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Japan’s Central Bank Moves To The Phase 2 In CBDC Research

Since April 2020 the Bank of Japan (BOJ) has started developing the proof of concept for a national CBDC. In May 2021 they reported on the…

Since April 2020 the Bank of Japan (BOJ) has started developing the proof of concept for a national CBDC. In May 2021 they reported on the preliminary findings and moved to Phase 2 that investigates “more complex additional functions” and possible implications on financial stability and compatibility with the private banking sector. For the latter, the Liaison and Coordination Committee on CBDC was established that included members from the government, BOJ and the private sector.

In Phase 1 BOJ was mostly focused on performance evaluation of three designs: 1) account based (like that of Ethereum), with ledger only with BOJ, 2) account based, with ledgers with BOJ and intermediaries and 3) ID based or “token-based ledger” (like that of Bitcoin) with ledger only with BOJ. The results of this experimental work showed a preference for design 1) over design 2). Design 3), while thoroughly considered because of its similarity to Bitcoin, was found to be difficult to scale. However only a fixed-value option of design 3) where the coins tokens can be split and merged was evaluated, while flexible-value option could potentially bring an advantage over the account-based designs. The result report concluded that all three designs remain within the evaluation scope for the Phase 2.

Phase 2 of the research will be looking at broader functions of CBDC such as convenience of use, economic designs that would ensure the financial stability and compatibility with private banks. The Liaison and Coordination Committee (LCC) interim report issued in July 2022 summarized the main experimental topics for the Phase 2 in the following table:

Additionally, the LCC report will outline a possible pilot program, privacy and handling of user information, offline services and cross-border payments. We will cover more on their choices of these aspects as they develop.

BOJ is a member of the CDBC coalition that includes seven Central Banks (US, EU, UK, Canada, Switzerland and Japan) and Bank for International Settlements, formed “to evaluate the feasibility of central bank digital currencies by major economies.” Each of these countries have their own workgroups and projects aimed at research for a national CBDC and BOJ emphasized the importance of following the developments in these countries. Additionally, LCC report looks at the work of Sweden e-krona, Cambodia BAKONG, the Bahamas Sand Dollar, Eastern Caribbean Dcash, Nigerian eNaira, Jamaican CBDC and Indian Digital Rupee.