Multiple nations are now on track to developing their state-backed cryptocurrencies as blockchain continues to garner the attention of the regulators. China is the closest to launching its Central Bank Digital Currency (CBDC) the digital yuan, and now the Bank of Japan has announced the launch of its own experimentations with a CBDC.
In a report dubbed the Technical Hurdles for CBDC, Japan’s central bank announced that it will start experimenting to check the feasibility of a CBDC from a technical perspective. This is the first time the Bank of Japan has revealed that it would commence a Proof of Concept (PoC) process with the digital yen.
In the report, the bank mentioned that it would “check the feasibility of CBDC from technical perspectives, collaborate with other central banks and relevant institutions, and consider introducing a CBDC”.
According to the central bank, there are two main obstacles to developing a CBDC, universal access and resilience. The first one is about the ability of the CBDC to be accessible to everyone, even those without smartphones. A report from Nikkei had revealed that only 65% of Japanese have smartphones.
The bank noted that “it is important to develop CBDC to be available to a variety of users”.
The other factor is ‘Resilience,’ which refers to the availability of the digital currency even when the power is down. The central bank stressed on the importance of making the CBDC accessible in any kind of environment, even in an emergency situation such as an earthquake.
The Bank of Japan is also considering whether the CBDC should be developed on blockchain. Centralized systems have the merits of “having large capacities and fast transaction speed” but the entire system can go down at once due to the existence of a single point of failure.
DLT-Based systems on the other hand are not dependent on a single point and can address this issue. However, the transaction times are longer because blockchain networks require consensus among multiple validators.
As previously reported by The Daily Chain, a survey conducted by London-based journal Central Banking, the majority of central banks aren’t willing to use blockchain as the underlying technology for CBDC. Survey participants noted that there were concerns regarding the security and scalability issues that still largely persist.
Hence, the Bank of Japan concluded:
“Both centralized and decentralized types have pros and cons […] in the case of massive transactions for retail use cases in advanced countries, it is better to adopt the centralized type […] in the case where the amount of transaction is limited and resilience and future possibility are prioritized, there is room to consider the decentralized type.”
Earlier this year, there were reports that three economic watchdogs of the nation, namely the Finance Ministry, the Financial Services Agency, and the Bank of Japan, have joined forces to boost the research on a central bank digital currency (CBDC).
The Bank of Japan was also the part of a consortium of central banks that included the Bank of Canada, the Bank of England, the European Central Bank, the Sveriges Riksbank — of Sweden, and the Swiss National Bank. The group was formed to work in collaboration with the Bank for International Settlements to educate each other on the potential consequences of utilizing a CBDC.