On October 17, 2024, the Bank of Japan (BOJ) held its Third CBDC Forum Plenary Meeting, the first since January. The meeting materials detail the future direction, progress of discussions in the CBDC forum, domestic and international trends, and future challenges.
Overview of the Pilot Experiment
The BOJ is conducting PoC experiments in stages to verify the technical feasibility of CBDC. As of October 2024, the BOJ is working on building an experimental system and conducting desk-based studies.
- Development and verification of the experimental system: System development is in progress.
- Desk-based studies: Examining and debating on points related to functionalities not implemented in the experimental system.
CBDC Forum
The BOJ established the “CBDC Forum” to discuss CBDC with private businesses, experts, and stakeholders. Within this forum, seven working groups (WG) are exploring specific themes.
- WG1: Connectivity between the CBDC system and external infrastructure/systems (currently paused).
- WG2: Additional services and the CBDC ecosystem
- WG3: KYC and user authentication/authorization
- WG4: New technologies and CBDC
- WG5: User devices and UI/UX
- WG6: Coexistence with other payment methods
- WG7: Business flows for basic functions (commenced September 2024)
The BOJ is developing an experimental system on the cloud for pilot experiments. The system emphasizes performance, scalability, and privacy considerations.
- Performance and transaction volume: Addressing technical points and identifying solutions to build a system capable of handling high loads.
- Scalability: Implementing measures in the design phase to ensure flexible implementation of function and performance enhancements. This involves identifying and addressing technical points related to achieving scalability.
- End-to-end implementation: Conducting verification with end-users, intermediaries, and the central bank systems working together.
- Privacy considerations: The system is designed to avoid handling personal information within the ledger management section, thereby ensuring user information and transaction details remain confidential.
Domestic Trends
- The Japanese government decided to formulate a broad framework for CBDC system design in the “Basic Policy for Economic and Fiscal Management and Reform 2024.”
- The Ministry of Finance held a series of “Expert Meetings on CBDC” from April 2023 and compiled the discussions in December.
- The “Liaison Meeting among Relevant Ministries and Agencies of the Government and the Bank of Japan on CBDC” was established in January 2024 to advance discussions based on the interim report released in April 2024.
International Trends
United States
- The Federal Reserve (Fed) published a discussion paper and report on CBDC.
- President Biden signed an executive order on “Ensuring Responsible Development of Digital Assets.”
- However, there are strong opinions against issuing a CBDC, and the U.S. House of Representatives passed the “CBDC Anti-Surveillance State Act.”
Eurozone
- The European Commission published a draft EU regulation on the digital euro.
- The ECB completed its “investigation phase” in October 2023 and transitioned to the “preparation phase.”
- The next progress report is scheduled to be released in the fall of 2024.
United Kingdom
- The Bank of England (BOE) released the results of public consultations on the digital pound in January 2024.
- The BOE plans to complete the design phase by 2025 at the earliest and decide whether to proceed to the build phase.
China:
- The pilot experiment for the digital yuan is expanding.
- The cumulative transaction volume is expected to reach 7 trillion yuan by the end of June 2024.
WG1: Connectivity between the CBDC system and external infrastructure/systems
WG1 discussed the technical feasibility of connecting the CBDC system with external systems, considering factors such as security and processing performance to identify the optimal connection method.
Main Discussion Points
- Business requirements for issuance and redemption
- Methods for connecting the CBDC system with core banking systems
- Non-functional requirements for various connection methods
- Considerations for various connection methods
Future Plans
- WG1 is currently paused. The results of the discussions will be used for the development of the experimental system.
- Discussion may resume by setting new themes as needed.
WG2: Additional services and the CBDC ecosystem
WG2 discussed potential additional services that could be realized through CBDC and the ideal form of an ecosystem where new services are created.
Main Discussion Points
- Conceptual understanding of the CBDC ecosystem
- Case studies of ecosystems in the payments area
- External linkage of CBDC related to additional services
- Potential of CBDC additional services
- CBDC as a service provision platform
API Sandbox Project
WG2 is building a collaborative experimental environment (API sandbox) in the cloud, with a focus on CBDC additional services, to develop and test various APIs.
- Participants: 18 companies voluntarily participate in two teams: “Sandbox Development Team” and “Additional Service Study Team.”
- Objective: Conduct practical research on CBDC functionality expansion and explore potential additional services and use cases.
Future Plans
- Continue deepening understanding through insights from private businesses on technologies supporting additional services and their implications for CBDC.
- Further examine potential additional services and use cases through the API Sandbox project.
WG3: KYC and user authentication/authorization
WG3 discussed the KYC procedures and user authentication/authorization methods for the CBDC system while considering measures against money laundering and terrorist financing (AML/CFT).
Main Discussion Points
- Current KYC, AML/CFT, authentication, and authorization implementation in existing fund settlement services
- Potential methods of KYC and authentication/authorization required for the CBDC system
Future Plans
- Examine the characteristics and ideal form of a fraud detection function within the CBDC system.
- Address additional themes and encourage further discussion as necessary.
WG4: New technologies and CBDC
WG4 discussed the impact and potential applications of new technologies such as distributed ledger technology (DLT) and crypto-assets (virtual currencies) on CBDC.
Main Discussion Points
- Ledger System
- Coexistence with other payment instruments and assets
- Front-end domain
Future Plans
- In addition to the backend domain, the discussion will expand to areas like coexistence with existing payment methods/assets and front-end domain.
- Focus will be placed on topics such as asset tokenization, interoperability with DLT platforms, and wallet technologies.
WG5: User devices and UI/UX
WG5 discussed user devices and the user experience (UI/UX) when individuals and businesses use CBDC.
Main Discussion Points
- Discussion on existing payment channels
- Discussion on “universally accessible” CBDC
- Discussion on “accessible anywhere” CBDC
- Discussion on “accessible under a wide range of circumstances” CBDC
- Other discussion points
Future Plans
- Based on past discussions, the group will continue to explore the necessary UI/UX and technologies to realize a CBDC that is “accessible to anyone, anywhere, and under a wide range of circumstances.”
- The group will also discuss UI/UX in contexts like e-commerce and P2P payments as needed.
WG6: Coexistence with other payment methods
WG6 discussed the interoperability and coexistence of CBDC with existing payment methods and private digital currencies.
Main Discussion Points
- Sharing discussions from other WGs
- Current state of private digital currency businesses
- Interchangeability between private digital currencies and CBDC
Future Plans
- Based on the discussions of other WGs, the group will analyze the current state of private digital currency businesses and further discuss the interchangeability and coexistence of CBDC with these currencies.
WG7: Business flows for basic functions
WG7 discussed the business flow of the CBDC system’s basic functions, referring to the existing mechanisms of fund transactions at financial institutions.
Main Discussion Points
- Exchange of cash and CBDC
- Operations related to basic functions
Future Plans
- Referring to various existing mechanisms (system processing, clerical work, operations, etc.), the group will examine the business flows for remittances and other functions within the CBDC system.
- The WG will take up additional themes for discussion as necessary.
The BOJ will continue to conduct PoC experiments and discussions within the CBDC Forum to examine the technical and institutional feasibility of CBDC, as well as its potential impact on society.