Japan, U.S. To Launch CDBC Tests

Japan is to begin testing a CBDC alongside three megabanks in 2023. The New York FED recently announced another pilot.

Yen bank notes
Japan, U.S. to launch CDBC tests. (Pic by jun Rong Loo on Unsplash)

In Short

  • Bank of Japan to begin digital yen trials in early 2023.

  • Regional megabanks to participate in the program.

  • New York FED started a pilot as well.


Japan's Digital Yuan test

Japan's central bank plans to begin a digital yen testing program in 2023. The Bank of Japan (BoJ) expects to launch the experiments early next year in partnership with several financial institutions and private banks in the country.


According to the coverage, which cited a report by local news agency Nikkei, the "stress tests" will be aimed at testing the functioning of the CBDC and identifying potential problems with deposits and withdrawals. They also seek to analyze whether the digital system can function under adverse scenarios, such as natural disasters or in areas without Internet access.


Although Nikkei did not disclose the names of the financial institutions participating in the pilot, the report suggests that "three regional megabanks" will work alongside the BoJ in the experiments, including Japan's largest bank. CoinDesk suggested that the entities could be Mitsubishi UFJ Financial Group Inc, the country's largest bank, Sumitomo Mitsui Financial Group Inc, and Mizuho Financial Group Inc, as they are Japan's three megabanks.


The reports added that the program would last two years, and the Japanese authority would formally decide whether to adopt a digital yen in 2026. A BoJ official said last year that the central bank's priority was to ensure that a CBDC allows competition among private payment providers and is universally accessible to the public. The BoJ launched the first phase of its digital yen experiment in April 2021 but had so far taken things slowly.


Now, Japan is taking a more active approach to test its CBDC as other world powers, such as China, take the lead in these developments. Most major economies are trying to develop some form of state-backed digital currency. This week the Bank of England highlighted the need for a digital pound.


New York Federal Reserve's trial

The NYIC (New York Federal Reserve's Central Bank Innovation Center) announced on Tuesday, November 15, that it would conduct a 12-week trial of a central bank digital currency (CBDC).


The New York Fed says such a program will explore the feasibility of an interoperable network of wholesale digital central bank money and commercial bank digital money operating in a distributed ledger shared by multiple entities.

Major banking firms such as Citi, BNY Mellon, Mastercard, PNC Bank, TD Bank, Truist, U.S. Bank, and Wells Fargo will be present in the pilot program, issuing tokens and settling transactions through simulated central bank reserves. The project, called the Regulated Liability Network, will be in a test environment.


The pilot project will be able to test the technical feasibility, legal viability, and commercial applicability of distributed ledger technology, also of token simulation and will review existing regulatory frameworks. According to the New York Fed, this project could extend to multi-currency transactions and regulate stablecoins.


In remarks by Per von Zelowitz, director of the New York Innovation Center:

"NYIC looks forward to collaborating with banking community members to advance research on asset tokenization and the future of financial market infrastructures in the U.S. as money and banking evolve."

According to the release, this pilot program does not intend to advance toward any specific policy outcome, nor is it intended to imply that the Federal Reserve will make any decision on the appropriateness of issuing a retail or wholesale CBDC. The results will be published once the test finishes.


Michelle Neal, head of the New York Fed's market group, says she sees promise in using a digital central bank dollar to speed up settlement times in markets, particularly foreign exchange.


U.S. regulators have yet to agree on the launch of a digital dollar. However, agencies and the private sector have been exploring that possibility. After U.S. President Joe Biden issued an Executive Order calling for a framework on digital assets, several lawmakers raised the roles of Congress in passing legislation in support of a CBDC and how the digital dollar might instead sabotage innovations in the private sector.



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