CBDC Initiatives of the Bank of Japan (7th CBDC Forum)

The Bank of Japan held its seventh “CBDC Forum” on Wednesday, and published the secretariat’s presentation (in Japanese). The document outlines the BOJ’s fundamental stance on CBDC, delves into the specifics of the pilot experiment currently underway, and elaborates on the structure and activities of the CBDC Forum, which involves numerous private sector stakeholders.

I. General Overview

The document commences by establishing the BOJ’s core philosophy on CBDC. Acknowledging the rapid advancements in information and communication technology (ICT) and the ensuing digital transformation across various sectors, the BOJ recognizes the potential for an increasing societal demand for CBDC. While the BOJ does not currently have plans for issuing a CBDC, it emphasizes the criticality of proactive preparation to ensure the stability and efficiency of the overall payment system in the face of future environmental changes.

The BOJ’s strategy for addressing this potential future demand for CBDC involves two key pillars:

1. Conducting pilot experiments: This involves building and validating an experimental system to test end-to-end processing flows and performance, while simultaneously fostering discussions and collaborative research within the CBDC Forum.
2. Undertaking institutional design considerations: This encompasses the establishment of the CBDC Forum, a platform for dialogue and research with retail payment-related private sector entities, on a wide range of CBDC-related issues.

The document highlights the BOJ’s vision for a CBDC as a supplementary payment method that coexists alongside cash, potentially serving as a foundation for private sector innovation in developing new and diverse payment services. This vision underscores the BOJ’s commitment to maintaining cash as a viable payment option while simultaneously exploring the potential of CBDC to enhance the financial landscape.

II. Pilot Experiment

The document then delves into the details of the BOJ’s pilot experiment, emphasizing its importance in providing valuable insights into the practical implementation of a CBDC. The pilot experiment is designed to be highly informative, incorporating features that mimic a real-world scenario:

1. End-to-end processing flow verification: The experiment involves the BOJ constructing an experimental system that simulates a full-fledged CBDC ecosystem, enabling comprehensive testing of its performance and functionality.
2. Collaborative research and institutional design considerations: The CBDC Forum, comprising a diverse array of private sector stakeholders, engages in extensive dialogue and research, contributing to the development of a robust and well-defined institutional framework for CBDC.

The document stresses the interconnected nature of these two facets, with the findings from the experimental system being integrated into the ongoing discussions and research within the CBDC Forum. This dynamic interplay ensures that the pilot experiment is informed by the broader insights gleaned from the collaborative process.

Key Features of the Pilot Experiment

The pilot experiment is designed with a strong focus on its potential for social implementation, incorporating features that address key considerations:

• Data Model: The experiment adopts a flexible data model that allows for various ledger design patterns, enabling the BOJ to explore different approaches without committing to a specific design at this stage.
• Privacy Considerations: The pilot experiment prioritizes privacy protection by separating the handling of customer personal data from the management of payment data, ensuring a robust framework for safeguarding sensitive information.
• Performance and Transaction Volume: Recognizing the need for a scalable system, the experiment aims to build a system capable of handling high transaction volumes and workloads. This objective necessitates thorough evaluation of potential technical challenges and the identification of suitable solutions.
• Extensibility: The system is designed with built-in features that facilitate future expansion of functionality and performance, addressing potential future needs while considering potential technical challenges.

System Architecture

The experimental system is planned to be built on a public cloud platform, ensuring scalability and resilience. It consists of a centralized system managed by the BOJ, a network of intermediary institutions, and a diverse set of endpoint devices representing user wallets and applications. This interconnected architecture simulates a real-world CBDC ecosystem, allowing for comprehensive testing of key functionalities.

Core Functions of the Experimental System

The pilot experiment is equipped with a comprehensive suite of functions that mirror the essential operations of a CBDC system:

1. Issuance: This function enables the creation of new CBDC by debiting the intermediary institution’s account at the BOJ and crediting the CBDC equivalent.
2. Disbursement: This function allows users to withdraw CBDC from their accounts at intermediary institutions, transferring funds from their traditional bank accounts to their CBDC wallets.
3. Transfer: This function facilitates the movement of CBDC between users, incorporating features such as automatic swing, automatic charging, and various transaction restrictions like balance limits.
4. Receipt: This function enables the acceptance of CBDC by intermediary institutions, crediting user accounts when CBDC is received from their wallets.
5. Retirement: This function allows intermediary institutions to retire CBDC, crediting their BOJ accounts and reducing their CBDC holdings.

Peripheral Functions

The experimental system also includes several peripheral functions that enhance the functionality and user experience of the CBDC ecosystem:

1. Scheduled Transfer (Bulk Transfer): This feature allows for the pre-registration of future transfer instructions, enabling automatic execution upon the designated date. Bulk transfer capability allows for the simultaneous execution of multiple transaction instructions.
2. Reverse Transfer: This function enables a recipient to initiate a transfer back to the sender, subject to the sender’s prior approval. The recipient sends a transaction instruction to the sender’s account, triggering the execution of the specified reverse transfer.
3. Balance Inquiry and Statement Viewing: This function enables users to check their CBDC balances and view their transaction history.

Desktop Research Topics

The pilot experiment also serves as a platform for exploring a wide range of theoretical considerations regarding CBDC, encompassing both functional and non-functional aspects:

Functional Considerations:

• Implementation of Non-Implemented Functions: The BOJ plans to explore the feasibility and design considerations for various functions not implemented in the experimental system, such as account opening and closing, transfer requests, recurring payments, and account number restrictions.
• Interoperability with External Systems: To ensure seamless integration with systems outside the CBDC ecosystem, the BOJ will conduct research on the necessary adjustments and design modifications for the CBDC system to maintain interoperability.
• External Connection Interfaces: The BOJ will explore the design and considerations for external connection interfaces, such as API gateways, necessary for communication between the CBDC system and intermediary institutions, additional service providers, and other external entities.
• Compatibility with Offline Payment: The BOJ will study the functions and extensibility required for the online CBDC system to support offline payment capabilities.
• Privacy Protection Technologies: Recognizing the importance of data privacy, the BOJ will evaluate various privacy protection technologies (PETs) to ensure compliance with relevant legal and regulatory requirements.

Non-Functional Considerations:

• High Availability: The BOJ will explore methods for minimizing system downtime and ensuring high availability of the CBDC system.
• Functional and Performance Extensibility: The BOJ will evaluate mechanisms for facilitating the addition of new functionalities and enhancing system performance.
• Security Measures: The BOJ will conduct research on the security measures necessary to protect the CBDC system from potential threats.

CBDC Forum Participants

The CBDC Forum, a cornerstone of the BOJ’s CBDC research, comprises a diverse and extensive group of private sector stakeholders, representing various segments of the financial services industry:

• Financial institutions: This includes commercial banks, regional banks, online banks, and credit unions.
• Payment service providers: This encompasses companies involved in various payment services, including credit card companies, electronic money issuers, and mobile payment providers.
• Technology companies: This group comprises technology firms specializing in areas relevant to CBDC, such as information technology, cloud computing, data analytics, and cybersecurity.
• Other stakeholders: This category includes insurance companies, securities firms, and consulting firms, all of whom contribute their expertise to the CBDC discussion.

CBDC Forum Structure and Activities

The CBDC Forum operates through a dynamic structure, employing multiple working groups (WGs) to delve into specific areas of research:

• WG1: CBDC System and External Infrastructure/System Connections: This WG focuses on the intricacies of connecting the CBDC system with external systems, including bank accounting systems and private payment infrastructure.
• WG2: Additional Services and CBDC Ecosystem: This WG explores the potential for additional services within the CBDC ecosystem, examining various use cases and the role of CBDC in enabling a broader range of financial services.
• WG3: KYC and User Authentication/Authorization: This WG examines the implementation of KYC (Know Your Customer), AML/CFT (Anti-Money Laundering and Countering the Financing of Terrorism), and user authentication and authorization within the CBDC ecosystem.
• WG4: Emerging Technologies and CBDC: This WG delves into the potential application of innovative technologies for enhancing the CBDC system, exploring alternative ledger design patterns, advanced database technologies, and interoperability with other payment methods and assets.
• WG5: User Devices and UI/UX: This WG focuses on the design and user experience of user devices and applications within the CBDC ecosystem, considering factors like accessibility, usability, and offline payment functionality.

The BOJ emphasizes the dynamic nature of the CBDC Forum, with the composition and focus of WGs subject to adjustments based on evolving circumstances and the progress of discussions. This adaptability allows the forum to remain responsive to emerging trends and address critical areas of research as they arise.

WG1: CBDC System and External Infrastructure/System Connections

This WG focuses on the technical intricacies of seamlessly integrating the CBDC system with external financial systems, particularly accounting systems. The WG examines the business requirements and connection mechanisms needed for the key functions of disbursement and receipt, ensuring a smooth transition of funds between traditional banking systems and the CBDC ecosystem. The discussions within this WG aim to understand the nuances of various connection approaches, recognizing their limitations and potential technical challenges.

WG2: Additional Services and CBDC Ecosystem

This WG explores the broader implications of CBDC beyond its core functionalities, envisioning a vibrant and dynamic ecosystem of financial services. The WG engages in conceptualizing the CBDC ecosystem, analyzing existing examples from both domestic and international contexts, and exploring the potential for innovative services facilitated by CBDC. The WG delves into the technical aspects of enabling these additional services, particularly the role of open APIs and SDKs in enabling external integration and creating a thriving developer community.

WG3: KYC and User Authentication/Authorization

This WG addresses the critical aspects of KYC, AML/CFT, and user authentication within the CBDC ecosystem. The WG examines the existing practices in traditional financial services, analyzes the relevant legal and regulatory requirements, and identifies the specific challenges and opportunities posed by CBDC. The discussions aim to explore various authentication methods, balancing security with user experience, and determining appropriate authentication levels based on risk profiles.

WG4: Emerging Technologies and CBDC

This WG explores the potential applications of cutting-edge technologies in enhancing the CBDC system, focusing on both the back-end and front-end aspects of the system. The WG explores alternative data models like UTXO (Unspent Transaction Output) and explores the benefits and challenges of employing advanced database technologies. The WG also examines the integration of CBDC with other payment methods and assets, considering the implications of stablecoins, asset tokenization, and interoperability with DLT (Distributed Ledger Technology) platforms.

WG5: User Devices and UI/UX

This WG focuses on the user-facing aspects of the CBDC ecosystem, considering the design of user devices and the overall user experience. The WG analyzes the flow of operations from user devices to intermediary institution systems, evaluating various scenarios like online and offline transactions, and ensuring accessibility for all users. The discussions emphasize the importance of universal design principles, aiming for a user interface that is intuitive, accessible, and adaptable to diverse user needs.

API Sandbox

In addition to the CBDC Forum, the BOJ and participating members of WG2 have established a collaborative experimental environment in the cloud, known as the API Sandbox. This sandbox serves as a testing ground for exploring the potential of additional services within the CBDC ecosystem, focusing on the extensibility of CBDC functionalities through API integration. This hands-on approach enables participants to experiment with different API configurations, develop and test new services, and share knowledge about the potential for CBDC to enhance the financial landscape.

Conclusion

This comprehensive overview of the Bank of Japan’s CBDC initiatives demonstrates the BOJ’s proactive approach to exploring the potential of CBDC in Japan. The pilot experiment, coupled with the extensive research and collaboration within the CBDC Forum, provides valuable insights into the practical implementation of CBDC and its implications for the financial services industry. The BOJ’s commitment to continued research and experimentation reflects its dedication to ensuring a robust, secure, and inclusive financial ecosystem that adapts to the evolving demands of the digital age.

This document provides a detailed roadmap for the BOJ’s CBDC journey, highlighting its meticulous approach to exploring the technological, institutional, and social dimensions of this groundbreaking financial innovation. The insights gleaned from this initiative will be crucial in shaping the future of payments in Japan and potentially influencing the global discussion on CBDC.

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