DCJPY: Creating a Japanese Cryptocurrency

    10 Jan 2022

    Japan’s largest banks are preparing to start testing the digital yen, created by an independent consortium of developers. If the project were to succeed, Japan would become the first to issue a “real” nationwide cryptocurrency “on a voluntary basis.”

    In Japan, a consortium of the country’s 74 largest companies announced the release and subsequent trials of a yen-based digital currency. If everything goes according to plan, the new token will enter circulation in 2022.

    The digital yen, already designated DCJPY, will be backed by real bank deposits. At the first stage, it is planned to be used for corporate money transactions and settlements between companies.

    The Digital Currency Forum consortium working on a nationwide cryptocurrency includes the three largest private banks (Mitsubishi UFJ Financial Group, Mizuho Financial Group, and Sumitomo Mitsui Financial Group), a state bank (Japan Post Bank Co, Ltd), telecommunications companies, railway operators, insurance companies, and industrial giants like Mitsubishi, Nippon Telegraph and Telephone Corp., Kansai Electric Power Co Inc. and East Japan Railway Co. Government bodies – the Bank of Japan, the Financial Services Agency, and three ministries – act as observers.

    Notably, each of the three banks involved in the Digital Currency JPY project has and is actively developing its own digital payment systems. However, in terms of their capabilities, they lag behind the IT companies like PayPay, supported by tech investor SoftBank Group Corp (which wasn’t part of the consortium). Therefore, the participants in the experiment believe that implementing the digital yen on the blockchain will simplify the movement of large funds and settlements between companies.

    Kazuhiro Tokita, CEO of DeCurret cryptocurrency exchange, which leads the consortium, said at a press conference that DCJPY would use a common platform to accelerate large-scale transactions and settlements between companies.

    The digital platform will act as the primary issuer of cryptocurrency and a vehicle for trading conventional financial assets for crypto assets. The project’s “white paper” designates this exchange as the generation, or minting, of a currency asset.

    DCJPY holders will be able to transfer the digital yen to other parties on the platform or convert it back to standard currency in their bank account (though at the first stage, direct conversion of DCJPY to regular money won’t be available).

    The technical documents also say that DCJPY will eventually be issued by banks and considered a form of deposit bonds for the simple reason that those are already fully regulated by law. This, in turn, will allow for speeding up the digital currency introduction and secure the stability of its exchange rate.

    What tasks is the digital yen supposed to solve? First, ensuring the interoperability of prepaid systems used by different companies. For example, Japan’s largest rail operator, East Japan Railway Company, issues prepaid cards that can also be used to purchase goods at train stations and some small retail outlets. Other companies have similar systems, but they are incompatible with each other. Cryptocurrency will change this and make issuers of various prepaid schemes function as payment operators as well.

    The second task is making sure that banks issuing digital currencies don’t create competition with deposits. The white paper states explicitly that digital money will speed up the settlement of commercial transactions and reduce the cost of handling cash.

    Finally, the third challenge facing DCJPY is becoming the most convenient mechanism for transactions using smart contracts, as well as a means of payment for digital assets such as NFT.

    One appeal of the DCJPY built into the project from the outset is its flexibility and versatility. And while there will be a single shared blockchain platform, the currency can also be programmed to meet the various business needs of the project participants. Within the consortium, multiple groups are already considering such use cases as green energy settlements, retail payments, industrial transactions, etc.

    Another interesting point is to what extent the DCJPY project will correlate with the ongoing Bank of Japan experiments with CBDC. The bank has held plans to introduce CBDC for quite some time now, but it currently seems like the two projects may eventually merge.

    “A digital currency system built on a common platform backed by bank deposits would be a type of CBDC which could be devised and implemented in Japan “, –said Toshihide Endo, the former head of the Japanese Financial Services Agency, currently a special advisor to DeCurret.

    All these moves are quite fascinating, particularly since Japan, unlike other developed countries, has an unusually high share of cash in circulation – up to 80% of the money supply. Sounds improbable: in one of the world’s most advanced and “electronic” countries, most settlements are still made using banknotes and coins. Whether the Digital Currency Forum will be able to change this situation with its efforts, we will find out in about a year.

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