Bank of Japan Begins Japan CBDC Pilot

The Bank of Japan has announced the launch of a three-year pilot program for its central bank digital currency (CBDC), a digital version of the Japanese yen. The successful launch of the digital yen in the world's third-largest economy could pave the way for CBDCs to go mainstream in Japan and change the way people pay for everything they do in their day-to-day activities.

Exploring a CBDC for the Japanese economy

Japan joins a growing list of countries exploring digital versions of their currencies. Although CBDCs are not true cryptocurrencies, they are inspired by innovations brought about by blockchain technology.

In the two years leading up to the launch of the pilot, the Bank of Japan conducted a series of proof-of-concept trials using three undisclosed local banks and other regional banks to determine the actual potential of a BOJ digital currency.

The first phase starts in April 2021 and runs until March 2022. During this phase, three ledgers were tested, with 100,000 users transacting through 5 intermediaries at a transaction volume between 500 and 3,000 transactions per second.

The second phase begins in April 2022 and runs until March 2023. During this phase, a shared token-based ledger design was tested to assess the impact of additional functionality on the first one-year experiment.

During the pilot program, the end-to-end process will be tested to explore potential challenges with external systems. A CBDC forum will also be created to discuss private sector ideas related to retail payments.

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The Future of Japanese Currency

A digital yen could have a significant impact on the Japanese economy in a number of ways. Financial experts predict that by 2030, the CBDC circulating in the world's major economies may be as high as 5 trillion US dollars, and more than 1 billion users use blockchain and distributed ledger technology in their daily lives.

If the pilot is successful, Japan could become the first major economy to issue a CBDC. However, Japan is not the only country exploring the possibility of injecting a CBDC into its economy.

The growing global interest in CBDCs shows how digital currencies will reshape finance. More than 114 countries are actively considering launching CBDCs. China recently launched its own CBDC pilot test, and countries such as India and Australia are also testing pilot programs.

Unlike decentralized cryptocurrencies, central bank digital currencies would still give central banks control over monetary policy. Meanwhile, cryptocurrencies offer more anonymity but are highly volatile monetary assets.