Bank of Japan publishes a CBDC report, to start pilot programs in 2021

Japan’s central bank intends on launching a central bank digital currency proof of concept (PoC) in 2021. In a recently-published report on its approach to CBDCs, the bank revealed that it’s preparing itself for a future in which CBDCs could become a critical part of the payments system.

The Bank of Japan believes that there’s a possibility of a surge in public demand for a CBDC, considering the rapid development of technological innovation. In a report titled ‘The Bank of Japan’s Approach to Central Bank Digital Currency’, the regulator broke down what roles it expects CBDCs to fulfill, the core features required, the factors to be considered before launch and how it intends on responding to the demand for a digital yen.

“The Bank will explore general purpose CBDC in a more concrete and practical way by conducting experiments, rather than confining itself to conceptual research as before,” the regulator stated. It will begin by testing the technical feasibility of the core functions and features of a CBDC through a PoC.

In the first phase of the PoC, the bank will develop a test environment for the CBDC system, including experiments on its issuance, distribution and redemption. In the following phase, it will implement additional functions and test them as well. The bank aims on starting the PoC phase 1 in early fiscal year 2021.

In line with the experiments, the bank will also cooperate with other central banks and coordinate with other stakeholders such as commercial banks, payment service providers, legal experts, IT specialists and public authorities.

In its paper, the Bank of Japan also outlined the core features expected of a CBDC as security, universal access, resilience, instant payment capability and interoperability. A CBDC’s relationship with price and financial stability, its promotion of innovation, relationship with cross-border payments and its handling of privacy are also critical to consider before issuance, the report stated.

Despite planning to start a PoC next year, the bank clarified that it currently has no plan to issue a CBDC. However, in July, it included a digital yen in its official economic plan.

The report comes just days after the Bank of Japan jointly released a CBDC report with the Bank for International Settlements and six other central banks. In their report, the banks claimed the report would help other central banks that were exploring CBDC issuance.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

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