In a bid to keep pace with other major economies, the Bank of Japan has revealed plans to launch a pilot program for its central bank digital currency (CBDC) in April.
A CBDC is a digital version of a state’s fiat currency, such as the yen or the US dollar, backed by a central bank. Unlike cryptocurrencies like Bitcoin, CBDCs are operated on private blockchains controlled by governments.
During the pilot, the bank will simulate transactions to test the CBDC’s technical feasibility and gather insights from participating private businesses on their use of the digital currency. The bank will also use the trial to explore the technical challenges of integrating the experimental CBDC network with existing financial networks, as well as determining the appropriate data models and architecture for facilitating offline payments.
The Bank of Japan’s announcement comes as other major economies around the world are accelerating their CBDC plans. The Bank of England and the UK Treasury recently announced a consultation on implementing a digital pound, while Australia also announced its intention to pilot a CBDC, called eAud.
The Bank of America reports that around 114 central banks, representing 58% of all countries, are currently exploring CBDCs. The latest move from the Bank of Japan is just the latest in a series of trials, experiments, and working papers from the central bank in the field of digital currencies.
What is a CBDC?
A central bank digital currency (CBDC) is a digital form of a fiat currency that is issued and backed by a country’s central bank. CBDCs are different from other digital currencies, such as Bitcoin or Ethereum, in that they are backed by the full faith and credit of the issuing central bank.
A CBDC functions similarly to physical currency, but with the added convenience of being digital. It can be used for purchases, transfers, and other financial transactions, just like any other currency. However, CBDCs operate on private blockchains that are controlled by governments, which ensures that they are secure and can be traced back to their source.