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Stablecoins are in the crosshairs as policymakers focus on sanctions busters, while Japan’s central bank digital currency (CBDC) study forges ahead.
A top official at the Bank of Japan (BOJ) has called for a new common framework to regulate cryptocurrencies throughout the G7.
Kazushige Kamiyama, head of payment and settlement systems at the BOJ, said the G7 must focus on building uniform regulations to ensure that crypto cannot be used to evade financial sanctions.
Referring to sanctions imposed on Russia, Kamiyama said that crypto poses a systemic threat to the existing global settlement system by making it easier to make payments outside conventional fiat currency rails.
"By using stablecoins, it's not very difficult to create an individual global settlement system," Kamiyama told Reuters in an interview last week.
"G7 nations are now working together on this front, while sharing information on current developments," he added.
Although Japan has supported efforts to sanction Russia following the invasion of Ukraine, including the removal of major Russian banks from SWIFT, it believes more can be done to tighten the sanctions loophole offered by crypto.
Challenging crypto with CBDCs
At the same time, Japan is also exploring its own CBDC.
This month, Japan will launch Phase 2 of its CBDC Proof of Concept (PoC) study. The Phase 2 study will last about a year, and will focus on whether limits ought to be applied to individual holdings of CBDC.
Phase 1 of the study, which launched in April 2021 and ran for about a year, tested the “technical feasibility” of the core functions and features required by a CBDC.
In the Phase 1 PoC, the BOJ developed a test environment for the CBDC system and conducted experiments on the basic functions that are core to a CBDC as a payment instrument, including issuance, distribution and redemption.
Haruhiko Kuroda, governor of the BOJ, has said that Japan could decide on whether to issue a CBDC as early as 2026, but it will depend on how quickly other nations move forward with their own CBDCs.
“While there is no change in the Bank's stance that it currently has no plan to issue CBDC,” Kuroda said in a speech on March 29, “we consider it important to prepare thoroughly to respond to changes in circumstances in an appropriate manner, from the viewpoint of ensuring the stability and efficiency of the overall payment and settlement systems".
“Amid various new combinations that are being created in an increasingly digitalised society, the Bank will continue to carefully consider the expected roles of central bank money for people's lives today and in the future, drawing on the wisdom of various stakeholders both at home and abroad.”
Payments system wants and needs
In October 2020, when the BOJ first outlined its plans for the study of a CBDC, it stressed the need for a two-tiered system of “wholesale” and “general purpose” CBDC.
The BOJ said the general purpose CBDC — also known as retail CBDC — would have three main functions:
- To introduce a new payment instrument alongside cash.
- To support private payment services.
- To develop payment and settlement systems for a digital society.
The BOJ pledged that it would continue to issue cash, regardless of the results of its CBDC study or the introduction of a CBDC.
“As long as there is public demand for cash, the Bank will stay committed to supplying it,” the BOJ said in its announcement.
The BOJ also said that it plans to study a general purpose CBDC to enhance the “stability” and “efficiency” of current payment and settlement services, and to promote innovation in overlay services among both bank and non-bank private payment service providers (PSPs).
“CBDC, as central bank money, should offer settlement finality of transactions and instant payment capabilities similar to cash,” said the BOJ.
“Moreover, CBDC should be usable in many of the same types of transactions as cash, including person-to-business and person-to-person payments.
“To that end, in order to enable fast settlement of frequent payments by many end users, CBDC needs to have sufficient processing capability and scalability in preparation for future increase in the use of CBDC.”
Serving as the basis for PSPs to offer various new payment services, the BOJ said a CBDC could function as a payment platform “unique to a digital society”, and different from cash or central bank deposits.
“It is therefore important that the CBDC system ensures interoperability with other payment and settlement systems and has a flexible architecture to adapt to changes in the future, including advances in private payment services,” it said.
Security is key in mobile payments market
In October 2020, the BOJ predicted that “[f]or the time being, it is unlikely that the cash in circulation [in Japan] would drop significantly” during its CBDC study.
Moreover, the BOJ acknowledged that the uptake of mobile payments services has been slow in Japan — an outcome attributed to the country’s ageing population, among other factors.
In the BOJ’s "Opinion Survey on the General Public's Views and Behavior", for example, which was published in June 2020, the bank asked Japanese consumers what would encourage them to make more use of mobile payments.
By a wide margin, the number one incentive from a list of options given was if mobile payments offered stronger security benefits.
The second most popular was if mobile payments became “simpler and easier”, and the third most popular was if mobile payments offered greater reward points via loyalty schemes.
Japanese consumers’ focus on security is also linked to the BOJ’s preference for a CBDC over what it calls “private digital money”, or bank-issued stablecoins.
In the BOJ’s words, an alternative scheme to a CBDC would be for firms to issue private digital money backed by central bank liability (e.g., central bank deposits) and based on the credibility of a central bank.
“Such digital money is not CBDC as it is not issued by a central bank,” the BOJ noted, and would likely not offer the trust and security that Japanese consumers demand from mobile payments.
It is for this reason that the BOJ stresses the importance of central bank issuance for both wholesale and general purpose CBDC.
Japan has also taken a vocal stance against non-bank stablecoins, which amount to “private digital money” minus the “central bank liability”.
