Japan issues new reports on central bank digital currencies

The Bank of Japan in its new report has looked deeply into how digital currencies can affect the current monetary system if they are adopted to replace bank notes.

February 21, 2019. | AtoZ Markets - There has been a debate which has gathered momentum in recent times - should digital currencies replace bank notes? With the emergence of crypto assets, the idea of a global cashless payment system seems to look easier and more appealing. Some have therefore called for central banks to replace paper-based bank notes with digital currencies built with the blockchain technology. Over the years, blockchain has looked to be solid and has not been bridged yet by Cyber warriors thus should have a big role to play in the future of money. In its recent report, the Bank of Japan (BOJ) has examined the roles of central bank digital currencies (CBCDs) can play in the current monetary system.

In the report, BOJ explains how digital innovation can enable the emergence of new types of money with a variety of functions. These functions may include:

  • easier and faster traditional payments
  • processing of various information and data attached to payments
  • executing transactions

What are CBDCs?

The bank describes Central Bank Digital Currencies (CBDCs) as “digitalized instruments for payments and settlements issued by central banks as their liabilities (central bank money)”. In the report, the bank describes possible ways of implementing CBDCs and the effects of the different speculative approaches. They categorize CBDCs into two:

  • CBDCs used by general public - this was likened to the traditional banknotes issued by central banks
  • CBDCs for wholesale settlements - this was likened to central bank deposits

Possible roles of CBDCs

In the report, the bank elaborates on these two CBDC categories and how as a whole can enhance efficiency, reduce payment costs through applied new digital technologies and other functions listed below.

  • Decrease of cash in some countries and financial inclusion 
  • Blockchain, distributed Ledger technology and crypto-assets
  • Crime prevention and anti-money laundering
  • Enhancing the effectiveness of monetary policy
  • Enhancing financial stability through quasi-narrow banking

The report also explains issues concerning CBDC. Issues like: who can possess digital currencies and how they should be designed. Should they be token-based of account-based? Should the amount issued be regulated by the central bank? Should they bear interests like the paper-based notes?

Expert opinion on CBDCs

Meanwhile, at AtoZ Markets, we are so much interested in how the future of money will look like with the inclusion of well-regulated digital currencies. We asked questions from industry experts about their opinions on CBDCs. Should the central banks approve CBDCs to be used by the public in place of banknotes? Here is what Markus Haidt, a blockchain expert and CEO of International Institute for Data Science (IFDS), Geneva area, Switzerland has to say:

If I would be a central bank, I would definitely try to create a new currency and in order to get the political support and the management of power, I would implement some algorithm that would allow a back-match to identify the owner of a transaction. This would be ugly but I see a realistic chance that this will happen. There is actually an elegant solution that would allow anonymity while still giving access to personalized data under specific circumstances (example proven criminal acts). 

He added that the institute is currently preparing a white paper on this.

As this debate attracts more attention, the BOJ in the report admitted that many of major central banks including itself, do not have an immediate plan to replace banknotes with digital currencies. However, some central banks are considering issuing them soon or have issued as pilot studies.

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