Minutes of the Bank of Japan’s 7th Liaison Meeting on CBDC
The Bank of Japan has published the minutes of the seventh “Liaison Meeting on Central Bank Digital Currency (CBDC)” in Japanese (available on the Bank of Japan website), which was held on May 29. Please note that the following translation is for informational purposes only and may not be a perfect representation of the original Japanese text.
Regarding the progress of the pilot experiment
Japan Electronic Payment Services Association
We would like to comment on the operation of the CBDC Forum, in which member companies of our association are participating.
In WG2, which focuses on additional services, we initially anticipated that the theme would be collaboration between traditional financial services like banks and fintech companies. However, upon commencement, we have observed an extremely open and free-flowing discussion taking place in a very flat organizational structure. Furthermore, the engagement goes beyond mere exchanges of opinions and discussions. Through hands-on experiences like the API connection sandbox, participants are rediscovering fundamental yet crucial elements and gaining fresh insights. Moreover, participants from each company represent diverse roles, including planning, operations, engineering, and others, which leads to a broader understanding through interactions. This setting fosters a rich exchange of diverse viewpoints. As such, we believe the forum is being operated with a highly meaningful and essential approach, enabling discussions rarely seen in other forums.
In WG3, which focuses on authentication and authorization, fintech companies are gaining insights into the practical aspects of banks, which are not typically accessible. Additionally, the discussions provide opportunities to deepen the understanding of the operational challenges faced by each participating entity. By sharing and discussing different perspectives, the forum is exploring the future form and possibilities of CBDC, providing an excellent opportunity to consider the overall picture of payments. We understand that managing such a forum is extremely difficult, and we would like to express our gratitude for the skillful facilitation.
Japanese Bankers Association
Over the past three to four years, the discussion on CBDC has become more concrete, and practical considerations have significantly progressed. We believe the CBDC Forum, with its various working groups covering diverse themes, is making good progress.
Looking at individual WGs, we believe that collaboration between WGs is important for those with similar objectives, such as achieving programmability, despite differences in existing systems and new technologies. For example, in WG2, one theme is to ensure programmability in payments by connecting the CBDC system via API. Meanwhile, WG4 focuses on securing programmability within a framework like a unified ledger, where digital assets and tokenized deposits coexist. This highlights the importance of mutual cooperation.
Moreover, we believe that the efforts in WG2 regarding API connection and WG3 concerning KYC hold significant value, even if no specific use cases for CBDC are identified at this stage. We have high expectations for these endeavors. With various services offered in the private sector, we anticipate further progress in these areas by leveraging private sector technologies.
International Bankers Association of Japan
We find the discussions in the CBDC Forum to be very lively, particularly in WG2. In WG5, discussions revolve around payment methods accessible to anyone, anytime, and anywhere, which are unique to CBDC, being positioned as legal tender. The exploration of CBDC often involves envisioning its ideal future state, akin to digging a tunnel from the opposite side of a mountain, moving away from the current payment system. On the other hand, participants with hands-on experience in some WGs are engaging in discussions based on existing challenges, exploring how to build the CBDC system and adapt current regulations. Currently, foreign financial institutions, which are members of our association, are not participating in the CBDC Forum. However, we would appreciate it if there were any opportunities for them to join in the future.
Regional Banks Association of Japan
We have heard from participating members in the CBDC Forum that discussions are becoming increasingly concrete and active with each meeting. The Secretariat’s explanation today has left us with the same impression. We will continue to actively cooperate to further solidify the discussions on CBDC.
As the concretization of the CBDC discussions progresses rapidly, we request that you continue to share information on the progress of the pilot experiment and other relevant updates in a timely and appropriate manner to prevent an information gap from emerging between banks participating in the WGs and those that are not.
Second Association of Regional Banks
We feel that this liaison council serves as an excellent platform to confirm the progress of CBDC in Japan as a whole. This includes concrete discussions from each WG on various themes within the CBDC Forum and updates on the institutional design framework by the Ministry of Finance.
In Japan, where diverse private-sector digital payment methods are already available, it is crucial for all stakeholders to share concrete ideas about the significance of introducing CBDC and its potential use cases in each region. This will be vital to facilitate national-level discussions on the introduction of CBDC.
Therefore, we hope that the knowledge accumulated through the diverse discussions in each WG will continue to be widely shared within this council. We request that the Bank of Japan consider these points and facilitate discussions that enable various stakeholders to understand and engage in CBDC with a sense of agreement.
Center for Financial Industry Information Systems
We have three questions. Firstly, could you elaborate on the specific feedback mechanisms between the development and verification of the experimental system and the CBDC Forum, and how you plan to utilize them in the future?
Secondly, the minutes of the CBDC Forum’s WGs suggest that there are open and active discussions based on presentations from participants regarding the technological elements of the system. In this regard, we have observed an increasing expectation from participants for innovation, user-friendliness, flexibility in system interconnectivity, and security assurance. There’s a growing opinion that striking a balance among these factors is crucial. However, from our perspective, which deals with system security measures, we would like to point out that if the requirements for individual elements become too demanding, the overall system may become overly complex to maintain balance. This could potentially hinder smooth development and lead to unstable operations after launch. In other words, while balance is important, it could ironically become more difficult to achieve. To avoid such issues in system development, it is often emphasized that business requirements should be clearly defined from the outset. Therefore, we believe that in addition to building the target system for the pilot experiment, it is necessary to discuss the usage and business requirements of the entire CBDC-related system, including other payment systems and additional services. This essentially goes beyond the scope of a mere demonstration experiment. We would appreciate the Secretariat’s views on this point.
Thirdly, there seems to be an expectation from some CBDC Forum participants towards the Bank of Japan to take the lead in areas such as authentication for KYC, standardization and unification of API specifications, and establishment of common guidelines related to security. What are the Secretariat’s thoughts on this matter? Are there any plans to discuss these points in future WGs or API sandbox activities?
Bank of Japan
We would like to continue open and free discussions within the CBDC Forum. We appreciate your emphasis on the importance of information sharing and will keep it in mind.
Regarding your first question about the feedback between the experimental system development and the CBDC Forum, for example, in WG1, participants are working on clarifying the connection methods with the core banking system. We are incorporating these considerations into the design phase of the experimental system development and verification process. Currently, we are not providing concrete feedback to the CBDC Forum on the details of the experimental system’s development, verification, or its design. However, as our internal research and verification work progresses, we envision opportunities to share our findings with the Forum. We believe it would be extremely beneficial to receive feedback from the Forum on how our internal considerations can be applied to the actual practices of private-sector businesses.
As for your second point, in the pilot experiment, we plan to build an end-to-end experimental system, specifically focusing on verifying Pattern 2, which is considered to have a higher level of technical difficulty among the patterns identified in the proof of concept. A key challenge in this verification process is defining the roles of each system component and improving performance under those definitions. Therefore, we intend to conduct performance tests first during the development and verification of the experimental system. While we recognize the importance of security measures, such as deciding which ones to implement, we consider them to be future challenges at this stage.
Regarding your third point, we are currently in the stage of discussing the basic architecture and concept. Therefore, discussions about common standards, their necessity, and which aspects to standardize will be future topics. This is because these aspects are related to the roles of different entities — including the Bank of Japan — and involve institutional considerations that cannot be decided solely by the Bank.
Regarding the MOF explanation and overseas trends
International Bankers’ Association of Japan
While the Swiss government has expressed a negative stance on general-purpose CBDC, they are proactively engaged in wholesale CBDC initiatives, such as Project Helvetia’s Phase 3. While this clear disengagement from general-purpose CBDC is somewhat unusual, we would like to know if there’s any specific background information behind this approach.
The “Interim Summary” indicates that residents are the primary focus for CBDC users, and discussions on cross-border remittances seem to be somewhat sidelined, citing various challenges. Regarding the latter, both public and private sectors are facing heightened awareness due to the G20’s identification of four key challenges (high cost, slow speed, limited access, and lack of transparency) and the Financial Action Task Force’s (FATF) public consultation on “Recommendation 16.” Given this context, when investing resources and time in exploring the new platform of CBDC, shouldn’t we also consider an appropriate institutional framework? Additionally, since discussions on identity verification and anti-money laundering measures tend to be limited to within national borders, we urge you to consider the institutional framework from a broader perspective.
Secretariat
As you pointed out, it is unusual for a country to express such a clear negative stance on general-purpose CBDC. According to a survey by the Bank for International Settlements (BIS) on the status of CBDC initiatives in each jurisdiction, approximately 90% of jurisdictions are exploring CBDC, and in developed countries, many are considering both general-purpose and wholesale CBDC. In the case of Switzerland, their government’s early announcement of this policy in December 2019, before many countries had begun serious considerations about CBDC, might have influenced their current stance.
Ministry of Finance
Regarding the scope of CBDC users, we have concluded that it is not essential to allow non-residents to use CBDC from the initial issuance stage. This decision is based on the challenges associated with KYC and AML/CFT for non-residents and the possibility that their need for CBDC might not be particularly high. Our understanding is that Europe is also considering a two-phased approach: initial issuance and subsequent expansion. If, in the future, KYC and AML/CFT issues are resolved or the demand from non-residents increases, we will review the situation and consider their inclusion.
Regarding addressing the challenges of cross-border remittances, various projects are underway, not just limited to CBDC, such as the Project Dunbar published by the BIS. It would be undesirable if the introduction of CBDC leads to new challenges in cross-border remittances. Therefore, while monitoring the progress of other initiatives, we want to delve deeper into how to design CBDC to enable safe and efficient cross-border remittances. As stated in the “Interim Summary,” we believe that standardization in the technical aspects is crucial.
Japan Electronic Payment Services Association
As we delve deeper into the social implementation of CBDC and grasp its true essence, it becomes increasingly critical to examine the functions it can serve within the financial system beyond just being a payment instrument. Underlying issues like universal access and privacy will also have a far-reaching impact.
The payment infrastructure landscape is evolving globally. For instance, in India, the implementation of CBDC in a pre-existing UPI environment will have a different impact compared to a scenario without UPI. When considering CBDC, we believe it is crucial not to limit our perspective to comparing various payment methods or making comparisons with other countries solely based on similar aspects. Instead, we need to recognize that CBDC’s influence extends beyond merely replacing physical currency and affects various levels within the financial system. This necessitates a careful examination of the bigger picture.
Unlike India or Brazil, Japan’s central bank and government might not possess the same level of authority to uniformly lead advancements in the payments domain. Nevertheless, public entities need to collaborate beyond their respective areas of responsibility. Simultaneously, the private sector should complement these efforts through initiatives like API standardization discussions. It is important to be aware that inadequate requests from the user side can hinder the effectiveness of institutional frameworks. Therefore, conscious collaboration extending beyond established roles is crucial.
Regional Banks Association of Japan
We would like to comment on future considerations for the Liaison Meeting between Relevant Ministries and Agencies and the Bank of Japan on CBDC. Regarding the impact on financial intermediation functions, the current focus of safeguard measures is on holding limits, with discussions on specific amounts expected to progress in the future. Notably, due to recent changes in monetary policy, we are now in an “era of interest rates.” In this sense, with the increasing importance of deposits, we ask that you consider the impact on financial intermediation functions very carefully and thoroughly, taking into account these changing circumstances.
Japan Securities Dealers Association
We are encouraged by the highly active discussions in the WGs within the CBDC Forum, which hold the promise of innovation and the emergence of novel concepts. In this context, we anticipate the possibility of CBDC being utilized in a form distinct from traditional currencies. For example, securities companies could act as intermediaries, allowing direct use of CBDC in retail securities trading. The Ministry of Finance also mentioned that various cost-bearing structures are being considered for CBDC. Since CBDC will likely form the foundation of various economic activities, we hope that discussions will be directed towards public entities bearing the cost.
Fintech Association of Japan
The “Interim Summary” states that even after the introduction of CBDC, the government and the Bank of Japan will continue to supply cash responsibly as long as there is demand. This aligns with our previous discussions and reflects the stance of entities like the Bank of England. Conversely, if cash remains in circulation for at least a certain period after CBDC’s introduction, it implies that CBDC does not necessarily need to possess all the functions and features of current physical cash. For example, when considering aspects like programmability, we believe that simply replicating existing cash functionalities might not be the ideal approach for CBDC. Instead, we should explore possibilities unique to CBDC and design it based on the desired future state of the world and society. We request that such flexible discussions, breaking away from traditional thinking, continue.
Recently, the Bank of Japan announced its participation in the BIS’s new project, “Dunbar.” Our understanding is that this project focuses on wholesale payments to address cross-border remittance challenges. While there have been numerous discussions and pilot experiments on general-purpose CBDC, which should continue steadily, we believe that parallel efforts should be made to explore various aspects, including general-purpose CBDC, by leveraging the accumulated knowledge on technologies like distributed ledger technology.
Ministry of Finance
Firstly, we appreciate the suggestions regarding the need to consider the bigger picture and engage in discussions that go beyond our respective areas of expertise. General-purpose CBDC is not simply about digitizing cash but necessitates exploring various aspects of its digital nature, including additional services and potential conveniences. It is also essential to consider how the overall payment landscape will evolve and how CBDC will coexist and share roles with private-sector payment methods.
Next, regarding safeguard measures, we consider the credit creation and financial intermediation functions of bank deposits to be extremely important. During the Liaison Meeting, the Financial Services Agency (FSA) emphasized the need to carefully evaluate and analyze the impact on financial intermediation functions, the deposit insurance system, and overall economic activities before considering safeguard measures. The “Interim Summary” also states that we should be open to flexibly adjusting the content of safeguard measures based on changes in economic and social conditions, such as the recent shift in the interest rate environment.
Regarding the cost burden, you mentioned that the public sector should bear the cost because CBDC is the foundation of economic activities. While the “Interim Summary” lists both public and beneficiary burden sharing as possible approaches, no concrete decisions have been made at this stage, and further discussions are required. However, the point about CBDC being the foundation of economic activities and the current cost allocation for cash supply can serve as references.
You also mentioned that since cash will continue to circulate even after the introduction of CBDC, it is not essential for CBDC to replicate all cash functionalities and that we should adopt a free-thinking approach in designing CBDC. The “Interim Summary” states that, similar to other countries, we view CBDC as complementary to cash. For instance, it suggests that the offline functionality, which carries risks of double-spending and counterfeiting, might not be necessary during the initial stages if cash remains usable. Regarding anonymity, we are considering the extent to which it can be ensured, given AML/CFT concerns.
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