currency landscape has been abuzz in recent years, particularly thanks to the creation of a large private digital currency consortium in 2021, that involves some of Japan’s largest banks and industrial companies. The working name for the platform is the Digital Currency JPY (DCJPY), and it has plans to commercialize in 2023. In contrast, the BoJ has yet to announce if it will engage in a pilot program that will involve private payment service providers and users upon completion of the second phase of its CBDC trials.’
The progression of the Bank of Japan CBDC project demonstrates how central banks are moving beyond theoretical discussions about digital currencies and toward practical testing. By evaluating fundamental functions first and then advancing to more complex capabilities, the Bank of Japan can assess both the technical feasibility of a CBDC and its potential role within the country’s existing payment infrastructure.
The distinction between retail and wholesale applications will also be important. A general-purpose CBDC could provide consumers with another digital payment option, while wholesale applications could support transactions between financial institutions. The Bank of Japan’s earlier work with the European Central Bank on distributed ledger technology and cross-border payments demonstrates how digital currency research could eventually extend beyond domestic consumer transactions.
At the same time, Japan’s private sector is pursuing digital currency development through initiatives such as the Digital Currency JPY. The emergence of both central bank and private-sector projects creates an environment in which different approaches to digital money can be tested and evaluated.
As the Bank of Japan CBDC initiative advances, questions remain about whether the central bank will ultimately move from proof-of-concept testing to a broader pilot involving payment providers and consumers. However, the continued progression of the project, alongside similar initiatives from other central banks, indicates that CBDCs are becoming an increasingly significant area of payments research and development.
Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group