China continues to advance in the central bank’s digital currency race, as details of its secret digital yuan project appear intermittently. As a result, more countries are starting to worry about the potential implications.
In recent weeks, a number of Japanese lawmakers have publicly expressed their preference for a Bank of Japan-controlled CBDC. The general idea is to counter the digital yuan that will soon leave neighboring China and prevent it from disrupting the world economy.
According to a legislator of the ruling party, the development of a Japanese CBDC could take “two to three years”. Will it be too late to be a challenge for Beijing? What could a currency issued by the BoJ look like?
Bank of Japan vs. CBDC: a preference for cash
The Bank of Japan’s relations with the CBDCs date back to April 2018, when the agency’s deputy governor, Masayoshi Amamiya, raised the subject in public for the first time. Although the tone of his comment was mainly negative, the official did not rule out the possibility of considering the bank’s own cryptocurrency.
Specifically, Amamiya argued that issuing a general purpose CBDC would harm the existing financial system, as it would allow consumers to open accounts directly at the central bank and therefore completely abandon private banks, which which would place them at a major disadvantage:
“The issuance of general purpose central bank digital currencies could be analogous to allowing households and businesses to have direct accounts with the central bank. This can have a significant impact on the aforementioned two-level monetary system and the financial intermediation of private banks. “
The representative of the central bank concluded that, although his agency did not plan to issue its own virtual currency, it nevertheless realized that the application of emerging technologies was a possibility.
Six months later, in October 2018, Amamiya reiterated its mainly negative position towards the CBDCs. He said these digital currencies are unlikely to improve existing monetary systems, adding that the central bank has no plans to issue a CBDC that can be widely used by the public for settlement and payment purposes.
In his speech, Amamiya raised the idea of the CBDCs as a tool for central banks to control the economy once interest rates have fallen to zero. According to this theory, a state-controlled digital currency can allow central banks to charge more interest on deposits from individuals and businesses, which would encourage them to spend more money, thereby stimulating the economy. In particular, Japan was one of the first countries to introduce negative interest rates in 2016, alongside the European Central Bank.
For example, the BoJ’s deputy governor said that charging interest on the CBDCs would only work if central banks removed fiat money from the financial system, which is not an option for Japan, where the cash is still a popular form of payment. Otherwise, the public will continue to convert digital currencies into cash to avoid paying interest. Amamiya added, “In order for central banks to overcome the lower zero limit on nominal interest rates, they would have to get rid of the company’s liquidity.”
In February 2019, Bankof Japan released a detailed report on the CBDCs. The document, written by a BoJ official and a professor at the University of Tokyo, explored different ways of implementing a CBDC and the hypothetical consequences of these approaches. More specifically, the report focused on two types of CBDCs that had previously been classified by the Bank for International Settlements: one type accessible to the general public for daily transactions (such as banknotes) and the other used for large value settlements (central bank deposits) only.
Echoing Amamiya’s concerns, the authors of the document argued that the latter type of CBDCs would not improve the current monetary system and focused mainly on the first type in their analysis. The report also noted that the blockchain could be used for a token-based CBDC.
Finally, in July 2019, Amamiya again stated that countries issuing CBDCs with a negative interest rate would force the public to turn to money, while eliminating physical money is not an option.
Chinese threat: new wave of interest in CBDCs among Japanese politicians
In 2020, a year that has already been remarkably hectic in terms of global adoption of cryptography, Japanese lawmakers reverted to the idea of a CBDC. The wave of renewed interest was sparked by a parliamentary group of around 70 members of the ruling Liberal Democratic Party, alarmed by the rapid development of the digital yuan in neighboring China.
Earlier in January, the People’s Bank of China would have completed the design of the top layer and joint testing of its CBDC, which will be released soon. The idea that China could force other countries to digitize their currencies has been widely debated since the announcement of Libra in the summer of 2019 apparently prompted Beijing to accelerate the development of its digital yuan. One common theory is that China can revive its CBDC through its Belt and Road initiative, using it to maintain trade ties with a number of friendly developing economies.
Norihiro Nakayama, Parliamentary Deputy Minister for Foreign Affairs and key member of the Liberal Democratic Party of Japan, said on January 24: “China is moving towards the issuance of digital yuan, so we would like to propose measures to counter such attempts “.
On January 30, Amamiya of the Bank of Japan continued the discussion, stating that the central bank should be ready to issue a CBDC if public demand skyrockets due to rapid technical change.
Amamiya did not withdraw its previous claims on these digital currencies, as it stressed that the issuance of CBDCs would not significantly affect the effectiveness of monetary policy and its effect on interest rates, asset prices and bank loans. However, the BoJ official focused on technical innovations in settlement systems that the CBDCs could involve: “The transmission mechanism […] could become more complicated and difficult (to break) if the settlement systems change. “
Amamiya said the institution still has no imminent plans to issue a digital currency, as it continues to assess the potentially overlooked implications for monetary policy, as well as security concerns. It is “very important” for the BoJ to continue studying the possibility of issuing CBDCs, he added.
Akira Amari, former Minister of the Economy and member of the ruling Liberal Democratic Party, led a group of lawmakers on February 7 calling on their governments to push for digital currencies to be placed on the agenda of the G -7 this year. The 2020 G-7 summit will be held June 10-12 at Camp David, Washington. In particular, Amari and his allies clarified the source of their concern – the Chinese CBDC:
“We live in a stable world led by dollar settlement. How should we react if such a foundation collapses and if (China’s decision) gives rise to a struggle for monetary supremacy? “
Three days later, on February 10, another Japanese lawmaker stepped forward to support the idea of a digital currency issued by the BoJ. The head of the Liberal Democratic Party’s banking and financial system research commission, Kozo Yamamoto, said that Japan should create a digital currency in yen, hopefully “in two to three years”.
Is Japan too late for the party? Experts believe not
Jeff Wentworth, co-founder of Curvegrid, the Tokyo-based blockchain tooling start-up, believes that issuing a digital yen would be a logical step for the local central bank. He told Cointelegraph that “every economy needs a CBDC, just as almost every economy went from paper money to electronic banking in the 1980s” However, according to Wentworth, Amari may overestimate the influence of a CBDC issued by China, as its performance will probably depend on the conception of the currency:
“The CBDCs in general will upset the current status quo, but it is difficult to say what the impact of the digital yuan in particular on the world money balance will be. A key consideration is the decentralization of the yuan and other CBDCs. “for the most part centralized, they will only be CBDCs and will not be much different from the current state of electronic money. Larger changes are likely to be driven by CBDCs who are taking a more decentralized approach.”
Maurizio Raffone, CFO of blockchain company Credify, which is also based in Tokyo, shared a similar sentiment, saying that the digital yuan may not dethrone the U.S. dollar in the near future:
“At least in the next few years, I don’t see a digital yuan replacing the USD. China should remove currency control over the yuan (as it would be linked to the digital yuan), which would mean some loss of control over monetary policy, which the Chinese government simply will not do. ”
Nevertheless, Raffone added that the BoJ was late for a CBDC since its flexible monetary policy is running out of space, and that, “a CBDC could be a great way to improve monetary speed in the Japanese economy and stimulate GDP growth. “He added that Japan should take into account technical and financial considerations, adding:
“Technically, the CBDC of Japan would be a formidable pole of digital transformation and innovation for all Japanese financial services companies and a means for them to piggyback on the digital currency of the Bank of Japan to push their own product development . Financially, a CBDC could be a huge money saver for banks as well as an effective tool to protect against tax evasion and money laundering. “
The two experts agree that, although the People’s Bank of China is considered to be the precursor to the CBDC race, it is not too late for the Japanese central bank to launch its own digital currency project, because two to three years in terms of global financial markets are still pretty fast.
As for the United States, its officials recognize that the prospect of the digital yuan could pose a threat to the domination of the US dollar, but prefer to remain on the sidelines for the time being. Earlier this week, Congressman Bill Foster asked a Federal Reserve official about the matter, and was told that the institution was still unsure whether deploying such a digital currency would be beneficial for the American economy.
Meanwhile, China continues to finalize its CBDC project, leaving other countries behind. On February 12, the Financial Times reported that the Chinese central bank had filed more than 80 patents related to its undisclosed plans to launch the digital yuan and how it integrates into the banking system.