A group of Japanese banks and corporations is forming a system to digitise bank deposits, creating a blockchain payments network. The system neatly circumvents a number of thorny questions about the legal status of stablecoins as well as exploring creative uses of the technology, like green certificates for clean electricity.
The Digital Currency Forum – a consortium of 74 Japanese banks and corporations including Mitsubishi UFJ Financial Group, Mizuho and Sumitomo Mitsui Banking Corp – will launch a digital currency platform in 2022. It has subcommittees already investigating creative use cases for programmable money.
The DCF’s aims go beyond the usual goals of ensuring quick, cheap payments and bettering financial inclusion. The forum is exploring how its initiative, tentatively titled DCJPY, can contribute to the fight against climate change by providing cryptographic proof that electricity purchased on energy trading markets was cleanly produced.
‘Electricity tokens’ programmed to only purchase clean electricity could give corporations the ability to demonstrate that their corporate activities ‘are consistent with carbon neutrality’, according to the DCF’s progress report. It might also create a greater economic incentive to produce electricity using clean methods, since it would allow market participants to express their preference for sustainably produced power.
DCJPY will use a permissioned blockchain network to ‘turn bank deposits into digital currency’, according to a white paper published last month.
Blockchains are often criticised for the huge energy demands required to maintain their security. However, those demands only apply for blockchains that, like bitcoin, make use of the proof of work consensus mechanism. DCJPY, by contrast, will use a less energy-intensive consensus algorithm known as practical Byzantine fault tolerance, which is more suitable for a permissioned network since it functions best with a small number of nodes.
Rather than a central bank digital currency, DCJPY will be a digitalised version of commercial bank money. However, a future central bank currency could operate on the same rails established for this project. Because it primarily requires the digitalisation of existing bank deposits, the DCF believes the project sidesteps difficulties regarding the regulatory status of stablecoins as distinct from bank deposits.
A prototype of the DCJPY has been undergoing testing in a sandbox environment since June this year.
The DCF assumes that the DCJPY will be issued by commercial banks as their liabilities, in much the same way as bank deposits. Both corporations and individuals will have access to the digital currency platform.
The digital currency will be minted when a user withdraws money from their account and posts it on the digital currency platform, where it can be transferred to another user who can then withdraw it to their own account, burning the digital currency.
Simple transfers of value like that will take place in the ‘common area’ of the platform. More complicated use cases, like the electricity trading project, are housed within the business process area, where payments can be programmed to be conditional on the delivery of goods, services or digital assets like non-fungible tokens or security tokens.
Security tokens, which enable transfer of ownership or rights on distributed ledgers, are already operating in Japan. The DCF has a subcommittee working on ensuring that the introduction of DCJPY will allow simultaneous delivery of security tokens and payment in digital currency. If security tokens become widespread, this could form the basis of a distributed ledger technology securities settlement network.
For the moment, the project will be available only for domestic use within Japan, but the DCF said that ‘in the near future’ it will ‘profoundly research and may consider the possibility of use by non-residents and use outside Japan.’ However, it also highlighted that there are unresolved obstacles around preventing money laundering.
The system represents an advance in the use of DLT in regulated payments networks. Although the digital currency will be liabilities of commercial banks, rather than the central bank, it establishes a framework that central banks could easily adopt, if it proves a success.
While its use in the green electricity trading network is still only being explored, it is a rare example of a potentially valuable use of the programmability of money.
Lewis McLellan is Editor of OMFIF’s Digital Monetary Institute.