Japan central bank explores offline CBDC payments

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Japan’s central bank has been conducting research into the applicability of a central bank digital currency. In its latest study, the Bank of Japan (BoJ) delved into the offline usage of a CBDC as it seeks to cater to the two biggest features for digital currencies—resilience and universal access.

In the research paper which it published on its website, the BoJ recognized that Japan faces unique challenges that must be considered before launching a CBDC. They include earthquakes and power outages, which makes it crucial to have the CBDC usable offline.

Despite being viewed as one of the most technologically advanced countries globally, Japan’s smartphone penetration stands at just 65%. The use of cash is also prevalent, with only 20% of the payments happening via digital means.

Offline usability can be enabled through several ways, one of which is the use of a SIM card chip. This allows even those without a smartphone to use the CBDC. However, the BoJ notes that this method would not be user-friendly.

Alternatively, the bank could create its own debit cards similar to Visa and Mastercard. These types of cards are also popular in public transport in Japan. However, the challenge lies in keying in the value of the payment in an offline setting. The users would have to use a smartphone or a POS machine.

The regulator suggested other methods, including a debit card that comes with a small screen and keypad for keying in the payment value.

However, almost all the offline payment methods have common challenges. They include security, especially at an era where hacking is prevalent, as well as enforcement of AML and CFT rules.

The research paper also delved briefly into other aspects of a CBDC. These included whether to use a centralized or decentralized blockchain. A centralized blockchain is faster, but is prone to single points of failure. A decentralized blockchain, on the other hand, is more secure, but the consensus mechanism makes the transactions slower.

The BoJ revealed that it was still exploring the possibility of issuing a CBDC, and that it was working with other global central banks to refine its CBDC technology.

Earlier this year, the BoJ’s deputy governor Masayoshi Amamiya called on Japan to be prepared for CBDC launch should the need arise. Amamiya stated at the time that the rate of financial innovation in the country could necessitate a CBDC soon.