Japan’s central bank begins research into digital yen

The Bank of Japan has announced its intentions to begin researching and developing its own central bank digital currency

The Central Bank of Japan has announced it is to start experimenting with a central bank digital currency (CBDC) to test its feasibility from a technical perspective.

This is the first time that the Bank of Japan has expressed its intentions to commence a Proof of Concept (POC) process with the digital yen. The bank has yet to reveal a timetable on its research and development.

According to a report released by the bank entitled Technical Hurdles for CBDC, it would “check the feasibility of CBDC from technical perspectives, collaborate with other central banks and relevant institutions, and consider introducing a CBDC.”

The Bank of Japan believes that the two main technical hurdles it will encounter throughout its study will be ensuring universal access to the technology and building good resilience for the asset.

According to a study conducted by Nikkei in 2018, only 65% of Japanese people have smartphones. The central bank has emphasised that it will be important to develop a CBDC that is available to a wide variety of users.

The CBDC’s resilience refers to the capacity for the asset to be available offline when there is no electricity. The central bank has made this feature a priority, as it influences the CBDC’s capacity to be used in emergency situations, such as earthquakes.

The Bank of Japan is still in discussion on the merits of using a blockchain for their CBDC. While a centralised system is capable of fast transaction speeds and a significant volume of work, the entire system could tank if a single point of failure exists.

Conversely, CBDCs based on decentralised ledger technology (DLT) are not as affected by a single point of failure and are more resilient. However, this system does require a longer amount of time for transactions since blockchain networks would need a consensus between multiple validators.

“Both centralized and decentralized types have pros and cons […] in the case of massive transactions for retail use cases in advanced countries, it is better to adopt the centralized type […] in the case where the amount of transaction is limited and resilience and future possibility are prioritized, there is room to consider the decentralized type.” The Bank of Japan explained.

It was announced in February that the central banks of the eurozone, United Kingdom, Canada, Switzerland, Sweden and Japan were to collaborate on researching digital currencies.