On July 2, the Bank of Japan (BoJ), Japan’s central bank, published a report titled “Technical challenges of CBDC: Central Bank Digital Currency as the cash equivalent.” In this report, the BoJ focuses on the technical aspects of central bank digital currency (CBDC), which central banks are planning to issue. The report explains the technical issues that need to be solved in order for CBDC to have the properties of cash, which can be used to settle transactions securely and reliably by anyone, anytime, and anywhere.

 

In order for CBDC to have such cash-equivalent functionality, the BoJ states that CBDC needs to be a payment method that can be used to settle transactions securely and reliably by anyone, anytime and anywhere. In short, the report says that it would be desirable for CBDC to have two properties: “universal access” and “resilience.”

 

On universal access, the BoJ believes that CBDC should be specially designed to ensure that everyone can use it, without restricting the scope of users. With this in mind, the report adds that it would be desirable for people in a variety of age groups, from children to the elderly, to have access to CBDC, and it would be even better if CBDC was also available to inbound tourists visiting Japan. In addition, the document points out that CBDC should be designed to support peer-to-peer (P2P) transactions, including money exchanged among individuals, just like cash, instead of limiting the payment functionality to money paid to companies, such as payments from individuals to merchants.

 

Additionally, the report also examines the property of resilience. The BoJ identifies overcoming the vulnerabilities of online services utilizing computers and networks, such as the internet, as an issue. The report notes that many forms of credit card and smartphone payments ordinarily require an online network connection when users send money or make payments, so access to such payments will be limited during a system or connection failure. Moreover, the document adds that online payments require the continuous supply of electric power.

 

In light of these considerations, the BoJ summarizes its position as follows: In order for CBDC to have the properties of universal access and resilience, it would be desirable to offer offline P2P payment transactions that can withstand connection and power outages, using specialized terminals accessible to many different people.

 

Furthermore, the BoJ identifies two different types of ledger management: the “centralized type,” where a single entity owns the ledger and verifies transactions and keeps transaction records, and the “decentralized type,” where multiple entities own a single ledger and each entity verifies transactions and keeps transaction records. In choosing which type of ledger to adopt, the BoJ articulated its belief that both centralized and decentralized types have pros and cons, and that it will be crucial to study this matter further based on consideration of the prospects for technological innovation in the future, as well as the purpose and environment of use.

 

Looking ahead, the BoJ stated that it plans to “check the feasibility of CBDC from technical perspectives through such means as experimentation, collaborate with other central banks and relevant institutions, and consider introducing a CBDC.”

 

*This article was written by FISCO.