Navigating the Digital Frontier: A Closer Look at CBDCs and Japan's Position - Devrath Singh Rathore

Navigating the Digital Frontier: A Closer Look at CBDCs and Japan's Position 

Currency, as we know it, is a token or medium of exchange that facilitates the trading of goods and services, saving us valuable time. Throughout history, we have used various forms of currency, including paper money and coins. Long ago, the barter system was prevalent, but trading your gold necklace for 1 kg of rice wasn't a practical way to exchange goods. Slowly, societies began using tokens such as bronze and gold coins. With the advent of paper currency, these coins, along with the introduction of banks, became standardized mediums of exchange.

The Bank of Babylon, established in ancient Mesopotamia around the 18th century BC, is considered the world's first recorded bank. Interestingly, this bank was essentially a temple that served as a financial institution, providing loans and safeguarding valuable items (First bank in the world and the oldest bank in the world, 2020) [1]. It played a pivotal role in shaping the modern banking system. 

Until recently, a wave of decentralized cryptocurrencies gained popularity, with Bitcoin being a notable example. However, even before Bitcoin, early attempts were made to create widely accepted cryptocurrencies, such as eCash, developed by David Chaum's company, DigiCash, in 1990. Concepts like B-money, Bit Gold, and Hashcash paved the way for the cryptocurrency revolution we are experiencing today (Reiff, 2022) [2].

Central Bank Digital Currency (CBDC) is a state-controlled, digitalized form of currency. (Seth, 2023) [3] CBDCs are similar to cryptocurrencies, but with one key difference: their value is determined and fixed by the central bank, equivalent to the country's fiat currency. Essentially, CBDCs are digital versions of traditional money issued by the central bank. 

Figure 1

In a recent podcast by Lewis Howes with special guest Mihir Desai, the host mentioned that finance, often perceived as a complex skill, is not as intricate as it seems. He emphasized the difference between consumption and investment, which are sometimes confused. The entire currency system exists to facilitate spending, buying time, and seizing opportunities.

Implementing a centralized digital currency may not be an urgent necessity, but it can be a significant step toward keeping pace with the global economy. CBDCs can enhance economic growth by enabling faster transactions, supporting consumption of goods and services, and fostering environmental conservation. As technology advances rapidly, it's crucial to curb fraud and scams related to digital currency. 

An example of the potential of digital transactions can be seen in India with the Unified Payments Interface (UPI), even though it doesn't fall under the CBDC category. Over 300 million people are using UPI for transactions, with 500 million merchants accepting UPI payments for their businesses (Mistry, 2023) [4]. The importance of digital transactions has become even more evident in the post-pandemic world.

Like any other concept, CBDCs have their pros and cons. On the one hand, they can improve the banking system, promote rapid development, and reduce the reliance on paper currency, making transactions more environmentally friendly. They also have the potential to reduce fraud and enable better tracking of financial transactions.

However, on the flip side, several issues need addressing before CBDCs can become a viable option. These include concerns about technological infrastructure, educating citizens about usage, and the fact that not all citizens may have access to electronic devices needed for digital transactions. CBDCs might not permanently replace other currency systems but can exist alongside them as an efficient alternative.

Japan's CBDC Prospects

The feasibility of a country adopting a CBDC depends on various factors, such as its level of advancement and economic stability. A country like Japan, which is highly advanced and economically stable, is well-positioned to explore CBDC implementation. 

Japan, like many other countries, is closely monitoring the global developments in the realm of CBDCs. While Japan has not yet introduced a CBDC, it is actively considering the potential benefits and challenges associated with implementing a digital currency issued by its central bank.

Figure 2,
[8] Source: Bank Of Japan (2020); Shinzo Abe (official portrait, 2012)

 

The primary motivation behind exploring CBDCs in Japan is to enhance the efficiency and stability of the payment and settlement systems. Japan's Financial Services Agency (FSA) has been leading discussions on CBDCs, engaging with financial institutions and experts to understand the implications of digital currencies on the Japanese financial landscape (Japan’s Banks Plot Digital Currency Launch In 2022, 2021) [5]. 

One of the key factors influencing Japan's consideration of CBDCs is the declining use of cash in the country. Japan is known for its affinity for cash transactions, but in recent years, there has been a shift towards digital payment methods, particularly among younger generations [6] Kutty, T. (2022). The FSA recognizes the need to adapt to these changing consumer preferences.

Additionally, Japan has been closely observing the progress of digital currencies in other nations, particularly in China. (Kumar, 2022) [7] The People's Bank of China (PBOC) has been actively piloting its digital yuan, or e-CNY, in various cities. This has sparked interest in Japan about how a digital currency could impact international trade and cross-border transactions.

However, it's important to note that Japan, known for its meticulous approach to financial regulation, is taking a cautious stance. The Bank of Japan, the country's central bank, announced in early 2022 that it did not have immediate plans to issue a CBDC. Their approach is to carefully evaluate the benefits, risks, and technical aspects of a digital currency before moving forward.

The development of a CBDC is a complex process that involves addressing issues related to privacy, cybersecurity, financial inclusion, and compliance with international regulations. Japan is committed to ensuring that any digital currency it introduces aligns with these considerations.

In the coming years, it will be interesting to observe how Japan navigates the evolving landscape of digital currencies and whether it decides to move forward with a CBDC. While they may not be at the forefront of CBDC adoption, Japan's deliberative approach ensures that when they do enter the space, it will be with a well-considered and robust digital currency system.

Figure 3,
[9] Source: Atlantic Council CBDC Tracker (2023)

Although the Bank of Japan announced in October 2020 that they had no immediate plans to issue a CBDC, they do recognize the importance of maintaining payment and settlement system stability and efficiency. Japan is currently working on the development of its digital yen, making strides in the centralized digital currency world.

7. Reference list

    

   1. GBO Specialist (2020). “First bank in the world and the oldest bank in the world”. Money-gate. Available at: https://money-gate.com/first-bank-in-world/ (Accessed: october 17, 2023)

    

   2. Reiff (2022). “What Was the First Cryptocurrency?”. Investopedia. Available at https://www.investopedia.com/tech/were-there-cryptocurrencies-bitcoin/#:~:text=The%20first%20cryptocurrency%20was%20eCash%2C%20created%20by%20David%20Chaum's%20company,very%20influential%20in%20Bitcoin's%20creation.

   (Accessed: October 17, 2023)

    

   3. Seth (2023). “What Is a Central Bank Digital Currency (CBDC)?”. Investopedia. Available at:https://www.investopedia.com/terms/c/central-bank-digital-currency-cbdc.asp (Accessed: October 17, 2023)

    

   4. Mistry (2023). “The Rise of UPI: Transforming the way Indians transact”. Times of India. Available at: https://timesofindia.indiatimes.com/blogs/voices/the-rise-of-upi-transforming-the-way-indians-transact/ (Accessed: October 19, 2023)

    

   5.“Japan’s Banks Plot Digital Currency Launch In 2022” (2021). Vixio. Available at: https://www.vixio.com/insights/pc-japans-banks-plot-digital-currency-launch-2022 (Accessed: October 23, 2023)

    

   6. Kutty, T. (2022), “How Japan is moving towards a cashless society with digital salary payments “. Weforum. Available at: https://www.weforum.org/agenda/2022/09/japan-cashless-society-digital-salary-payment/ (Accessed: October 31, 2023) 

    

   7. Kumar (2022), “A Report Card on China’s Central Bank Digital Currency: the e-CNY”. Atlantic Council. Available at:

   https://www.atlanticcouncil.org/blogs/econographics/a-report-card-on-chinas-central-bank-digital-currency-the-e-cny/ (Accessed: October 31, 2023)

    

   8. Bank of Japan (2020). "The Release of "The Bank of Japan's Approach to Central Bank Digital Currency". Bank Of Japan. Available at: https://www.boj.or.jp/en/about/release_2020/rel201009e.htm (Accessed: 12 October, 2023); "SHINZO ABE" (2023). Wikipedia. Available at: https://en.wikipedia.org/wiki/Shinzo_Abe (Accessed: October 12, 2023)

   
   

   9.  Chhangani (2023). "Snapshot: Which countries have made the most progress on CBDCs so far in 2023". Atlantic Council. Available at: Snapshot: Which countries have made the most progress on CBDCs so far in 2023 - Atlantic Council (Accessed: October 12, 2023)