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BOJ Dep. Governor Notes Possible Pitfalls Of Central Bank Digital Currency




An official with Japan’s central bank has weighed in on the topic of national digital currencies, raising questions about the ripple effects that these instruments might create in a country’s financial system.

In a year full of buzz about the possible issuance of central bank digital currencies (CBDCs), an official with the Bank of Japan (BOJ) has stated that the institution will not introduce such a monetary instrument any time soon.

In prepared remarks delivered on April 16 at a conference attended by representatives of the International Monetary Fund and Japan's Financial Services Agency, BOJ Deputy Governor Masayoshi Amamiya said that while the central bank "does not have a plan to issue its own digital currency at this juncture," it could be open to such a project "in the future."

Amamiya also used the platform to explore possible negative outcomes that central bankers might consider before issuing a CBDC.

In many countries, he explained, central and private banks have achieved a sort of equilibrium: Their relationships form the basis of a "two-tiered system" in which central banks supply a country's currency and the private banks operating there "perform the function of credit creation and … provide payment services to the general public," among other services. In Amamiya's estimation, the symbiotic relationship between these two types of institutions "reflects the wisdom of human beings in history to achieve both efficiency and stability in the currency system," and any action that threatens to unsettle this system should only be taken after great deliberation.

From the perspective of a central bank, he argued, issuing a CBDC would be akin to "allowing households and firms to directly have accounts in the central bank." Therefore, he worries that one possible effect of introducing a CBDC could be to unsettle the "role-sharing structure" in which private banks, acting in their capacity as middlemen between central banks and the public, create value for a country's economy (e.g., in the form of credit).

While he did not say so explicitly, his apprehensions over the possible breakdown of these roles suggest that he lacks confidence in the BOJ's ability to adequately perform some of the functions that private banks, driven by their regard for their bottom line, are able to fulfill.

Absent from the deputy governor's cursory discussion of CBDCs and their attendant complications were two other questions that may warrant exploration.

First, in the event of an economic catastrophe, what would a run on a CBDC-issuing central bank look like? (A bank run is a rash of withdrawals by panicked customers who fear the bank may run out of money.) Might its economic consequences be more – or at least differently – drastic than those of a run on a private bank?

Second, in a scenario in which individuals could "have accounts" with the central bank, it's feasible that the bank would also have the power to issue them loans. What would be the implications of a state institution acting as a counterparty to a loan in the event of a default?

While the BOJ has no imminent intention to debut an official digital currency, the bank is reportedly supporting a private sector project to develop J-Coin, a cryptocurrency that aims to wean Japan off of physical cash and which would be pegged in value to the yen. 

Adam Reese

Adam Reese is a Los Angeles-based writer interested in technology, domestic and international politics, social issues, infrastructure and the arts. Adam holds value in Ether, Bitcoin, and Monero.

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