BOJ to Start Piloting CBDC Transactions with Japan's Three Megabanks Next Year

The BOJ (Bank of Japan) will reportedly start piloting CBDC transactions with Japan's three megabanks and regional banks next year.

The BOJ has been testing a CBDC in phases as part of preparatory measures in case it needs to respond to any future changes in the digital currency environment, but it has not confirmed plans to issue a CBDC.

The first phase of CBDC experimentation tested the technical feasibility of the basic functions required for a digital yen that would be used by the general public.

A second one-year phase of experimentation commenced in April to test more complex functions, including limits on the amount of CBDC each entity can hold, and mechanisms to balance AML requirements with privacy protections.

The next phase, starting around April 2023, will involve Japan's three megabanks (Mitsubishi UFJ, Sumitomo Mitsui, Mizuho) as well as regional banks, focusing on testing deposits and withdrawals from accounts, and checking whether the CBDC can work without internet access in an emergency, as reported.

Depending on the results of the trial, the BOJ will decide whether to go ahead with issuing a digital yen as early as 2026.

The BOJ has previously said it would consult the public to help it decide on the possible issuance of a retail CBDC, and that its preferred model would be one that allows existing payment methods to coexist.

Banks have reportedly been eager to join the CBDC testing programme. Meanwhile the BOJ is also recruiting fintech companies and IT vendors to develop security measures for the CBDC like identity verification.

In July, the BOJ released an interim report to encourage further discussion on the CBDC, highlighting concerns that a possible shift away from bank deposits could interrupt credit creation and impact the local economy.

The report said the BOJ would consider measures such as setting caps on CBDC holdings and transaction amounts to mitigate such risks.