Japan’s Central Bank Experiments With Digital Currency

izmir, Turkey - September 28, 2018 Close up ethereum ripple litecoin bitcoin dash coins shot in metallic black background in studio.
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With the continued interest in Bitcoin and other cryptocurrencies, Japan is going to begin experiments to create a government-backed monetary token. In a statement, the Bank of Japan confirmed it would begin researching the feasibility of creating its own central bank digital currency.

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Experiments Focused on Creating and Redeeming Digital Yen

In October 2020, the Bank of Japan issued a working paper outlining its approach to creating a central bank digital currency. While it did not anticipate the need to issue a digital currency, it created a research path in order to “prepare thoroughly to respond to changes in circumstances in an appropriate manner” by expanding from conceptual research to conducting experiments to test the feasibility of a cryptocurrency’s core functions and features.

In order to be considered successful, the digital currency must meet a number of requirements. The coin must be universally accessible through common devices such as credit or debit cards; it must have built-in security measures to deter counterfeiting; and it must be available at all times. A central bank digital currency must also offer instant payment capability and be interoperable with other payment and settlement systems.

The first phase of the digital currency experiment will focus on a “test environment” for core functions of the central bank digital currency —  “issuance, distribution and redemption.” This phase is expected to last about a year and run through March 2022. 

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After phase one, the bank will explore a second proof of concept phase where the coin will go through feasibility tests on additional features. If both phases are successful and the bank determines it can move forward, it would work with a number of private payment service providers to create a pilot program.

While the experiment is the first step towards a bank-backed digital token, it would still take several years for the coins to be distributed and used in everyday spending. A number of stakeholders, including commercial banks, non-bank payment service providers, legal experts and public authorities, would all need to create a common framework for the coins’ circulation and usage.

Move Comes as Major Payment Providers Move Towards Digital Coins

The Bank of Japan experiment begins as major payment providers are finding ways to implement digital coins as part of their regular infrastructure. In March, Visa announced it would begin using USD Coin — a digital coin backed by the value of the U.S. dollar — to settle transactions on the Ethereum blockchain.

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