Japan wants to ensure the coexistence of CBDCs with other forms of money

This morning, Bank of Japan (BOJ) Governor Haruhiko Kuroda spoke on the evolution of payment systems and argued that central bank digital currencies (CBDCs) should coexist with other forms of money and digital currencies, such as stablecoins. He also commented on the BOJ’s recent announcement about launching a pilot program for the digital yen in April.

In his speech, Mr. Kuroda explained that the BOJ does not see CBDCs as excluding or replacing other forms of money. “Ensuring the coexistence of CBDC with various other forms of money […] is something that we need to and will in fact achieve in the future,” said the Governor. He also wants to collaborate with the private sector to develop “a payment instrument in digital form that is safe and usable anywhere, anytime.”

As for the upcoming pilot program, the goals will be to test the technical feasibility of integration with different stakeholders and improve the design of the digital yen. To date, trials have been largely internal, following two years of proofs of concept (PoC). While no decision to issue a digital yen has been made yet, the BOJ wants the multi-phase pilot program to become a first step toward finding designs that address users’ needs.

The Governor also spoke of notable developments in payment services, including the unbundling of services and functions and the simplification of payment arrangements. In both cases, he observed the potential for stablecoins.

First, he described stablecoins as representing “an unbundling of two payment functions.” With commercial bank money, the bank is effectively the issuer and records the asset in its own ledger. In contrast, with stablecoins, there is a stablecoin issuer, but the ledger is a separate permissionless blockchain.

Hence that unbundling will allow the entry of new entities aside from those in charge of the payment functions, leading to new innovative services. Another example is programmability functions, such as conditional payments. With stablecoins the conditionality can be added by third parties. In contrast, with commercial banks, the issuer controls the conditionality.

The second area is the simplification of payment arrangements, particularly in cross-border settlements. Mr. Kuroda observed that private-sector stablecoins and wholesale CBDCs might significantly enhance the efficiency in interbank cross-border settlements by providing simpler alternatives. This is compared to correspondent banking which inherently involves intermediaries.