More countries are rolling out plans to establish digital currencies as the wave of crypto currencies spreads across borders, disrupting mainstream financial systems and riling up central banks.
On Monday, the Bank of Japan (BOJ) began experiments to study the feasibility of issuing its own digital currency, joining efforts by other central banks that are aiming to match the innovation in the field achieved by the private sector, Reuters reported.
In January, China embarked on the third trial of e-yuan in the city of Shenzhen, as part of a larger scheme to introduce the digital currency in mainland China. The first test was held in Luohu District, in October 2020, while a second round was conducted in Futian District at the beginning of this year.
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In February, Beijing joined Hong Kong, Thailand and the United Arab Emirates (UAE), along with the Bank of International Settlements (BIS), to explore cross-border payments for digital currencies.
These big moves by China seems to have ignited other nations to speed up action toward developing their own digital currencies. Last month, European Central Bank announced a plan to issue digital euros, and America is contemplating digitizing the dollar. Global central banks are looking at developing digital currencies to modernize their financial systems, ward off the threat from cryptocurrencies and speed up domestic and international payments.
The Asians are faster with their plans as they believe it will help their currencies to upset the US dollar.
For Japan, the first phase of experiments, to be carried out until March 2022, will focus on testing the technical feasibility of issuing, distributing and redeeming a central bank digital currency (CBDC).
“Since the release of “The Bank of Japan’s Approach to Central Bank Digital Currency” in October 2020, the Bank of Japan has been preparing to conduct experiments, such as specifying basic requirements of the test environment and selecting partners to collaborate with, in accordance with this approach.
“We will begin to test the technical feasibility of the core functions and features required for CBDC through a Proof of Concept (PoC) from April 2021. If the Bank judges it necessary to go a step further, it will also consider a pilot program that involves payment service providers (PSPs; e.g., banks and non-bank PSPs) and end users,” the BOJ said in a statement.
The BOJ will thereafter move to the second phase of experiments that will scrutinize more detailed functions, such as whether to set limits on the amount of CBDC each entity can hold.
If necessary, the central bank will launch a pilot programme that involves payment service providers and end users, BOJ Executive Director Shinichi Uchida said last month.
“While there is no change in the BOJ’s stance it currently has no plan to issue CBDC, we believe initiating experiments at this stage is a necessary step,” Uchida told a committee of policymakers and bank lobbies looking into CBDC.
While China leads the pack, the BOJ has been speeding up efforts to catch up with a plan announced in October to begin experimenting on how to operate its own digital currency.
In February, the European Central Bank and the Bank of Japan released the outcome of the phase 4 of their joint research on distributed ledger technology in a report titled, “Balancing confidentiality and auditability in a distributed ledger environment,” under the Stella project.
However, while the experiment has recorded significant success, the BOJ acknowledges that developing a sustainable digital currency will not come easy, as there are still many technical and non-technical questions to answer.