CBDCs and Crypto-Assets: A Japanese Perspective Date: July 3, 2023 Presented by: Prof. Dr. Takashi KUBOТА, Waseda University Introduction: 1) Adapting law to digitalization; 2) Central bank accountability on CBDCs. Situation in Japan Cashless in Japan: MOF (2023), CBDC in Japan: BOJ (2023), Many Challenges 1: Adapting Private, Regulatory & Int'l Law To Changing Money (Digitalization). Up To Now 1. Recorded debt ex. Quipu 2. Goods ex. Tobacco in Jail 3. Barter trade 4. Tangible Cash (legal tender) 5. Promissory notes 6. Bank transfer 7. Credit Card, Prepaid Card 8. Intangible Digital currency To The Future 1. CBDC? 2. Crypto Assets? Stable Coins? Though money and payment are the important source of state power, Governments cannot control what the people use for payment, even if they defined legal tender. Then how should we adapt law to social usage of money and to protect monetary sovereignty? 2: Central Bank Independence and Accountability [Central bank Independence] - Regarding the Accountability of the CBDCs, the BOJ have no plan to do consultation to the general people. They should do so as US, UK, NZ did. - "Central Bank Independence" does NOT mean "Central Bank Immunity." How to motivate central banks to increase accountability? 1. [Some Criticism] Quantitative Easing (QE) as deviation from traditional rule-based monetary policy. It should be subject to clear accountability and transparency. 2. [Japan after the 1997 Reform] While Art. 3 and 5 of the Bank of Japan Act respect the BOJ independence, the BOJ has only obligation to make efforts in policy accountability. No or false public announcement by the BOJ constitutes penalties at most only 2,740GBP (Art. 65(3)). The BOJ Governor and vice Governor serve fiveyear terms and cannot be dismissed due to policy failures (changed after the 1997 reform respecting "central bank independence"). The Government can express opinions and ask postponing the decision, but has no voting power at the BOJ policy board (Art. 16-19). Still, the BOJ always has to communicate and coordinate smoothly with the Government (Art.4). Part I. Situation in Japan Source: Handouts at the Expert Group Meeting Part 1 on CBDC at the Ministry of Finance, 21 April 2023, available from the MOF HP (original in Japanese). - Cashless is increasing but still cash is much used: 36.0% cashless in 2022. - No financial exclusion: more than 99% Japanese have bank accounts (easy to open accounts). - Few Counterfeit cash compared with €/ £. - 85% Japanese people have never heard of CBDCs. - Emerging countries adopt CBDC for the purpose of financial inclusion, which Japan has attained. Trends In The Circulation Of Cash For both banknotes and coins, Japan's nominal GDP crimp is higher than that of other major countries. Nominal GDP proportion of banknotes in circulation in major countries major countries. Nominal GDP proportion of monetary circulation in coins (Reference) Counterfeit Banknotes Around 13 counterfeit banknotes per million in circulation have been detected by the police in Japan, compared to only about 1 counterfeit Euro banknote and 1 counterfeit. Awareness In terms of public awareness of CBDC, around 5% of respondents had heard about it and were aware of specific details. The total of "Have heard about it but don't know the specifics" was only around 15%. - 4.7%: I have heard about it and know the specifics. - 10.3%: I have heard about it, but don't know the specifics - 85.0%: Never heard of them CBDC in Japan 1. "Although there are no plans to issue CBDCs at the moment, it is important to be well prepared" BOJ (2023). The former BOJ Governor Kuroda said "CBDC must and will happen in Japan" in March 2023. 2. CBDC Issuance: indirect type of issuance via private banks. 3. CBDC Aims: coexistence with banks and payment providers. To avoid significant shift to CBDCs from bank deposits, the BOJ will limit the maximum amount & interest rates of holding and trading CBDCs. 4. Pilot Experiment started in April 2023 as Account Type: legal analysis is mainly done in Account Type. However, the ledger model has not been decided yet (another is Token Type). 5. The BOJ established a 'CBDC Forum' to discuss with private retail payment providers. But, [As stated above] no public consultation like UK, US, NZ has been planned yet. Many Challenges Merits - Efficient and accepted by the people? Cf. So far, e-CNY seems unpopular (see next). - Robust Security? Can central banks assure it perfectly? - Financial Inclusion? Side Effect such as financial exclusion of elder and poor people. - Financial Stability? Significant risk exists if hacked. Demerits - Protection of Personal Info.? - Excessive Government Control? - Cf. Threat: a) Foreign laws such as US CLOUD Act, Chinese Cybersecurity Act; b) Foreign attacks such as national hacking by N. Korea, China, Russia, etc. - ⇒Technical Anonymization can solve the issue, and thus we - propose our SK4SC system. - Technical Glitch? need to develop and implement post- quantum cryptography. Chinese e-CNY - The digital renminbi (e-CNY) has gradually grown, with individual accounts increasing to 19% of the total population, but the number of transactions remains at only about 1/4,000 of the total number of mobile payments. Much smaller than Alipay. - Outstanding e-CNY circulation is 136.1 RMB 100 million (0.13% of total RMB). Individual Accounts (10 thousand) June 2,087 Corporate Accounts (same) 351 Cumulative # transactions (10 thousand) 7,075 Cum. Trade Amount (RMB 100 million) 345 Trade Opportunities (10 thousand) 132 Individual Accounts (10 thousand) 30, 2021 Oct 22, 2021 Dec 31, 2021 May 31, 2022 Dec 31, 2022 14,000 Corporate Accounts (same) 1,000 Cumulative # transactions (10 thousand) 15,000 Cum. Trade Amount (RMB 100 million) Trade Opportunities (10 thousand) 620 155 876 809 26,400 830 457 36,000 1000 26,100 Predicting Future Is Not Easy  In March 2023, Federal Reserve Bank of Australia Governor Lowe implicitly looked backward in introducing retail CBDCs.  Some experts argue that even if CBDC is introduced only for large transactions, once introduced, the distinction from small transactions will become hazy. (S. Alexander, "CBDC in the USA: Not Now, Not Ever, CE Think Tank Newswire; Miami, "Dec 13, 2022)  U.S. Congressman Tom Emmer sees CBDC as a potentially dangerous and powerful means of state surveillance of citizens' privacy, and has even proposed legislation (the CBDC Anti-Surveillance Act) to prevent the Federal Reserve Bank, the central bank of the United States, from issuing digital dollars in February 2023 "two minds are better than one": Under this uncertain situation, I highly evaluate the UK regulatory style of collecting public opinions widely, while Japanese style is limiting discussions among few experts.