BOJ Publishes Approach to Development of Central Bank Digital Currency

There are two main variants of CBDC, namely "wholesale" CBDC and "general purpose" CBDC. Expected functions and roles of a general purpose CBDC, if introduced in Japan, include introducing a payment instrument alongside cash, supporting private payment services, and developing payment and settlement systems suitable for a digital society. Even if BOJ were to issue a general purpose CBDC, it would be appropriate to maintain a two-tiered payment and settlement system of a central bank and the private sector. This means that CBDC would be issued indirectly through intermediaries. In issuing CBDC, careful consideration is required for the functional requirements and economic design of CBDC from the perspective of the effectiveness of monetary policy and financial stability. It is desirable to ensure that CBDC could be used for cross-border payments while thoroughly monitoring developments in each central bank. BOJ will continue to make the necessary preparations to respond to changes in circumstances in an appropriate manner. The planned next steps include the following:

• BOJ will explore the general purpose CBDC in a more concrete and practical way by conducting experiments, rather than confining itself to conceptual research as before. BOJ will first test the technical feasibility of the core functions and features required for a CBDC through a Proof of Concept (PoC). It will then consider the need for a pilot program if necessary. In the Proof of Concept Phase 1, BOJ will develop a test environment for the CBDC system and conduct experiments on the basic functions that are core to CBDC as a payment instrument. In the Proof of Concept Phase 2, BOJ will implement additional functions of CBDC in the test environment developed in Phase 1 and test their feasibility. BOJ aims to start Phase 1 in early fiscal year 2021.
• In tandem with experiments, BOJ will proceed to successively explore topics such as cooperation and role-sharing arrangements between a central bank and payment service providers, economic design of CBDC, privacy protection and handling of end-user information, and standardization of information technology relating to digital currency.
• BOJ will continue to deepen understanding of the core features of a CBDC and their impact on practices, while closely coordinating with other central banks, and to use the information obtained in its CBDC exploration. BOJ will emphasize the application of the knowledge of various stakeholders in considering CBDC issuance.

Keywords: Asia Pacific, Japan, Banking, CBDC, Digital Currency, Cross-Border Payments, Central Banks, PMI, BOJ