Central bank digital currencies (CBDCs) are not a new concept. In fact, with the sidelining of Facebook’s Libra project, the concept of CBDCs even seemed to have become a bit passé–that is, until last week.
Indeed, on July 14th, Japanese news outlet Nikkei reported that the Japanese government is going to include the include consideration of a CBDC in its official economic plan, known as the ‘Honebuto Plan for Economic and Fiscal Revitalization.’
Nikkei reported that specifically, the Japanese government said in a statement that it “will consider a CBDC while coordinating with other countries” (translated quote.)
Additionally, the announcement of the inclusion of the CBDC in the Honebuto Plan came 10 days after the Bank of Japan’s announcement that it would begin exploring the technical feasibility of a ‘digital yen’.
What could Japan’s motivations be for announcing the exploration of a digital currency at this moment in time? And does Japan’s interest Japan’s CBDC announcement the next step in the inexorable global march toward a digital currency-based, cashless world?
Was Japan’s CBDC exploration a response to China’s CBDC development?
Joel Edgerton, the chief operations officer of the United States arm of BitFlyer, explained that one possible reason for Japan’s decision to announce the exploration of a CBDC could be a sense of competition with a certain westward neighbor.
Edgerton said that it’s possible that “[Japan] may feel threatened by the progress being made by China’s CBDC,” the development of which was announced several years ago.
While the exact timeline for the launch of China’s CBDC is unknown, the country has said that the development of the project would be accelerating in response to the development of Libra.
However, even though the development of Libra seems to have been delayed by regulatory woes, China has not backed down on its plans to create a national digital currency–a factor that could put pressure on other nations around the world.
Facebook chief executive Mark Zuckerberg made this point when he testified before congress regarding Libra near the end of 2019, seemingly trying to paint Libra as a sort of digital ambassador for the good old USD–and by proxy, the United States.
“China is moving quickly to launch similar ideas in the coming months,” Zuckerberg said during his opening remarks. “Libra will be backed mostly by dollars and I believe it will extend America’s financial leadership as well as our democratic values and oversight around the world.”
A global CBDC ‘arms race’ in a developing (crypto)currency war?
In other words, part of Japan’s reasoning behind the exploration of a digital currency could be to prepare for a possible digital arms race in what could become a (crypto)currency war in the future.
If China (or any other country, for that matter) could be the first to create a CBDC and incentivize its use in global markets, there could be much gain to be had–and at this point, many countries have begun to consider the development of a CBDC.
Indeed, bitFlyer’s Joel Edgerton told Finance Magnates that “if China’s CBDC became preferred for transactions in Asia and globally, Japan may lose economic opportunities and prestige.”
Similarly, John Deacon, the Financial Services Lead at cybersecurity and cryptography firm Dragon, told Finance Magnates that “as with existing cryptocurrencies, there is likely to be some degree of first-mover advantage in the space.”
“With China launching the digital yuan, this has the potential to become a currency arms-race for maximum adoption, with the prize being increased use of CBDCs in central bank reserves and international trade.”
Joel Edgerton added that this could potentially have a number of significant ramifications: for example, “carrying this point to an extreme, if Japanese themselves started to prefer the Chinese CBDC, it would be difficult for the Japanese government to sustain their massive debt load with domestic investors.”
“This could lead to a situation similar Greece during the financial crisis: a government enjoying low-interest rates suddenly needs to borrow on a market that no longer is willing to offer cheap funds.”
Countries may be gravitating toward CBDCs because of their technological potential
Of course, it’s also very possible that Japan’s CBDC exploration initiative may not be so much the result of a digital currency arms race as it is the result of a more generalized push toward digitalization and innovation.
Specifically, Joel Edgerton said that “the consideration for countries is more likely about not losing economic power rather than gaining economic power.”
“As an innovative technology seeks to replace an incumbent technology, there is a risk of those that hold to the incumbent technology becoming irrelevant.”
FXTM Launches Commission-Free Stock Trading ServiceGo to article >>
For example–as Scott Freeman, co-founder and partner at JST capital–explained that if formed, “Japan’s CBDC should allow for quicker and safer transfer of JPY between anyone around the globe.”
Indeed, “corporations, banks, and others” who need to make international transactions in their day-to-day operations may be more likely to use a CBDC (such as a digital JPY) “as compared to other currencies,” because of the assurance that “they know they can safely and quickly move it.”
”CBDCs are likely to gain significant adoption worldwide.”
Regardless of whether countries may be focusing on gaining economic power rather than fearing that economic power could be loss, the trajectory seems to be going in the same direction: for many, a global landscape populated with CBDCs is becoming increasingly realistic.
Dragon’s John Deacon also told Finance Magnates that “with the ongoing digitalization of domestic economies and increased seigniorage on moving away from paper currency, CBDCs are likely to gain significant adoption worldwide.”
Indeed, beyond the possible advantages that CBDC-adopting companies may gain over one another, there are could be a number of benefits inherent to the technology that would support a global push toward CBDCs.
“Given the potential ability of CBDCs to be used internationally without incurring the significant transaction fees typical on making cross-border payments in fiat currency, whilst still maintaining direct government backing, CBDCs are also likely to become a significant feature of the international landscape,” Deacon told Finance Magnates.
“Over time, implementation of CBDCs will become an industry standard.”
Similarly, Alex Axelrod, chief executive of cryptocurrency account and payments firm Aximetria, explained to Finance Magnates that “over time, implementation of CBDCs will become an industry standard, so we should speak not as much about its impact, but about the advantages that the states that launch CBDCs will instantly gain.”
“From these advantages, positive economic factors could possibly materialize,” and this may eventually be the real reason that other countries choose to develop CBDCs. However, Alex believes that “by itself, the use of CBDCs within just one country alone does not create international influence.”
JST Capital’s Scott Freeman told Finance Magnates that the march toward global CBDC implementation is just a matter of time.
Indeed, as more and more countries develop CBDCs, more and more countries will need to develop CBDCs: “we believe every central bank–and all commercial banks for that matter–will [eventually] need to develop a strategy for implementing digital currencies,” he said.
“As first movers, Japan’s and China’s CBDC will serve as testing ground that other banks and governments can look to as they continue to develop their plans.”
Logistical concerns for Japan’s possible CBDC implementation
However, Joel Edgerton pointed out to Finance Magnates that there are some specific concerns when it comes to the practicalities of implementing a CBDC in Japan specifically.
“As a country prone to earthquakes or tsunamis, the resilience of a CBDC when power or telecommunications are down is an important consideration,” he told Finance Magnates.
A similar point was raised by Spiros Margaris, fintech influencer and founder of Margaris Ventures, in an interview with Finance Magnates earlier this year about the feasibility of a truly cashless society.
Margaris pointed out that even with today’s technology, a cashless financial ecosystem could easily crumble in the face of natural disaster.
“What if we don’t have electricity for two weeks?”, Margaris asked. “How are you gonna get the money out of your bank? How are you going to pay for something? It could happen. I mean, anything could happen.”
Therefore, as it currently stands, it may be that “there’s a value to cash” that can’t be totally replaced by a CBDC–at least, not yet. And indeed, this is probably the reason why Japan’s CBDC initiative is only exploratory at the stage.
Indeed, Michael Hamelburger, chief executive of The Bottom Line Group, told Finance Magnates that “at this stage, there’s not a lot of concrete evidence” that Japan’s exploration will come to fruition as a fully-formed digital currency “since it’s still considering resiliency concerns (for example, IT shutdowns) and access by all age groups once it issues a CBDC in the future.”
Additionally, beyond disaster scenarios, a shift toward a CBDC could mean a significant cultural shift for Japan.
“Japan is also a country that tends to prefer cash transactions, so ease of use is important to convince people to change behavior,” Edgerton explained, adding that “point-of-sale systems and debit card transactions would need to be included in their mix of transaction points.”
Aximetria’s Alex Axelrod, told Finance Magnates that Japan’s propensity for cash could be a part of the reason for the CBDC exploration: that “the introduction of CBDC in Japan has several objectives at once,” including “[reducing] the amount of cash in circulation,” and–perhaps thereby–”increasing the transparency of payments.”
What are your thoughts on Japan’s exploration of a CBDC? Let us know in the comments below.