Japan Central Bank To Start Testing The Digital Yen CBDC

CBDC Developments in Asia are currently on a swing and this time it’s the Bank of Japan (BOJ) who has announced that it will start the technical testing of its central bank digital currency (CBDC).

The central bank of Japan said that it will initiate a Proof-of-Concept for the testing of Digital Yen, as per the research paper published last week on July 2. In the paper BoJ has said that the country’s financial system involves some major challenges that need to be considered before launching the CBDC. The report cites two major technical hurdles: resilience and universal access.

The central bank will be testing its CBDC for its two biggest features which include resilience and universal access. Another major feature for the BoJ CBDC will be that it should be available for the offline use.

While Japan is undoubtedly considered as one the world’s most technologically advanced countries, digital payments contribute only 20% with cash largely dominating the payments market. Thus, offline usage of the CBDC will be a crucial application in the country’s financial ecosystem.

Offline use of CBDC can be enabled in different ways one of which is based on the SIM card use. Thus, users who have a simple mobile phone but not a smartphone can still make use of it. But the central bank of Japan thinks that this method would not be much user-friendly.

In the report, the bank stated it would “check the feasibility of CBDC from technical perspectives, collaborate with other central banks and relevant institutions, and consider introducing a CBDC.”

Another alternative which the bank is working upon is creating its own debit card similar to MasterCard and Visa. These sort of cards are very much popular in Japan’s public transport systems.

The BoJ is also working out options whether or not to use blockchain for its CBDC purpose. The centralized systems are fast, scalable, and can accommodate large capacity transactions easily. But again, they are always vulnerable to a single point of failure.

While the blockchain technology helps to address some of these issues, it has some other concerns like not able to handle multitude of transactions every second. The Bank of Japan concluded noting: “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.”