The Bank of Japan’s Framework for Participation in the CBDC Forum

This month, the Bank of Japan published a document outlining the operating procedures for its CBDC Forum in light of the CBDC Pilot to be conducted from April onwards. As an English translation of the document does not seem to be available yet, the following captures the essence of the framework.

For context, after completing two proof-of-concept phases since fiscal 2021, in fiscal 2023, the Bank of Japan will select participants for the CBDC Forum and contractors for developing the experimental system, proceeding with discussions and explorations with the participants and the development of the system accordingly. Overall, the pilot program is expected to last three years (although this goal has previously been set by Governor Kuroda, and could possibly be adjusted with the new leadership taking the helm in April 2023).

1. Overall View of the Pilot

• Construction and verification of experimental system: From the perspective of confirming the end-to-end processing flow of the CBDC system , the Bank of Japan will build an experimental system and conduct performance tests.
• Discussions and considerations with private business operators: Participants in the CBDC Forum will be recruited from among private business operators, and issues and countermeasures for connection with external systems, issues that are mainly required for contact with users will be discussed and technologies/ functions, additional services, and the nature of ecosystems.

2. Overall View of the CBDC Forum

• Method of discussion and consideration: In principle, designated participants take turns as presenters and discussants on themes presented by the Secretariat (Bank of Japan). In addition, the participants acting as moderators summarize the content of the discussion at the end of the meeting. Depending on the theme, the participants involved may vary. The secretariat will make presentations as needed on the purpose of each theme, or a wide range of participants will respond or make presentations on the hearing items presented by the secretariat.
• Operating method: From the viewpoint of revitalizing discussions and facilitating operations, we are considering establishing working groups according to the relevance of the themes for discussion and consideration, for example consisting of participants from 10 to 20 companies. Several groups will be formed initially, but new groups may be formed as discussions progress. Based on face-to-face meetings, we plan to hold discussions in one working group several times a month for 1–2 hours each time, while also utilizing web-based meetings . Although it depends on the working group and discussion/examination themes, after the participants are decided, the first meeting will be held around the end of July, and will be held several times a month from the end of August.
• Information sharing: In addition to sharing information from the Bank of Japan on the status of discussions in other working groups of the forum as needed, opportunities will be provided for all participants to share and collaborate on the progress of discussions and examinations for the entire experiment and for each theme as appropriate. Regarding the verification status of the experiment and the outline of the discussion and examination with the participants, the opinions of any individual participants, we will make an announcement at an appropriate time while taking care not to identify the remarks. Because information will be shared outside the forum, whether or not to participate in the forum will depend on future central bank deliberations. It does not lead to an advantage or disadvantage in the position or involvement in projects related to digital currency.
• Discussion topics: Additions and deletions are made as needed depending on the situation and the progress of discussions. In particular, it is recommended that the items presented by the Secretariat are not limited to those listed here. The purpose of this is to list a wide range of issues as themes for discussion and examination at the present time, and not to make any assumptions about the future institutional design.

3. Discussion Topics

• Clerical flow for basic functions: Opinions on various administrative flows (not only issuance/refund, withdrawal/acceptance, remittance, but also additional administrative work such as account opening/closing, reverse remittance), impact on existing administrative work related to end-to-end administrative flow, and other considerations on the impact on various retail transaction operations (e.g., handling of unusual events, counter operations).
• Exchange of cash and CBDC: How cash and CBDC should be exchanged (e.g., possibility of utilization of the system), and propose solutions.
• Connection with accounting system: Assuming CBDC issuance/receipt operations, it is necessary to connect financial institutions’ accounting systems (including information systems such as data warehouses and office systems such as sales systems) with CBDC systems. Identify points to consider (operational, technical, connection specifications), and propose solutions.
• Connection with private payment infrastructure: Sorting out the advantages and disadvantages of connecting the CBDC system and the private payment infrastructure, and clarifying points to consider (e.g., operational, technical, connection specifications), and proposals for solutions.
• Cooperation with existing Internet banking applications: Clarify matters to be considered in linking existing systems with CBDC systems when enabling CBDC transactions (withdrawals/acceptances, remittances, balance inquiries, etc.) through existing Internet banking applications of financial institutions (operational, technical, connection specifications) and proposals for solutions.
• Best practices in private retail payment systems: Proposal of best technical practices in consideration of performance regarding the design and implementation of the ledger part. Proposal of best practices in terms of technical, administrative and organizational aspects, taking into account availability and reliability.
• Implementation of KYC, AML, CFT: To organize KYC methods and points to consider in existing fund settlements, and to improve KYC based on the operational flow and characteristics of CBDC. Suggestions on technical methods and administrative aspects for sorting out AML/CFT methods and points to consider in existing fund settlements, and proposing technical methods and operational aspects for advancing AML/CFT based on the operational flow and characteristics of CBDC. Organization of authentication & authorization methods and points to consider in existing fund settlements, and technological development for advanced user authentication & authorization and transaction authentication based on the operational flow and characteristics of CBDC.
• Endpoint devices: When considering smartphones, sorting out points to consider in terms of technology, administrative operation, etc. based on the administrative flow and characteristics of CBDC. When considering card-type devices, organize points to consider in technical and administrative aspects, etc., based on the administrative flow and characteristics of CBDC. Regarding store payment terminals, sorting out and resolving points to consider in terms of technical and administrative aspects, etc., based on the operational flow and characteristics of CBDC. Proposals on how to popularize wallet apps, store payment terminals, etc. Proposals regarding UI/UX design for wallet applications, store payment terminals, etc. Suggestions on measures to make CBDC easier for all users, including the elderly and people with disabilities (accessibility).
• Ease of exchange with electronic money: Arrangement of technical and administrative considerations when exchanging existing private electronic money (other than cash and deposits) with CBDC understanding and proposing solutions.
• CBDC business utilization (additional services): Definition of the concept of a payment system “appropriate for a digital society”. Types and use cases of additional services (including discussion on programmability and utilization of information on additional services), role sharing, etc.
• External linkage of the CBDC system for additional services: Open API for additional services, provision of SDK and sandbox functions, concept of “embedded CBDC”.
• CBDC ecosystem design: Specifications required for CBDC as a service infrastructure, community management of additional service providers (developers), ecosystem sustainability (API updates, maintenance).
• Examination of alternative data models other than account type: Alternative data model options (UTXO). Comparison of each data model (processing performance such as throughput and latency, development & operation burden, environmental load, affinity with offline payment, compatibility, ease of implementation of programmability, etc.). Asset tokenization and CBDC (relationship between asset tokenization and CBDC, interoperability with DLT infrastructure).
• Offline payments: Social need and utility (universal access, resilience). Comparison of technical options (data model, risk of counterfeiting/double spending, convenience, etc.). Coordination of offline and online payments.

4. Participation

• Participants: The expectation for the total number of participants is several dozen companies. Some participants will take part in multiple workshops designated by the Bank of Japan. The purpose of the experiment is to utilize the technology and knowledge of private business operators. The purpose of holding the forum is to actively contribute to discussions and studies through the provision of specific knowledge and technology. In light of this, we do not expect participation from industry groups. The forum runs working groups in roughly annual cycles. Selected participants are expected to continue to be involved in the forum for this duration.
• Participating individuals: Each participant is asked to select a practitioner (with at least several years of experience) who has extensive experience in business planning, payment planning, system planning, or payment-related research and development. In principle, one person for each discussion/examination theme is expected to register and continue to participate. Except for small start-up companies where the management level is directly in charge of practical work and technology, as a general rule, we do not expect the participation of those at the management level. The Bank of Japan may request the registration of persons with expertise and knowledge related to specific themes, while monitoring the progress of discussions and considerations on each theme in the Working Group.

5. Expenses & Information Management

• Cost: Participants are not required to pay participation fees to the Bank of Japan. However, when participating in the forum, actual costs (transportation expenses, communication charges for web conferences, etc.) will be borne by the participants themselves. The experimental system will be constructed by the Bank of Japan at its own expense. Participants are not required to build their own experimental system.
• Information management: Information obtained from the Bank of Japan or other participants in the course of the forum cannot be disclosed to outside parties. The Bank of Japan will also strictly manage information provided by participants.
• Consent to terms: Participation in the CBDC Forum is conditional upon agreement to the terms and conditions that stipulate the handling of such expenses and information management.

6. Recruitment Process

Regarding the future application process, the public application period will run from April 3 to April 28, 2023. After that, the Bank of Japan will conduct an examination, and after the beginning of June, BOJ will inform applicants of the examination results. After that, the agreements will be concluded one by one, and the list of participants (companies) will be announced by the end of July.

The contractor for project management support, technical consulting, etc. is currently undergoing procurement procedures. In addition to not being able to become a participant, in the selection of contractors related to the construction of the experimental system (scheduled for July or later), from the perspective of ensuring fairness in bidding, there are restrictions on bidding for participating corporations. Please keep this in mind when applying for participants (as for the companies that participated in the bidding, BOJ will consider recruiting additional participants as necessary after the selection of contractors).

Themes that can contribute to discussions and related achievements in accordance with the format specified by the Bank of Japan (Participation in various meetings related to CBDC, publication of various papers, etc.), etc., will be filled out and submitted by e-mail from applicants (the method of submission will be posted on the Bank of Japan website when the public offering period begins).

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