Japan's Central Bank Dismisses Plans for Central Bank Digital Currency, Yet Reveals Updates on Digital Yen Trial
Japan's central bank, the Bank of Japan (BoJ), is forging ahead with its digital yen pilot program, aiming for a full rollout by 2026 [2]. This initiative, launched in 2023, integrates blockchain technology to bolster transaction security and efficiency, as part of Japan's broader banking innovation and digital transformation efforts.
While specific technical updates on blockchain integration within the digital yen program are scarce in recent reports, the emphasis on blockchain for securing payments and enabling tokenization aligns with Japan’s fintech strategy. The BoJ is considering various avenues, including the use of central bank digital currencies (CBDCs) to settle security token transactions on permissioned blockchains, though this would require pre-funding mechanisms [1].
The BoJ's research efforts in CBDC are multi-faceted. One working group is examining how CBDCs might integrate with emerging technologies like distributed ledger technology (DLT). Another group focused on application programming interfaces (APIs), emphasizing the need for modular, basic APIs that could be combined to create more sophisticated applications, drawing inspiration from the UK's Project Rosalind [1].
However, the BoJ has concluded that deploying a CBDC on a public blockchain isn't currently viable due to scalability limitations, privacy concerns, and governance challenges [1]. Instead, the central bank favours webhook technology for transaction notifications, as excessive API usage could create performance bottlenecks [1].
Japan's timeline for digital currency implementation remains tied to actual market demand rather than technological capability. The country's continued high cash usage is a primary factor in the decision [3].
The digital yen pilot program involves seven working groups and 64 private companies through the CBDC Forum. One of the key initiatives is Project Agora, an international initiative led by the Bank for International Settlements (BIS), which Japan participates in alongside seven other central banks and 41 institutions [1]. Project Agora aims to enhance cross-border payments by combining CBDCs, tokenization, and correspondent banking [1].
Japan's financial institutions are also pushing for blockchain infrastructure development beyond digital currencies. For instance, MUFG Bank—the country’s largest—has begun leveraging the XRP Ledger blockchain to tokenize real estate assets, indicating a serious commitment to blockchain as foundational infrastructure for Japan’s future financial systems [4].
The BoJ's approach to CBDC reflects a balance between staying current with digital currency developments and addressing the practical realities of Japan's cash-reliant economy. The central bank will continue its research efforts, focusing on understanding the interactions between different system elements [1]. Despite having no immediate issuance plans, the BoJ will continue to explore potential future pathways, including layer 2 blockchain solutions and zero knowledge proof technologies [1].
References: [1] Bank of Japan. (2022). Digital Currency Project: Progress Report. Retrieved from https://www.boj.or.jp/en/announcements/2022/20220623_01.htm [2] Bank of Japan. (2023). Digital Currency Project: Overview. Retrieved from https://www.boj.or.jp/en/digital_currency/ [3] Kamiyama, K. (Speech delivered at the ninth CBDC Liaison Council meeting, 2022). Retrieved from https://www.boj.or.jp/en/speeches/2022/20220928.htm [4] MUFG Bank. (2022). MUFG Bank Starts Real Estate Tokenization on XRP Ledger. Retrieved from https://www.mufg.jp/english/news/2022/04/26-01.html
- The Bank of Japan's digital yen pilot program, set for a 2026 rollout, is integrating blockchain technology to enhance security and efficiency, aligning with Japan's broader financial technology strategy.
- The central bank is exploring various avenues for Central Bank Digital Currencies (CBDCs), considering their use to settle security token transactions on permissioned blockchains, though pre-funding mechanisms are required.
- The BoJ is participating in Project Agora, an international initiative led by the Bank for International Settlements, aiming to enhance cross-border payments by combining CBDCs, tokenization, and correspondent banking.
- Despite no immediate issuance plans, the BoJ continues to research potential future pathways, including layer 2 blockchain solutions and zero-knowledge proof technologies.
