Bank of Japan CBDC PoC Phase 2 Results-Kannan Sathishkumar

Central Bank Digital Currencies (CBDCs) have emerged as a focal point in the global financial landscape, prompting several central banks, including the Bank of Japan (BoJ), to delve into exploratory phases to comprehend their feasibility and implications. The BoJ has diligently undertaken a structured Proof-of-Concept (PoC), specifically focusing on Phase 2 of their CBDC initiative, conducted between April 2022 and March 2023.

This phase was primarily dedicated to identifying potential technical hurdles, evaluating basic functionalities as well as integrating additional, desirable functions that were not addressed in Phase 1. The objective was twofold: first, to unearth any technical challenges that might impede the smooth operation of a CBDC system, and second, to verify the technical implementation and processing performance. The BoJ emphasizes that no final decision regarding the introduction of a CBDC in Japan has been made at this stage.

They emphasize the need for ongoing preparations and technical verifications to be ready for potential outcomes following a national discussion. Phase 2 was meticulous in its approach, categorizing peripheral functions into three groups. The economic design aimed to prevent sudden shifts from bank deposits to CBDC through various safeguards.

It involved testing restrictions on maximum amounts held, transaction amounts, and numbers. Additionally, the PoC explored automatic conversion of excess amounts to bank deposits when upper limits were breached and even delved into the prospect of paying interest on CBDC holdings. Enhancements in payment convenience were also addressed, focusing on persistent remittance instructions, batch and reverse remittances, and the provision of multiple accounts to a single user.

The evaluation involved connectivity to external systems and assessed the use of new technologies such as variable denomination tokens and the potential implementation of a NoSQL database, aspects not scrutinized in Phase 1. The testing encompassed multiple design patterns for the CBDC ledger, where various models were constructed and deployed on the public cloud. The account-based ledger design recognized CBDC holdings as balances held by intermediaries and end-users, while the token-based ledger assigned unique identifiers to monetary data, establishing CBDC holdings linked to specific user IDs.

Furthermore, the PoC introduced a fourth pattern, expanding on the token-based CBDC ledger by incorporating a multi-ledger architecture. This addition aimed to augment the system's efficiency and flexibility in managing and recording account balances for both intermediaries and end-users. To integrate these peripheral functions, multiple systems were developed, and APIs played a pivotal role in linking these systems together. These included a transaction history management system that regulated transaction amount and frequency limits, and a reservation management system that automatically activated remittance instructions reserved by users.

The performance evaluation of these systems was crucial. Tests were conducted with the same number of users and intermediaries as in Phase 1, assessing the system's capacity to handle normal and high loads. The results confirmed that the system was resilient, handling the same number of cases without performance bottlenecks. However, a marginal increase in latency was observed due to the amplified processing volume and the greater number of systems involved compared to Phase 1. This meticulous testing and evaluation in Phase 2 signify the dedication of the BoJ to thoroughly understand the technical intricacies and potential implications of a CBDC.

The broad categorization of functions, integration of various design patterns, and rigorous performance evaluation depict a systematic and comprehensive approach towards the possible implementation of a CBDC in Japan. The phased approach undertaken by the BoJ underlines the importance of not only assessing the technical aspects but also stressing the need for national discussions and considerations before making a final decision. This deliberative process underscores the importance of being well-prepared and adaptable to address any outcomes that may arise from these discussions, ensuring a well-informed decision on the potential introduction of a CBDC in Japan.

REFERNCE LIST

1.Medium BLOG Online-- https://medium.com/tokyo-fintech/stablecoin-for-environmental-tokens-with-digital-currency-settlement-5f006c5bc6c5

2.Ledger Insights BLOG Online--https://www.ledgerinsights.com/bank-of-japan-cbdc-token-payments/

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