Policy Proposal on Central Bank Digital Currency (CBDC)— Clarifying the "Purpose" of Introducing CBDC and Ensuring Its Flexibility —

Summary of the Proposal

The potential challenges surrounding the introduction of Central Bank Digital Currency (CBDC) are highly complex and interrelated. Therefore, rather than addressing each issue in isolation, it is essential to begin by clarifying the overarching purpose of introducing a CBDC, and to organize specific issues based on that purpose.

In this proposal, as a provisional assumption, we examine various challenges associated with CBDC implementation on the premise that financial inclusion and universal service constitute the highest-level purpose.

At the same time, this highest-level purpose may evolve in response to future innovations, changes in the domestic and international economic environment, and shifts in public awareness. From this perspective, agile governance becomes critically important. For a successful CBDC rollout, it will be vital to:

ensure that stakeholders are capable of responding flexibly to changes in purpose, and

promote public understanding of this need for flexibility, including among the media and the general public.

Proposal

1. Current State of CBDC

Central Bank Digital Currency (CBDC) refers to digital currency issued by a central bank. Unlike electronic money—which is generally issued by private companies (and thus constitutes a liability of those companies) as a substitute for physical cash—CBDC takes the same digital form but is issued (and therefore becomes a liability) by the central bank.

Discussions on CBDC initially focused on use cases for institutional users (wholesale CBDC). However, following the announcement of the Libra initiative, a global debate emerged around whether central banks should issue their own digital currencies. This prompted increased attention to use cases for individual users (retail CBDC) (1).

CBDC-related research and pilot testing have been actively pursued around the world, reflecting the strong interest held by central banks in various countries. In Japan, the Bank of Japan has completed its proof-of-concept Phase 2 and is scheduled to begin a pilot program in April 2023 (2). The Bank has also released multiple research reports on the topic (3).

As of now, however, the Bank of Japan has stated that it “has no plans to issue a CBDC” (as of February 2023) (*4). It has clarified that the ongoing pilot programs are not based on a predetermined policy to issue CBDC, but rather on the recognition that “it is important to be well-prepared in case social demand for CBDC rapidly increases in the future.” This suggests a cautious and preparedness-oriented stance, rather than one of hastily pushing toward implementation.

A similar approach can be seen among other central banks, especially in advanced economies, where careful preparation and preliminary assessments are being conducted, but few have committed to a specific timeline for CBDC issuance. At present, the only countries that have formally introduced CBDCs are limited to island nations and others where a significant portion of the population is unbanked or underbanked, or where maintaining an independent cash distribution system is cost-prohibitive (*5). Even in these cases, adoption rates remain relatively low (see Table 1).

Table 1: CBDC Adoption by Country – Introduction Dates and Adoption Rates

　(Compiled by the Policy Research Institute based on various sources)

＊1　Based on remarks by the Governor of the Central Bank of The Bahamas. Refers to the proportion of CBDC in circulation relative to total currency issued.

https://www.globalgovernmentfintech.com/bahamas-central-bank-cbdc-sand-dollar-first-two-years/

＊2　Calculated by dividing the number of wallet downloads (942,000) by Nigeria’s population (213.4 million).

Wallet downloads: IMF Report

https://www.elibrary.imf.org/downloadpdf/journals/002/2023/093/002.2023.issue-093-en.xml

Population: World Bank

https://data.worldbank.org/indicator/SP.POP.TOTL?locations=NG

＊3　Calculated by dividing the number of wallet registrations (185,000) by Jamaica’s population (2.828 million).

Wallet registrations:

http://radiojamaicanewsonline.com/business/jam-dex-uptake-gradually-increasing-clarke

Population: World Bank

https://data.worldbank.org/indicator/SP.POP.TOTL?locations=JM

The pace and cautious stance of central banks regarding the introduction of CBDC likely reflect the wide range of complex challenges associated with its implementation, which will be discussed later in this paper. Nonetheless, the global shift toward cashless payments—driven in large part by the widespread adoption of smartphones—has advanced rapidly in recent years. In anticipation of a future point at which the introduction of CBDC may become necessary, it is important to begin by thoroughly examining the relevant challenges.

CBDCs are generally categorized into two types: retail CBDCs, which are intended for use by the general public including individuals and businesses, and wholesale CBDCs, which are primarily used for large-value transactions among financial institutions. Unless otherwise noted, this paper focuses on the retail CBDC model.

2. Challenges in Introducing CBDC

Challenges associated with the introduction of CBDC can be broadly categorized into technological, institutional, and business-related dimensions. While various technical issues are already being examined in detail through advanced proof-of-concept testing by the Bank of Japan, this paper focuses specifically on the institutional and business-related challenges.

Key challenges in these areas include:

・whether CBDC should be granted legal tender status,

・its designation as a universal service,

・the treatment of physical cash,

・the avoidance of undue competition with the private sector, and

・how to balance anti-money laundering/countering the financing of terrorism (AML/CFT) requirements with the preservation of user anonymity.

The following sections describe each of these challenges in detail.

（1）Legal Tender Status, Designation as a Universal Service, and the Treatment of Cash

Banknotes issued by the Bank of Japan (i.e., physical currency) are granted legal tender status under Article 46, Paragraph 2 of the Bank of Japan Act, meaning that merchants and other parties cannot refuse to accept them in settlement of payments.

If a CBDC were to be granted the same legal tender status, merchants and other businesses would likewise be prohibited from refusing to accept it. However, if the necessary infrastructure—such as communications networks, compatible devices, and applications—is not universally available, granting such legal tender status could provoke public backlash.

Even today, the expansion of merchant acceptance remains a challenge for private-sector digital payment services and often requires significant upfront investment. In the case of CBDC, this cost burden could become even more substantial, further complicating efforts to ensure its universal accessibility.

(Reference) When considering the universality of CBDC’s remittance function, one analog example worth referencing is the use of postal money orders (such as regular postal money orders and fixed-amount money orders) sent by mail.

Under the Postal Act, postal delivery is legally defined as a universal service nationwide, ensuring reliable reach※1. Additionally, since the use of money orders does not require the recipient to open a bank account, funds can be received without relying on financial institutions※2. In this sense, mailing money orders can be regarded as one of the most robust forms of universal remittance services.

In examining the universality of CBDC, it is essential to break down and consider multiple components—such as network coverage, compatible devices (including physical media such as cards, where applicable), and applications. Comparing each of these elements to the postal money order model may provide valuable insights in assessing the universal service nature of CBDC.

※1 Acceptance (placement of post offices and mailboxes), pricing, and delivery (in principle, once daily; delivery deadlines; and designated geographic delivery zones) are defined under the Postal Act and related regulations.

※2 Access to a Japan Post Bank counter is required to exchange a money order for cash.

In order to provide CBDC as a universal service, as described above, it will be necessary to consider how the costs of system development and implementation should be borne by participating private-sector entities—particularly the intermediaries discussed later in this paper. Where appropriate, the possibility of public financial support should also be examined.

These considerations are also closely linked to the broader question of whether physical cash should continue to be maintained. While the current social and economic context suggests that retaining access to cash remains necessary, it is conceivable that, if CBDC or private-sector digital payment services were to become sufficiently widespread and successfully established as universal services, discussions could begin on phasing out cash, or society may organically shift toward a cashless environment.

Conversely, if CBDC fails to fulfill the functions of a universal service, the continued maintenance of cash would remain essential. Indeed, the Bank of Japan has stated that, as long as there is societal demand for physical cash, it will continue to provide it (*6).

（2）Avoiding the Crowding Out of Private Sector Services

This issue is closely related to the matter of legal tender status discussed in (1). Given that many private-sector electronic payment services currently available—such as credit cards and various “〇〇Pay” platforms—offer user experiences similar to what a CBDC would provide, it is worth considering whether a CBDC should be granted such strong legal tender status or functionality that it risks crowding out these existing services. Notably, the Bank of Japan’s various reports have consistently indicated a stance of not hindering the growth and development of such private-sector services.

In fact, the Bank of Japan's publications (*7) assume a so-called two-tier (or multi-tier) structure, in which intermediaries operate between the central bank and CBDC users (see Figure 1). These intermediaries—primarily envisioned as private-sector entities—would handle the indirect issuance of CBDC. Because such intermediaries engage in credit creation based on their deposit holdings, careful consideration may be required regarding CBDC system design, including potential restrictions on CBDC functionality and holding limits, to avoid undesirable impacts on credit creation through a shift of funds from deposits to CBDC.

(Figure 1) Two-Tier (Multi-Tier) Structure for CBDC Issuance

Users

• Plain CBDC with no additional services

• Additional services (e.g., personal finance tools, programmable payments, P2P messaging, data analytics, etc.)

Intermediaries (Intermediary Institutions)

• Responsible for intermediary services, including:

  　・Issuance and redemption

  　・Transaction flow handling (e.g., KYC, wallet provision, transfers, and payments)

• May outsource some intermediary functions to other private sector entities

Bank of Japan (CBDC Issuance)

CBDC Infrastructure (Basic Payment Means)

• Intermediaries provide basic CBDC infrastructure to all users

• CBDC is a foundational payment means, with intermediary functions possibly outsourced

Additional Services

• Private businesses and intermediary institutions offer various value-added services leveraging CBDC

  　・Examples:

  　　・Budgeting tools

  　　・Programmable payment services

  　　・Information transmission between users

  　　・Utilization of transaction data

(Source) https://www.boj.or.jp/paym/digital/rel220513b.pdf

(3) Balancing AML/CFT and the Protection of Anonymity

Since CBDC can serve as a means of payment, it is necessary to address anti-money laundering and countering the financing of terrorism (hereinafter referred to as “AML/CFT”). At the same time, many reports from various countries suggest that CBDC should maintain a certain level of anonymity, similar to that of cash. Because AML/CFT and the protection of anonymity are inherently in tension, it is important to implement CBDC in a way that reflects social realities and strikes an appropriate balance.

It should also be noted that it would be challenging for a central bank to directly handle AML/CFT operations. Many experts suggest that it is more realistic for entities other than the central bank (e.g., private companies) to undertake such roles. From this perspective, the existence of intermediaries—such as those discussed earlier—who are responsible for AML/CFT operations is considered rational.

While it is technically possible for CBDC to operate entirely differently from current paper currency, making anonymity unnecessary, in practice, many countries are designing systems that offer a moderate degree of “soft” anonymity. For example, some pilot programs set a basic limit on the amount that can be transferred anonymously. If a user undergoes identity verification through an intermediary, the transfer limit may be raised. Examples of such system designs can be found in Table 2.

(Table 2) Identity Verification Methods and Transfer Limits at the Time of CBDC Introduction in Various Countries

（Compiled by the Policy Research Institute based on various sources)

＊4　Transfer limits may be relaxed through authentication by intermediary institutions.

＊5　https://www.centralbankbahamas.com/viewPDF/documents/2019-12-25-02-18-11-Project-Sanddollar.pdf

＊6　https://www.cbn.gov.ng/Out/2021/FPRD/eNairaCircularAndGuidelines%20FINAL.pdf

https://www.enaira.gov.ng/wallet/get-started

＊7　https://boj.org.jm/core-functions/currency/cbdc/cbdc-faqs/

＊8　https://ug.linkedin.com/posts/jfjabbo_jam-dex-cbdc-instruction-manual-activity-6975134739355607040

These issues are interrelated and include inherently conflicting elements. As such, discussions on these matters tend to resemble the process of solving a complex puzzle. Based on consultations with various stakeholders, the Policy Research Institute has reached the conclusion that clarifying the overarching "purpose" of CBDC introduction is essential for organizing and structuring the related discussions.

Section 3 below outlines how central banks currently define the "purpose" of CBDC introduction, followed by Section 4, which provides a detailed example of how related challenges may be organized based on a hypothetical "purpose."

3. The "Purpose" of Introducing CBDC

Despite being a top-level concept, the "purpose" of introducing a CBDC has not been clearly defined to date. For example, in the case of the Bank of Japan, the following have been stated under the expression "expected functions and roles" (*8):

(1) Introduction of a means of payment comparable to cash

(2) Support for private payment services

(3) Development of a payment system suited to a digital society

For points (1) and (2), certain preconditions are noted: for example, in the case of (1), “if private digital money cannot sufficiently substitute for the functions of cash,” and for (2), “if necessary from the perspective of improving the stability and efficiency of the overall payment system.” While (1) overlaps to some extent with the “purpose” of providing financial inclusion and universal service, as temporarily assumed in Section 4, it seems to be positioned more as a contingency policy in case of deficiencies, rather than as an aspirational goal. Similarly, (2) does not elevate the aim of “enhancing the overall stability and efficiency of the payment system” to the level of a clearly stated purpose.

As for (3), while it notes the “possibility of contributing to the development of a stable and efficient payment system suited to a digital society,” it does not specify what exactly would constitute being “suited” to such a society.

In addition, discussion papers (9) and working papers (10) have also been published by the U.S. Federal Reserve Board (FRB) and the European Central Bank (ECB). However, these primarily focus on analyses of the potential benefits and risks of CBDC introduction, or on specific aspects of system design, and do not provide a clearly defined and articulated "purpose."

As such, it can be said that central banks both in Japan and abroad have yet to clarify the "purpose" of introducing CBDC, and that this lack of clarity contributes to the complexity of evaluating and discussing related challenges.

4. Clarifying the “Purpose” of CBDC Introduction (Trial)

As described in Section 2, the challenges associated with the introduction of CBDC are interrelated and often contain conflicting elements. In order to advance appropriate social implementation, our institute believes it is necessary to revisit and clearly define the top-level “purpose” of introducing a CBDC, which has not yet been clarified.

To that end, our institute has conducted a trial analysis of the relevant challenges, assuming as one example that the top-level “purpose” is the “enhancement and efficient provision of financial inclusion and universal service” (hereinafter referred to as “financial inclusion, etc.”).

It should be noted that financial inclusion has been cited as a primary motivation for issuing CBDC in countries such as Jamaica (11) and Nigeria (12), and in certain countries or regions, it can be considered a realistic objective. However, the “purpose” of CBDC introduction naturally varies by country and region. Therefore, we ask that readers understand that the following analysis is not intended to target or assume any specific country or region.

(1) Legal Tender Status, Positioning as a Universal Service, and Handling of Cash

When financial inclusion, etc., is the primary objective, CBDC must be usable by anyone, anywhere. From this standpoint, legal tender status becomes essential to achieving that objective in situations where acceptance is required. Therefore, if financial inclusion is the goal, granting CBDC the status of legal tender should be considered a necessary condition.

Next, it becomes essential to examine how CBDC should be provided as a universal service. This includes reviewing networks, devices, and applications from the perspective of financial inclusion. Consideration must be given to elderly users who may not be familiar with digital devices, and in some cases, it may also be necessary to ensure that people with dementia or disabilities can use the service. Functionally, the system may need to be simple and limited to the most essential features. Regarding universal services, examples include water and sewage, energy supply, broadcasting, telecommunications, and postal services. However, it should be noted that the scope of what is required as “universal” differs across these services. For instance, postal services are often expected to meet stricter universal service standards than telecommunications, and telecommunications more so than broadcasting.

Furthermore, by referring to systems applicable to telecommunications carriers, it may be necessary to consider the establishment of a universal service fund and the appropriate level of burden to be borne by private companies. On the other hand, if private electronic payment services are already deemed sufficient to achieve policy objectives, such potentially inefficient systems—like universal service funds—may be rendered unnecessary.

Even with the above measures in place, if there are still gaps in the universal accessibility of CBDC from a financial inclusion standpoint, it is expected that society may choose to continue allowing the use of cash.

(2) Avoiding the Crowding Out of Private Sector Services

If financial inclusion is set as the highest-level “objective,” granting CBDC the status of legal tender would need to be considered to some extent. Conversely, some degree of crowding out of private sector services may become necessary and should be tolerated within reasonable bounds. However, such impact should be kept to a minimum.

For example, if electronic payment services based on cash are already being provided, and if cash is merely “replaced” by CBDC, it is conceivable that electronic payment services based on CBDC could be sufficiently viable. In such cases, the impact on existing electronic payment service providers may be limited to a certain extent.

In such a scenario, while ensuring stable operation and security of CBDC, it would be useful to build a framework that maintains interoperability between CBDC and private services. This framework could take the form of a layered structure—central bank ⇒ financial institutions/payment service providers ⇒ users—that enables private operators to enhance user interface/user experience (UI/UX) and value-added services through innovation.

(3) Balancing AML/CFT and Ensuring Anonymity

From the standpoint of user convenience, it is undesirable to set a low maximum transfer limit for CBDC. On the other hand, from the perspective of Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT), a high transfer limit is undesirable. The challenge, therefore, lies in determining the appropriate balance between these conflicting requirements.

If financial inclusion is set as the highest-level "objective," the necessity of ensuring a certain level of anonymity increases. However, there is no need to assume excessively high transfer limits. From the perspective of anonymity, if individuals are allowed to hold CBDC accounts with multiple intermediary institutions, the level at which identity unification ("name-matching") is implemented must be carefully considered. Cross-institutional name-matching may raise concerns from a privacy protection standpoint and could prove to be problematic.

Conversely, if the maximum transfer amount is set at a relatively low level (for example, below the threshold that triggers customer due diligence under the Act on Prevention of Transfer of Criminal Proceeds), it may be reasonable not to impose overly strict AML/CFT requirements.

In this way, by clearly defining the “objective” of CBDC implementation, it becomes possible to logically organize and examine the various complex challenges involved.

5. Ensuring Flexibility in Modifying the “Objective” and Preparing Responsive Frameworks

The “objective” of CBDC implementation, which was provisionally set as “financial inclusion and universal service” in Section 4 above, is not necessarily fixed. It may change in response to future developments in innovation, shifts in domestic and international economic and social conditions, or changes in citizens' lifestyles. Possible alternative objectives could include “national wealth creation,” “dramatic improvements in convenience,” or “maintaining external competitive advantage.”

For example, if significant “national wealth creation” or “dramatic improvements in convenience” are anticipated, and these are adopted as the primary objectives for CBDC implementation, it is conceivable that widespread adoption could occur even without granting legal tender status. In such cases, some level of crowding out of private-sector services may be acceptable, with the expectation that increased national wealth would compensate for it later.

Similarly, in terms of AML/CFT and anonymity, if the volume of transactions handled by CBDC is expected to grow substantially, stricter identity verification mechanisms may be required compared to when the objective is financial inclusion, in order to enhance AML/CFT measures.

Furthermore, stablecoins issued by global platform companies have been pointed out as potentially impacting the financial system and the transmission of monetary policy. Past analyses (*13) have noted that such coins should not be issued unless various challenges are adequately addressed. By extension, if initiatives by global corporations or foreign governments emerge that could affect a nation’s monetary sovereignty, setting “maintaining competitive advantage” as the objective of CBDC implementation may also be considered. In such cases, it would be appropriate to strongly grant legal tender status (even if this entails a certain degree of crowding out of private services) and to tolerate some inefficiencies in providing universal service. Regarding AML/CFT and anonymity, however, careful consideration would need to be given in light of the competitive landscape.

The preceding discussion illustrates that when the objective of CBDC implementation shifts from “financial inclusion” to “national wealth creation” or “significant improvement in convenience,” the corresponding policy measures may move in an almost opposite direction. Considering the accelerating advancement of IT technologies in recent years, it is highly likely that the initial objective of CBDC implementation will require revision over time.

On the other hand, implementing CBDC entails a comprehensive overhaul of the national payment infrastructure and is a major undertaking that requires coordination among many stakeholders. Given the timeline of core system upgrades among Japanese private banks and related institutions, the introduction of CBDC is likely to take several years, potentially even a decade. Therefore, embedding agile governance that bridges the temporal gap between the need for flexibility in redefining CBDC objectives and the long-term, steady advancement of payment infrastructure is essential for all stakeholders involved in CBDC.

To this end, it is crucial not only for direct stakeholders—such as the government, the Bank of Japan, private banks, and financial institutions—but also for the media and the general public to recognize that it is entirely possible for the “objective” of this national initiative to change. The Policy Research Institute believes that fostering “tolerance” toward the possibility that stakeholders (and, in some cases, the public itself) may need to adapt their roles or expectations is vital for the successful implementation of CBDC in the future (see Figure 2).

(Figure 2) Relationship Between the Objective of CBDC Implementation, Related Challenges and Response Framework, and Payment Infrastructure Modernization

(Figure 2) Relationship Between the Objective of CBDC Implementation, Related Challenges and Response Framework, and Payment Infrastructure Modernization

• Responsive Framework / Modernization of Payment Infrastructure
  ⇄ Flexible responses required in line with changes in implementation objectives

• Objective: Financial Inclusion / Universal Service

  Granting of legal tender status

  Consideration of service delivery formats as a universal service
  └ Handling of cash

  Avoidance of crowding out private-sector businesses

  AML/CFT
  └ Ensuring anonymity

Understanding by stakeholders (including media and the public) is also necessary.

（*1）For discussions that followed the announcement of the Libra initiative, see “The Truth About Libra: Will GAFA Dominate Currency?”, Libra Study Group (Nikkei Publishing Inc., 2019).

（*2）“Proof of Concept for Central Bank Digital Currency”* (Bank of Japan, February 17, 2023)

https://www.boj.or.jp/paym/digital/dig230217b.pdf

（*3）CBDC-related publications by the Bank of Japan:

https://www.boj.or.jp/paym/digital/index.htm

（*4）“The Bank of Japan’s Approach to Central Bank Digital Currency”*

https://www.boj.or.jp/paym/digital/dig230217c.pdf

（*5）CBDC Tracker:

https://cbdctracker.org/

（*6）“Interim Report by the Liaison and Coordination Committee on Central Bank Digital Currency”* (May 13, 2022)

https://www.boj.or.jp/paym/digital/rel220513b.pdf

(*7)See also footnote (*6).

(*8) Bank of Japan, “The Bank of Japan’s Approach to Central Bank Digital Currency” (October 9, 2020)

https://www.boj.or.jp/paym/digital/data/rel201009e1.pdf

(*9)“Money and Payments: The U.S. Dollar in the Age of Digital Transformation” (January 2022)

https://www.federalreserve.gov/publications/files/money-and-payments-20220120.pdf

(*10)“Working Paper Series – CBDC and Financial Stability” (February 2023), etc.

https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2783~0af3ad7576.en.pdf

(*11)https://www.sanddollar.bs/about

(*12)https://enaira.gov.ng/assets/download/eNairaDesignPaper.pdf　

(*13)Bank of Japan, “Innovation in Payments and the Role of Central Banks: Issues Raised by Stablecoins” (December 4, 2019)

https://www.boj.or.jp/about/press/koen_2019/data/ko191204a1.pdf

Contact Information

For general inquiries regarding this proposal, please contact us at:

Atsumi & Sakai – Policy Research Institute

Email: public-inst.contact@aplaw.jp

(April 28, 2023)