Japan begins building proof-of-concept CBDC

As part of its continuing efforts to create a central bank digital currency (CBDC), Japan is working on a proof-of-concept to see how a digital yen would work in certain use cases. 

A central bank digital currency (CBDC) is a digital currency issued and governed by a central bank. In the case of Japan, a CBDC would be a digital yen issued and controlled directly by the Bank of Japan, possibly even after it is transferred to a private citizen.  

Furthermore, whereas cash transactions are anonymous, CBDC transactions will not be, as recently confirmed by Federal Reserve Chairman Jerome Powell Tuesday. 

While on paper, CBDC has the potential to maximize payment efficiency, it also has far-reaching implications about the government’s involvement in private citizens' transactions. For example, if Japan were to order another lockdown, it would be able to see if a citizen broke the rules by trying to make a purchase and where the purchase attempt was made. The government could also restrict use of digital funds altogether. 

Now, a Japanese credit card company is investigating how CBDC could be used in a real-life environment. Japanese Credit Bureau (JCB) announced Monday it is building its own digital currency to simulate how people would be able to pay at restaurants with CBDC using credit cards. The company said that while it is currently using touch payments, JCB is working on providing mobile solutions for CBDC, where users can pay via mobile app and even QR codes. 

The company says it plans to have the payment infrastructure up and running by the end of the year and hopes to finish experimenting with CBDC payments in real-life scenarios by the end of March 2023. 

The news comes after the Bank of Israel announced last month it is working with the Central Bank of Norway and Sweden’s central bank Sveriges Riksbank on a proof-of-concept for how CBDC can be used for cross-border payments.  

While currently, cross-border payments using foreign currencies involve several banking systems, high costs and present difficulties for some retail transactions, the joint project aims to simplify cross-border payments and minimize their costs.  

Known as Project Icebreaker, it is expected to finish by year-end, with a final report expected in Q1 2023.  

"Efficient and accessible cross-border payments are of extreme importance for a small and open economy like Israel and this was identified as one of the main motivations for a potential issuance of a digital shekel,” said Bank of Israel Deputy Governor Andrew Abir. “We are privileged to be exploring the topic in this project together with partners that have vast knowledge and experience on CBDCs as well as on cross-border payment policies. The results of the project will be very important in guiding our future work on the digital shekel."