Japanese CBDC Could Be Pivotal in Payment Turf War

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In Brief
  • Further developments of a Japanese central bank digital currency (CBDC) could tip the balance in a potential turf war for payment providers.

  • Non-bank retailers are beginning to offer various online settlement means, threatening the position of commercial banks.

  • Depending on the further design of the digital yen, it could favor one payment paradigm over another.

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Further developments of a Japanese central bank digital currency (CBDC) could tip the balance in a potential payment provider turf war.

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In April, the Bank of Japan (BOJ) launched the first phase of its CBDC experiment. The BOJ is among a group of seven major central banks working with the Bank of International Settlements (BIS) to develop core features of CBDCs. 

However, by the end of the second phase, which is expected by the end of next year, Hideki Murai, who heads the ruling Liberal Democratic Party’s panel on digital currencies, said there should be a clearer understanding of some of the CBDC’s key functions. For example, which entities will serve as intermediaries between the BOJ and deposit holders.

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While there is still no ultimate decision on whether a CBDC will be issued, more details on its design could facilitate debate on how CBDC could affect financial institutions. The BOJ has speculated whether or not a digital yen would crowd out or meddle in private businesses.

Settlement turf wars

These CBDC developments are happening in the midst of massive financial upheaval in Japan. For instance, non-bank retailers are beginning to offer various online settlement means. This puts them in the crosshairs of commercial banks.

Murai believes that a CBDC could shift business and data away from such platform providers back to the banks if they are designed in a way that makes commercial banks key intermediaries.

“If the BOJ were to issue [a] CBDC, it would have a huge impact on financial institutions and Japan’s settlement system,” Murai said. “[A] CBDC has the potential to completely reshape changes occurring in Japan’s financial industry.”

Challenge of digital yuan

Aside from this, Murai also said the BOJ must ensure a digital yen is compatible with other CBDCs. He admitted this would be to counter China’s rapid progress towards issuing a digital yuan. Murai said that “the relationship between the yen and yuan could change,” if the digital yuan becomes the most convenient form of settlement.

However, another official of the BOJ had earlier spoken of his skepticism of the digital yuan. In April, Kazushige Kamiyama said that Joe Biden’s administration should not fear that the digital yuan would displace the dollar. Moreover, Kamiyama further highlighted his skepticism of the digital yuan.

 “I believe technology is constantly evolving, and the technology that they’re using currently might become outdated,” he said. “It might even hinder further technological innovation,” Kamiyama said. He added that for a currency to become popular, it has to be safe, stable, and move without restrictions. He implied that the yuan doesn’t meet those standards.

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Nick is a data scientist who teaches economics and communication in Budapest, Hungary, where he received a BA in Political Science and Economics and an MSc in Business Analytics from CEU. He has been writing about cryptocurrency and blockchain technology since 2018, and is intrigued by its potential economic and political usage. He can best be described as an optimistic center-left skeptic.

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