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China’s launch of its own cryptocurrency served as a powerful catalyst for similar processes in other countries. Recently, the Central Bank of Japan announced the start of pilot testing of the digital yen in early 2021. What preceded this decision of the regulator? What caused it? And why does Japan need a state cryptocurrency at all? Let’s figure it out together.
What is the national cryptocurrency
CBDC (Central Bank Digital Currency, digital currency of the Central Bank) is a stablecoin that is legally recognized by the state, issued by the Central Bank and used on a par with the national currency.
A stablecoin is a cryptocurrency, the value of which is provided by some asset: precious metals, monetary units or a basket of currencies, other cryptocurrencies.
Stablecoins have a fixed value in units of their collateral. For CBDC, the state currency serves as collateral. As a rule, a unit of virtual money of the state is backed by the same amount of fiat currency. For example, for Japan, 1 digital yen is equal to 1 JPY.
The emergence of CBDC was predetermined due to the emergence of cryptocurrencies. After all, this kind of digital money has a number of particularly useful properties compared to traditional monetary units:
- There is no physical implementation, it exists only in electronic form. And this means that there are no costs for its physical issue, replacement of worn-out banknotes, and storage in banks. Now there is no need for a long period of withdrawal of old banknotes from circulation during denomination, design changes, etc.
- Significantly reduces the risk of forgery.
- It simplifies the settlement and delivery of money to the consumer.
- Costs for cash services and transaction fees are reduced.
Despite the obvious advantages, many national regulators are wary of issuing government cryptocurrencies in their countries. Most of them cite the difficulty of predicting the impact of CBDC on the financial system of the state as the main obstacle. Read about all the difficulties in our material “National cryptocurrencies – an expensive trial and error”.
Japan and CBDC
In general, Japan is rightfully considered one of the few countries that are loyal to the cryptocurrency. She was among the first to adopt laws legalizing the circulation of crypto-currencies, introduced state regulation of the crypto-currency market with clear and understandable rules for business. At the same time, members of the government could not develop a unified position on the issue of developing a state digital currency for a long time.
Initially, the rhetoric of the Central Bank of Japan regarding the release of the national cryptocurrency was sharply negative. But towards the end of 2019, there was a significant warming in this matter. The then head of the Central Bank, Haruhiko Kuroda, said that Japan does not intend to issue its own cryptocurrency and does not approve of the spread of stablecoins. But this does not mean that the situation will remain unchanged in the future.
A little later, it became known that the Bank of Japan began to study CBDC and plans to exchange views on this issue with colleagues from other Central Banks. As part of this project, a new structure was created as part of the Department of Payment and Settlement Systems. The goals of the division will be to develop a legal justification for the functioning of state digital currencies, intensify research in this area, evaluate their results and, ultimately, issue a crypto-yen.
Already in February 2020, representatives of the ruling party called on the government to speed up research on CBDC. At this time, the Bank of Japan identified two main technical obstacles to issuing the digital yen:
- Publicity. The problem here is to provide every citizen with full access to the CBDC infrastructure. According to research, only 70% of Japanese people owned a smartphone in 2019.
- fault tolerance. Access to financial services must be provided uninterruptedly in any situation: power outage, natural disasters, geographical distance from habitable places.
Six months later, the Central Bank of Japan announces the official inclusion of CBDC in a new program for the development of the country’s economy. True, the exact timing of the release of the crypto-yen does not name. Only the start of pilot testing of the Japanese digital currency in the first quarter of 2021 is reported. Testing will take place in three stages:
- Study of the work of CBDC as a payment instrument.
- Adding additional features and checking their performance.
- The practical use of the digital yen by a select number of users.
The decision to issue a virtual national currency was made by the Central Bank for 3 reasons:
- Cash still dominates Japan’s economy. CBDC should accelerate the transition to a non-cash form of payment, make such payments more convenient and safer.
- Traditional payment systems are outdated and need to be updated. The digital yen already has the necessary qualities.
- Creating a digital society. Crypto-yen is designed to unite financial organizations of any type into a single system that will offer citizens new opportunities.
As for the full launch of the digital yen in Japan, representatives of the Central Bank believe that this will take at least 2-3 years.
How did the business react?
The largest financial institutions in Japan enthusiastically accepted the news about the release of the crypto-yen. Entrepreneurs believe that this will strengthen the position of the national currency in the international market. Japanese bankers have already offered their services to the Central Bank and help in testing the state cryptocurrency.
Business believes that the release of its own cryptocurrency will significantly accelerate the process of digitalization of the Japanese economy. And the new financial toolkit offers significantly more opportunities than the traditional financial system. We can safely say that with such strong support from business and the government, it will not be too long to wait for Japan to have its own cryptocurrency.
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