Bank of Japan, the country’s central bank, has announced it will launch a proof of concept (PoC) pilot programme for a Central Bank Digital Currency (CBDC).
The POC will commence in April and has two core goals. The first is to test the feasibility of core functions and features required for a CBDC. The other goal is to leverage the skills and insights of private businesses in terms of technology and operation for designing a CBDC ecosystem in the possible event of social implementation.
The Bank of Japan explained that in the CBDC system there is a need for an interlinking of various systems ranging from the central bank to users through intermediaries, intermediary network systems and other stakeholders.
Through the pilot program, the central bank plans to develop a system for experiments where a central system, intermediary network systems, intermediary systems, and endpoint devices would be configured in an integrated manner.
With this, the central bank plans to test the end-to-end process flow and outline the measures and potential challenges for connecting the experimental system with external ones.
Additionally, the Bank of Japan hopes the pilot programme will lead to improved designs through discussion with private businesses. Topics include measures and potential challenges for connecting the experimental system with external ones, alternative data models and architectures for offline payments, and the optimal design of the CBDC system.
To foster this, the central bank is creating the CBDC Forum and will invite private businesses engaged in retail payments or related technologies.
The pilot programme will launch with narrowed objectives and will gradually expand in a phased manner.
At present, the Bank of Japan is not expecting any actual transactions to take place among retailers and consumers, only simulated transactions will be completed.
This pilot programme comes after two years of investigation into CBDC. The Bank of Japan launched PoC Phase 1 in April 2021 with the creation of an experimental environment centred around a CBDC ledger.
Through this it was able to confirm basic transactions related to CBDC or a series of transactions such as issuance, payout and transfer could achieve the processing performance required for frequent and low-value retail payments.
Phase two of the PoC launched in April 2022. This stage saw the Bank of Japan implement more complex functions to the system and investigated their technical feasibility and processing performance.
The phase is set to conclude in March, but it has already shown the processing performance can be maintained even with additional functions whose implementation is challenging. It stated that one of these functions is the ability to check whether end users’ CBDC holdings and transactions do not exceed the upper limit imposed on each, even when end users hold multiple accounts.
Alongside these phases, the Bank of Japan has held discussions from a variety of players. These have covered the future of payment and settlement systems for a digital society.
In a post announcing the pilot programme, Bank of Japan executive director Shinichi Uchida said, “If a CBDC were to be issued in the future, exploring its framework in such phased manner and engaging in highly transparent communication with the private sector are necessary steps to take for adoption in society. Similar approaches have been taken by other advanced economies.
“A method of payment is not something that becomes the norm once an ideal arrangement is brought into the world.”
Japan is one of many countries holding CBDC tests. Earlier this year, the Central Bank of the Republic of Turkey (CBRT) concluded the first test transactions for its digital Turkish Lira CBDC network. The central bank is continuing to run limited, closed-circuit pilot tests with technology stakeholders during Q1.
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