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A coalition of Japan’s financial institutions has committed to issuing a digital currency to the Japanese population in late 2022, with trials beginning as early as this year.
A new digital currency, provisionally named DCJPY, is set to be tested imminently, according to a white paper released by Japan’s Digital Currency Forum.
Backed by bank deposits, the initiative involves the country's top banks, such as MUFG and Sumitomo Mitsui Banking Corporation, as well as 70 other companies and organisations, including rail operator East Japan Railway, which also issues a popular e-money transit card, Suica.
"The DCJPY is a great example of how private companies can take the initiative to help build a digital currency future rather than sit passively and wait for it to overtake them,” said Richard Turrin, fintech consultant and author of the book, Cashless: China’s Digital Currency Revolution.
The test phase will focus on the digital currency's feasibility for low-cost business transactions, such as large payments between companies, and the group could bring the currency into circulation as soon as H2 2022.
"The idea behind DCJPY is to run a blockchain system that tokenises users' deposits to make them transferable on the DCJPY network,” said Turrin.
Users can start making transactions in digital currency once they open an account.
It is expected to be used by domestic corporations and individuals, with the minimum transaction value set at 1 yen (less than 1 cent).
"The Digital Currency Forum touts that DCJPY will avoid the regulatory pitfalls of stablecoins by turning bank deposits into digital currency DCJPY. They’re correct,” said Turrin.
By building the DCJPY within the banking system they are simply creating a new bank cash transfer system rather than minting a new currency, he pointed out. “It’s an ingenious solution that allows banks to go digital prior to the launch of a CBDC."
Like many central banks, the Bank of Japan (BoJ) is investigating the potential of a central bank digital currency. Its experimentation phase is expected to last until April next year.
Meanwhile, the BoJ and its regulatory counterpart, the Japanese Financial Services Agency, are acting as observers in this new currency.
The Digital Currency Forum has also expressed an interest in the DCJPY’s network eventually converging with a possible Japanese CBDC — a prospect that has been welcomed.
“I believe the more established players that are testing the digital yen project the better,” said Pierre F. Suhrcke, a UK-based fintech and blockchain advisor.
This is an initiative that will accelerate the use of a CBDC in Japan, he continued.
“And it would certainly be helpful to get similar initiatives up and running in other countries,” he said. “All this would help to accelerate the process to establish CBDCs around the globe.”
Yet the DCJPY is not a CBDC and will work on a specific network only with participating companies. “In this way, it is more like a private payment network such as Alipay,” said Turrin.
“Because of this it may be a welcome payment system but will likely have little impact in reducing the threat to monetary sovereignty posed by stablecoins and crypto,” he said, stating that only a full-fledged CBDC with universal acceptance will help with that.
Drawing from past experience
The DCJPNY follows on from the already popular JCoin.
Launched in 2019, J-Coin Pay is a type of digital wallet platform. It was created by Mizuho Bank, with the backing of more than 50 financial institutions.
The QR code-based app allows its customers to make payments, send and receive transfers and perform other financial transactions on their smartphones.
Bankers Unite!
Interbank cooperation is not a new thing in payments — it has been a vital element of helping banks improve efficiencies and scale services for decades. Nevertheless, there appears an increasing trend towards distinguishing between common areas of collaboration to solve problems and areas of competition.
In Europe, in particular, the P27 real-time payments project is an example of this. As a collaboration between six of the region’s largest banks — Danske Bank, Handelsbanken, Nordea, OP Financial Group, SEB and Swedbank — the initiative aims to improve efficiencies and reduce the number of different systems the banks have to deal with by creating a pan-Nordic, multi-currency domestic and cross-border payments platform.
In Ireland, there is Synch payments, which recently announced it had received €5m in funding from its owner banks, Bank of Ireland, AIB, Permanent TSB and KBC Ireland. The cross-border money transfer app aims to compete with digital disruptors such as Revolut.
Another example is the European Payments Initiative (EPI), which includes collaboration between some of Europe’s largest banks, such as Deutsche Bank, ING, and Santander.
This project was first announced in Summer 2020 and has the might of the EU’s senior regulators and governments behind it as well as other private sector players.
“I would put the DCJPY in the same league as the EPI in that it is a new payment system designed to eliminate the costs associated with legacy systems,” said Turrin.
Yet, what makes the DCJPY unique is that as it is built to handle digital currency, it is likely to carry Japan's CBDC some day, he suggested. “That is what makes it so special, it is future-looking and I don't think the EPI can make the same claim.”
