Managing Director of the International Monetary Fund (IMF) Kristalina Georgieva stated: “Crypto assets and stablecoins are no match for well-designed central bank digital currencies (CBDCs). If CBDCs are designed prudently, they can potentially offer more resilience, more safety, greater availability, and lower costs than private forms of digital money.”
Having understood the preceding statement made by Georgieva, the Bank of Japan (BOJ) has decided to launch a pilot program to test the use of a digital yen in the backdrop of nearly 100 countries testing the adoption of CBDC.
In Proof of Concept (PoC) Phase 1, which started in April 2021, the Bank of Japan built an experimental environment centered around a CBDC ledger, which is the foundation of a CBDC system. In PoC Phase 2, beginning in April 2022, the Bank implemented more complex, additional functions of CBDC to the core functions explored in Phase 1 and investigated their technical feasibility and processing performance.
Stating more about the pilot program which is in the latter phase of development, BOJ Executive Director Shinichi Uchida in opening remarks at the central bank’s meeting with private-sector executives, stated:
Our hope is that the pilot program will lead to improved designs through discussion with private businesses.
Uchida is well known for his unorthodox approaches and structures to finance which have been successful in the past.
Moreover, the main purpose of testing the feasibility and the implementation of the CBDC was to make sure that Japan was ready to take up CBDC in the event that the government decided to issue a digital Yen. However, Japan has no plans of issuing a digital Yen as of yet.
Former governor of the Central Bank, Masayoshi Amamiya in a speech back in 2019 shared a survey on CBDC and the likelihood of issuing a CBDC.
The governor unfolded various reasons that were affecting the likelihood of BOJ issuing digital Yen. Based on the year-on-year rate of change in the amount of cash in circulation, it was found that high denomination banknotes in circulation were on the increase, the circulation of coins declined while the lower denomination notes’ increase was less than that of the higher denomination notes.
Based on these findings, he assumed that cashless payments seem to be expanding in small-value payments where the change piles up, but cash still continues to be widely used as a means of payment.
If and when the BOJ decides to issue digital Yen, it is of utmost importance that the BOJ strike a balance between developments on the design front and on the policy front. And even in the event BOJ strikes a balance, there are other risks that could dismantle the wheels of the running economy.
For instance, there is a possibility that users might withdraw too much money from banks all at once to purchase CBDCs, which could trigger a crisis. Moreover, the banking industry associations raised concerns that a central bank digital currency – if not well constructed – could implode their core business model.
A defective CBDC could loan out depositors’ funds by enticing consumers to take deposits out of traditional accounts and keep them in digital currencies. This could cut deeply into the funds banks have available to lend. Hence, it is very important that the BOJ coordinates with the respective entities to ensure smooth flow.
However, the adoption of the digital Yen by the citizens would be the key to the project’s success. When considering the e-Naira digital currency, it wasn’t well received by Nigerians. As per Bloomberg report, it was found that less than 0.5 percent of Nigerians are using digital currency at the completion of one year since the launch. This means less than one in 200 people in Nigeria are active users of the eNaira.
Interestingly, Nigeria ranked No. 1 by search interest for the keyword “Bitcoin” in August 2021. Moreover, the African nation ranked sixth in the 2021 Global Crypto Adoption Index published by blockchain analytics organization Chainalysis in October 2021.
If a digital Yen is introduced in a context where the adoption of cryptocurrency is quite lethargic, it will interesting to find out what would be on the horizon for Japan’s digital currency. Or, can Uchida the expert in finance, known for his unorthodox yet successful financial structure pull out something special for Japan? Time will tell.