Bank of Japan has recently launched a CBDC API Sandbox. The central bank had run 2 previous proofs of concept for a digital yen, the latest coming to an end about a year ago. Unlike the proofs of concept, the sandbox work will cover not just the CBDC platform, but will involve end-to-end experiments, including with intermediaries. Apart from APIs, the proposal is to explore interoperability with external systems and additional functionality.
The sandbox has extensive industry engagement and there are 5 working groups. Initially, the work is more of desk-based research, however, there are documented plans for experiment-based work.
PRIVACY, SCALABILITY
Some of the areas where newer functionality of the CBDC that are being explored in the current phase are privacy and scalability. It is expected that personal data would be separated from payment data, like in the case of the digital euro. There could be provision to sell data, including details of purchases by the public in case there is consent.
The central bank had initiated a pilot program since April 2023, aiming to conduct technical evaluations not explored in the previous proofs of Concept phases. The 2 specific areas of work specified in the pilot program are development of a system for the pilot program and experimentation, and CBDC Forum where Bank of Japan acts as the secretariat and conducts practical discussions with private businesses related to retail payments.
DATA DISTRIBUTION
Bank of Japan has hinted that the data distribution function would be external to the central bank and intermediaries. It also believes that the CBDC platform should be capable of processing tens of thousands of transactions per second during normal periods and more than 100,000 transactions per second during peak times.
Other functionalities discussed included compatibility with offline payments, extending functionality including programmable payments, and security.
5 WORKING GROUPS
According to the central bank, there would be 5 working groups, each group covering the following topics:
1. Connection between CBDC system and external infrastructure/systems
2. Additional services & CBDC ecosystem
3. KYC and user authentication/authorization
4. New technologies and CBDC
5. User devices and UI/UX
There is also another working group proposed, which will explore the coexistence between CBDC and other payment methods, including electronic money.
The Bank of Japan has so far not formally decided to introduce a CBDC as it believes it would be a challenging task to promote the CBDC in a situation where consumer awareness of the concept is very low in the country. It is now part of Project Agora, the Bank of International Settlements project for cross border payments using tokenization. Japan’s first tokenized deposit solution, called DCJPY, is now set for launch soon.
AKIN TO PROJECT ROSALIND
The CBDC API sandbox in fact draws inspiration from the Bank of England’s Project Rosalind. The focus of study would now be beyond a CBDC platform but could include proposals to integrate intermediaries and probe both interoperability with external systems and the addition of new features.
The proposal to develop a CBDC in Japan should be viewed the context of Japan remaining one of the world’s few cash-centric economies. The country is aging at the fastest rate in the world with around a third of its citizens aged 65 or older. In spite of this situation, the country is interested in creating a CBDC, especially to facilitate better cross-border payments.
SLOW MOVE TO CASHLESS
Several studies have shown that Japan is slowly but steadily inching towards a cashless payment system. Citizens are now more comfortable with using ATMs, online transactions and credit cards, However, the country remains one of the world’s few cash-centric economies. The ratio of cash in circulation to nominal GDP has been around 20%, higher than several Asian countries. One of the reasons for cash transactions still remaining popular is the fact that more than a third of its citizens are above the age of 65 and they are not adept at online cash handling. It has also come to light that even hospitals and of course small stores do not want to install equipment for online transactions and adopt digital systems.
Japan, unlike other developed countries, is not keen on developing a Central Bank Digital Currency (CBDC). The central bank, Bank of Japan, has said it has no immediate plans for a CBDC, but it is evaluating the pros and cons of a digital currency and how quickly, in case it decides to have CBDC, a plan can be brought to fruition. It is definitely working on a CBDC that it can use for cross-border transactions. It is already collaborating with the Bank for International Settlements (BIS) and is part of the Innovation Hub, which has taken up several cross-border currency projects.
A survey conducted by Bank of Japan sometime in early 2024 had revealed that familiarity with the digital yen concept is very low – just 3.1% of consumers surveyed said they knew about a CBDC, while 20% said they had heard of it but did not know much. Meanwhile, Japan has its own blockchain-backed digital currency, created by a group of Japanese organizations and managed by the Digital Currency Forum, which has 4 private banks, telcos, railway operators and corporates like Mitsubishi. Japan’s central bank, Financial Services Agency, and 3 relevant ministries as members. The digital currency is called DCJPY.