Experts’ Meeting on CBDC of the Ministry of Finance (9th Session) — Secretariat’s Presentation

The Ministry of Finance held its ninth “Experts’ Meeting on CBDC” on Tuesday, and published the secretariat’s presentation (in Japanese), which delves into the deliberations and preliminary framework for the potential introduction of a Central Bank Digital Currency (CBDC) in Japan. It examines the current landscape of cash and digital payment systems, outlines key considerations for a Japanese CBDC, and details the potential benefits, challenges, and necessary safeguards associated with such a transformative monetary innovation.

The 7th CBDC Forum of the Bank of Japan was held one day later.

1. Introduction: Embracing the Digital Transformation of Money

In an era marked by the rapid digitalization of economies and societies, the global financial landscape is witnessing a paradigm shift with the emergence of Central Bank Digital Currencies (CBDCs). These digital representations of a country’s fiat currency, issued and backed by the central bank, hold the promise of revolutionizing traditional payment systems and reshaping the way we interact with money.

Japan, a nation at the forefront of technological innovation, recognizes the transformative potential of CBDCs. As part of its commitment to fostering a dynamic and inclusive financial ecosystem, the Japanese government, in collaboration with the Bank of Japan, has embarked on a comprehensive exploration of the feasibility and implications of introducing a CBDC in Japan.

This report consolidates the insights gleaned from extensive deliberations within the “Liaison and Coordination Committee on Central Bank Digital Currency” comprising representatives from relevant ministries and agencies and the Bank of Japan. It serves as a crucial step towards shaping a national dialogue on CBDCs, ensuring that any future decisions regarding their issuance are informed by a deep understanding of their potential benefits, challenges, and implications for the Japanese economy and society.

2. Current Landscape: Navigating the Evolving World of Money and Payments

Before delving into the intricacies of a Japanese CBDC, it is crucial to understand the current state of Japan’s payment landscape and the global context surrounding CBDCs.

2.1 The Evolving Payments Landscape in Japan

• Rise of Cashless Payments: Japan, traditionally a cash-centric society, is witnessing a gradual yet steady increase in the adoption of cashless payment methods. This shift is driven by factors such as technological advancements, government initiatives promoting cashless transactions, and changing consumer preferences, particularly among younger generations.
• Diversity in Cashless Payment Options: The Japanese payments ecosystem offers a diverse range of cashless options, including credit cards, debit cards, prepaid cards, and mobile payment services. This competitive landscape has fostered innovation and provided consumers with a plethora of choices for their daily transactions.

2.2 The Global CBDC Momentum

• International Exploration of CBDCs: The exploration of CBDCs has gained significant traction globally, with central banks around the world actively researching, experimenting, and in some cases, even piloting their own digital currencies. This surge in interest stems from several factors:
• The Emergence of Stablecoins and Other Digital Assets: The rise of private digital currencies, such as stablecoins, has prompted central banks to examine the potential impact on monetary sovereignty and financial stability. CBDCs, being central bank-backed, offer a compelling alternative within the digital currency landscape.
• Enhancing Cross-Border Payments: Cross-border payments often involve multiple intermediaries, resulting in delays and high transaction costs. CBDCs have the potential to streamline these processes, making international payments faster, cheaper, and more efficient.
• Promoting Financial Inclusion: In many parts of the world, a significant portion of the population remains unbanked or underbanked, lacking access to traditional financial services. CBDCs, with their potential for wider accessibility and lower barriers to entry, offer a promising avenue for promoting financial inclusion.

2.3 The Bank of Japan’s CBDC Initiatives

• Proactive Research and Experimentation: The Bank of Japan has been actively engaged in researching and experimenting with CBDC technology. The central bank has conducted proof-of-concept trials and simulations to gain a deeper understanding of the technical aspects, potential benefits, and challenges associated with CBDC issuance.
• International Collaboration: Recognizing that CBDCs are a global phenomenon, the Bank of Japan actively collaborates with other central banks and international organizations to share knowledge, best practices, and coordinate efforts in CBDC development.

3. Envisioning a Japanese CBDC: Key Considerations and Design Principles

Based on the deliberations of the Liaison and Coordination Committee and the insights gleaned from global CBDC developments, this section outlines the key considerations and design principles that would guide the potential development of a Japanese CBDC.

3.1 Fundamental Purpose and Objectives

• Complementing Existing Payment Systems: A Japanese CBDC would primarily aim to complement existing payment systems, providing an additional, secure, and efficient option for both consumers and businesses.
• Enhancing the National Payment Infrastructure: The introduction of a CBDC could serve as a catalyst for further innovation and efficiency within Japan’s payment infrastructure, potentially lowering transaction costs, improving interoperability between different payment systems, and enhancing overall resilience.
• Maintaining Financial Stability: Safeguarding financial stability remains a paramount concern. The design and implementation of a Japanese CBDC would prioritize measures to mitigate any potential risks to the existing financial system, such as rapid shifts in deposits or disruptions to financial intermediation.

3.2 Key Design Features

• Two-Tiered Distribution System: Similar to the issuance of physical cash, a Japanese CBDC is envisioned to operate under a two-tiered system. The Bank of Japan would issue the CBDC and maintain the core ledger, while private financial institutions and potentially other regulated entities would act as intermediaries, handling the distribution and day-to-day management of CBDC accounts for users.
• User Privacy and Data Protection: Protecting user privacy and ensuring the secure handling of personal data are paramount considerations. The design of a Japanese CBDC would incorporate robust privacy-enhancing technologies and adhere to stringent data protection regulations to address public concerns and foster trust.
• Coexistence with Cash: The issuance of a CBDC would not necessarily replace physical cash. The Japanese government remains committed to providing cash as an option for as long as there is public demand for it.

3.3 Addressing Potential Challenges

• Cybersecurity and System Resilience: A CBDC system must be highly resilient and secure against cyberattacks and other potential threats. Robust security measures, including advanced encryption and multi-factor authentication, would be essential to protect the integrity and stability of the system.
• Preventing Illicit Activities: As with any financial instrument, CBDCs could be potentially misused for illicit activities such as money laundering and terrorism financing. The design and implementation of a Japanese CBDC would incorporate robust anti-money laundering (AML) and counter-terrorism financing (CFT) measures to mitigate these risks.
• Ensuring Accessibility and Inclusivity: A Japanese CBDC should be accessible to all segments of society, regardless of their technological proficiency or access to digital devices. This might involve providing offline functionality, user-friendly interfaces, and potential partnerships with community organizations to reach underserved populations.

4. Exploring the Potential Impact of a Japanese CBDC

The introduction of a CBDC in Japan has the potential to bring about significant changes across various aspects of the economy and society. This section explores some of the potential impacts, both positive and negative, that need to be carefully considered.

4.1 Potential Benefits

• Enhanced Efficiency and Lower Transaction Costs: By streamlining payment processes and potentially reducing the reliance on intermediaries, a CBDC could lead to lower transaction costs for consumers and businesses. This could particularly benefit small and medium-sized enterprises (SMEs), which often face higher transaction fees for digital payments.
• Increased Innovation in Financial Services: The introduction of a CBDC could foster innovation within the financial services sector. It could pave the way for the development of new financial products and services, such as programmable money, micropayments, and smart contracts.
• Strengthened Monetary Policy Transmission: A CBDC could potentially enhance the effectiveness of monetary policy by providing central banks with more direct tools to influence interest rates and money supply.
• Improved Cross-Border Payments: CBDCs have the potential to make cross-border payments faster, cheaper, and more transparent. This could benefit businesses engaged in international trade and individuals making cross-border remittances.

4.2 Potential Challenges and Risks

• Impact on Financial Intermediation: The introduction of a CBDC could potentially disintermediate traditional financial institutions, such as banks, by offering a direct alternative for holding and transacting in central bank money. This could have implications for bank funding models, credit creation, and the overall structure of the financial system.
• Privacy Concerns and Data Security Risks: The digital nature of CBDCs raises concerns about user privacy and data security. While privacy-enhancing technologies can be incorporated, the potential for data breaches, surveillance, and misuse of personal information needs to be addressed.
• Exacerbating the Digital Divide: The introduction of a CBDC could potentially widen the digital divide if not carefully implemented. Ensuring accessibility and inclusivity for all segments of society, including those without access to digital devices or the necessary technological skills, is crucial.

5. Public Engagement and Future Steps

The potential introduction of a CBDC in Japan is a significant decision with far-reaching implications for the economy and society. It is essential to foster a broad and inclusive public dialogue to ensure that any future decisions are well-informed and reflect the needs and concerns of all stakeholders.

• Transparent and Accessible Information: The government and the Bank of Japan are committed to providing clear, accurate, and accessible information to the public about CBDCs, their potential benefits, risks, and implications. This will involve leveraging various communication channels, including public forums, educational materials, and online platforms.
• Engaging with Stakeholders: A comprehensive stakeholder engagement process will be crucial in gathering feedback, addressing concerns, and incorporating diverse perspectives into the design and implementation of a potential Japanese CBDC. This will involve engaging with consumers, businesses, financial institutions, technology providers, academics, and civil society organizations.
• Pilot Programs and Further Research: Pilot programs and further research will play a vital role in testing different design options, assessing the practical implications of a CBDC, and identifying any potential challenges or unintended consequences. These initiatives will be conducted in a controlled environment and will provide valuable insights for informing future policy decisions.

Conclusion: Shaping the Future of Money in Japan

The exploration of CBDCs represents a pivotal moment in the evolution of money and payments. Japan, with its technological prowess and commitment to financial innovation, is well-positioned to play a leading role in shaping the future of money in the digital age.

The deliberations of the Liaison and Coordination Committee, as outlined in this report, represent a crucial step towards building a shared understanding of the potential benefits, challenges, and implications of a Japanese CBDC. As the exploration process continues, public engagement, stakeholder collaboration, and rigorous research and experimentation will be essential in guiding the development of a CBDC that serves the best interests of Japan’s economy and society.

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