The government and the Bank of Japan announced the second interim summary regarding the digital yen, considering coexistence strategies for privacy protection and private settlements.

## Overview of the 2nd Interim Summary

On the 22nd, the government and the Bank of Japan announced the "Second Interim Report" of the inter-ministerial meeting on the Central Bank Digital Currency (CBDC) of the Japanese yen.

In this second round of organization, we summarize specific examination results on three themes: (1) civil law organization, (2) balancing privacy protection with data utilization/public policy demands, and (3) the division of roles with private payment methods.

CBDC is defined as a digital currency that meets three elements: being digitized, denominated in yen, and issued as a liability of the central bank. The Bank of Japan has been conducting technical proof-of-concept experiments since October 2020, and has been implementing pilot experiments since April 2023.

The first interim report published in April 2024 outlined key issues such as the division of roles between the Bank of Japan and intermediary institutions, coexistence and division of roles with existing payment methods, responses to national concerns about privacy, and legal responses.

"Two-Layer Structure" focusing on privacy protection

The most noteworthy aspect of this interim report is the approach to privacy protection. The Bank of Japan has indicated that it will not handle user information or transaction information, and it has established as a basic policy the adoption of a "two-layer structure" (an indirect issuance model) in which private intermediary institutions stand between the Bank of Japan and the users.

Specifically, the data held by the intermediary will be divided into a "customer management section" and a "ledger management section," with the ledger management section designed not to handle user information or transaction information. This minimizes the handling of personal information by the central bank.

On the other hand, it is necessary to appropriately respond to public requests such as AML/CFT (Anti-Money Laundering/Counter Financing of Terrorism), and it is being considered to require intermediaries to implement measures similar to those for other private payment methods.

The coexistence with private payment methods is key.

Regarding the division of roles between CBDC and private payment methods, as a result of hearings with businesses, there were concerns about the impact on existing cashless payment merchant fees, while there were also expectations for promoting the utilization of digital payments as a public infrastructure.

Two specific usage patterns are anticipated as follows:

• Utilization in situations where cash is primarily used The use of payment methods alongside cash for certain administrative services, small businesses, and medical institutions. Providing a user-friendly UI/UX that is easy to use for the elderly and others is important.
• Utilization as an Interoperability Infrastructure
  Functions as a bridge for remittances between different payment methods. Improves interoperability between payment methods through CBDC.

Additionally, it has been suggested that by providing a nationwide common system platform that can issue digital regional currencies as a secondary application of the CBDC system, it may lead to a reduction in response costs for municipalities, an increase in participating stores, and facilitate broad regional initiatives.

Legal Reorganization and Future Outlook

Regarding the organization under private law, it was established that CBDC is positioned as legal currency, ensuring dynamic safety equivalent to cash. By utilizing traceability as digital property, it is expected to facilitate the recovery of rights in cases of misuse and to achieve a higher level of rights protection than current monetary systems.

In the future, discussions are planned regarding the division of roles between the Bank of Japan and intermediary institutions (vertical coexistence), cross-border settlements, and the burden of costs. It is assumed that the anticipated benefits, such as improved convenience, will outweigh the necessary social costs, and we will deepen our examination toward organizing the broad framework of institutional design.

It is stated that this organization is a summary of the discussions at this point in time and does not preclude the introduction of CBDC. Regarding feasibility, it will be reconsidered in light of trends in other countries, changes in domestic economic and social conditions, and advancements in technology.