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Waseda University released the fifth episode, “Central Bank Digital Currencies from a Japanese Legal Perspective”, of its English language podcast series “Rigorous Research, Real Impact” on January 7, 2025. All podcast episodes are available for free on Spotify, Apple Podcasts, Amazon Music, and YouTube.

Episode 5: “Central Bank Digital Currencies from a Japanese Legal Perspective”

     In this episode, Professor Takashi Kubota (Waseda Law School) sits down to chat with MC Assistant Professor Robert Fahey (Waseda Institute for Advanced Study) about the potential of Central Bank Digital Currency (CBDC) in Japan using international comparisons. He shares his expert knowledge of the Japanese legal system, highlighting the aspects that obligate Japan’s government to communicate with the public on financial matters, and yet notes that low awareness of CBDC remains a significant obstacle to its introduction. Professor Kubota also weighs in on the question of whether CBDC, or digital currency in general, may potentially replace fiat currency in the future.   

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About the Series:

Waseda University’s first ever English-language academic podcast titled “Waseda University Podcasts: Rigorous Research, Real Impact” is an 8-episode series broadly showcasing the diverse work of our renowned social sciences and humanities researchers. In each of the short 15-30 minute episodes we welcome a knowledgeable researcher to casually converse with an MC about their recent, rigorously conducted research, the positive impact it has on society, and their thoughts on working in Japan at Waseda. It’s a perfect choice for listeners with a strong desire to learn, including current university students considering graduate school, researchers looking for their next collaborative project, or even those considering working for a university that stresses the importance of interdisciplinary approaches.

About the Guests

Professor Takashi Kubota

Professor Kubota has been teaching at the Waseda Law School since 2004. Prior to that, he worked for eight years at the Bank of Japan and taught as an associate professor at Nagoya University. Professor Kubota has served as an advisor to the government of Japan through his positions on a number of committees, including the Strategic Committee on International Promotion of Japanese Law and the Japanese Law Translation Committee. 
Professor Kubota was educated at the University of Tokyo (LL.B. in 1990, LL.M. in 1993), Harvard Law School (LL.M. in 1996) and Osaka National University, where he received a Ph. D. in International Public Policy in 2003. His research interests include international finance, international business law, cyber law, and negotiation.

MC Assistant Professor Robert Fahey

Dr. Robert A. Fahey is an assistant professor of political science at the Waseda Institute for Advanced Study in Tokyo, Japan. His research interests include populism, polarisation, the effects of conspiracy theory belief, and Japanese politics. He is currently working on a series of large-scale surveys aimed at discovering what kinds of conspiracy beliefs are widespread in East Asian countries, and how those beliefs impact the political and social life of those nations.

Transcript

MC Professor Robert Fahey: Hello and welcome to Waseda University’s English podcast series titled “Rigorous Research, Real Impact”. In this series, we dive into interesting conversations and stories from Waseda’s vibrant academic and cultural community.

My name is Robert Fahey. I’m an Assistant Professor of political science at the Waseda Institute for Advanced Study and today we’re excited to have Professor Takashi Kubota from the Waseda Law School with us. Professor Kubota will be talking to us about central bank digital currency, or CBDC, and its relationship to economic security from a legal perspective. CBDC is a new form of digital money issued by a central bank that could change how we handle payments in the future.

Professor Kubota brings a wealth of experience to this topic. Prior to joining Waseda University, he spent eight years at the Bank of Japan as a legal expert and economist. He has been a visiting scholar at prestigious institutions such as Queen Mary University of London, Australian National University, and the University of Auckland, and has authored several research papers and books on international business transactions, digital currency and monetary law.

 

MC Prof. Fahey (1:08~): Professor Kubota, welcome. We’re so happy to have you on the podcast. Most of us today are, of course, familiar with making digital payments via various types of apps or credit cards, debit cards, QR codes.

From what I understand this central bank digital currency or CBDC is a new form of digital money. Could you explain what it is and how it differs from these other kinds of currency?

Guest Professor Takashi Kubota: Thank you very much for the question. And central bank digital currency (CBDC) is, as you said, the digital form of a fiat currency or legal tender such as US dollar or JPY, denominated banknotes and coins.

And the general currencies include three types. One is crypto assets such as Bitcoin, which is issued by the private sector and not linked to legal tender, generally. And the second one is stablecoin such as Tether, issued by the private sector also, and their prices stabilize by linking to legal tender or crypto assets or algorithms.

And the third one is the CBDC such as Chinese digital renminbi issued by the central bank, which is digitalization of legal tenders.

 

MC Prof. Fahey (2:26~): You mentioned Bitcoin and I think when we talk about digital currency, it’s blockchain-based concepts like Bitcoin that would come to the mind of most people.

What is the real key difference apart from, I suppose, the issuing organization between CBDC and something like a cryptocurrency or a stablecoin?

Guest Prof. Kubota:  A CBDC can be managed on a digital ledger, which may or may not be a blockchain, enabling faster and ensure secure payment between banks, institutions, and individuals.

CBDC is issued and operated by, as you say, the central bank, while both cryptocurrencies and stablecoins are issued by private sectors. This means that CBDC offers the benefits of stability control and regulatory oversight within existing centralized financial systems, while cryptocurrencies emphasize decentralization and user autonomy.

 

 MC Prof. Fahey (3:26~): I think a lot of people would, perhaps, argue that the current system that we have for government issued currencies works rather well.

Why would governments or their citizens want to switch away from the existing system to a digital currency?

Guest Prof. Kubota: So, for wholesale or large value transactions which are already electronic, the CBDC will speed up transactions or reduce fees such as international money transfers, or improve security by using blockchain inspired technology, or improve the effectiveness of monetary policy, or prevent money laundering and tax evasion, and protect its own monetary sovereignty against Bitcoin and foreign CBDC. So there are lots of merits. But on the other hand, for retail of small value transactions, digital payments will, yes, significantly reduce the cost associated with cash or be needed to trade with other countries that digital payments become mainstream or be resilient to natural disasters by offline data wallets.

Though financial inclusion is the most telling reason in other countries to adopt CBDC, especially the retail CBDCs, it has already been achieved in Japan. Retail CBDC has relatively fewer advantages than wholesale CBDC since private digital payments are already well developed and more challenges such as cybersecurity, privacy concerns and the digital literacy gap among old people in rural areas.

 

MC Prof. Fahey (5:11~): You mentioned just there about other countries’ CBDC development and perhaps competition with them.

The European Union, the United States, the United Kingdom are all looking into launching their own CBDCs. And as you mentioned before, China already has a digital currency. Where does Japan sit in terms of the current status of the implementation of CBDCs?

Guest Prof. Kubota: Yeah, as you mentioned, the majority of the world’s countries are considering to introduce CBDC.

And like in China, Japan is also in the pilot stage to explore the technical and operational feasibility of a CBDC since April 2023. But the CBDC known as the digital yen has not yet been formally introduced. The decision to issue a CBDC will be based on public debate.

While the BOJ has issued many technical papers, public consultation paper has not yet been issued. The CBDC Forum was established in 2023 to explore the potential use cases infrastructure challenges for CBDC implementation with financial institutions, technology companies and other stakeholders except consumers. And the legislation is also under discussion.

So the legal challenge are the three points. One, the Bank of Japan Act clearly states that the CBDC has legal tender. Two, the penal code to include counterfeiting CBDC. And three, the CBDC Civil Code to recognize digital assets as proprietary rights to be protected from insolvency proceedings by adopting the global standard UNIDROIT Digital asset principles in 2023.

 

MC Prof. Fahey (6:59~): I’d like to go back to something else you mentioned. You talked about the need for countries to issue a CBDC in part in order to defend their sovereignty over currency from things like Bitcoin. In China, they have implemented very strict legal regulations around cryptocurrencies in favor of this digital renminbi, their own central bank issued currency. Whereas in other countries like the UAE, they have licensed the use of cryptocurrencies and made it official.

What’s Japan’s current stance legally on digital currency? Are there regulations in place here that govern the use of cryptocurrencies and digital currencies?

Guest Prof. Kubota: So, while allowing free trading of digital currencies, Japan has imposed laws and regulations for the healthy development, and there is regulated legal definition of digital currency but not transactional legal definition. In transaction law, while legal tender is subject to ownership even if it is intangible, digital currency such as cryptocurrencies and stablecoins are not subject to ownership according to Article 85 of the Civil Code, which allows only tangible assets subject to ownership.

On the other hand, regarding the regulatory law, digital currencies are primarily governed by the Payment Services Act (PSA). The PSA requires crypto asset exchanges and stablecoin exchanges to be registered with the FSA (Financial Services Agency) and imposes various regulations aimed at protecting customer assets and combating money laundering. For example, the PSA requires exchanges to manage customer assets in offline accounts or entrusted accounts in trust banks.

The FSA also imposes global notification obligation called travel rule, requested by the Financial Action Task Force, International Body for promoting anti-money laundering.

 

MC Prof. Fahey (9:06~): You’ve recently published a book in Japanese. The title in English translated is Legal Perspectives on Money and CBDC.

And in this book, you really emphasize the need for both legal adaptation and public involvement in the digitization of money. However, there’s only about 15% of the Japanese population that’s even aware of something like CBDCs. And of that 15%, just 4.7% in the polling data understand the specifics. Why do you think people’s awareness of this is so low and what steps can be taken to address this lack of public awareness?

Guest Prof. Kubota:  So, there are four reasons for the low CBDC awareness.

First, the slow penetration of digital payments compared to other countries. Second, the limited public relations and consumer education. Third, a lack of media coverage, and fourth, the complex concept.

According to Article 26 of the Constitution, Japanese citizens have the right to education. Financial education has already been offered in junior high and high schools, but digital currencies are rarely taught, as the BOJ (Bank of Japan) has played a central role in financial education. The BOJ should properly educate the public about crypto assets and CBDC.

Japan can increase CBDC awareness by first, public awareness campaign using media about what CBDC is with schools and communities; second, consumer pilots and simulations to give them first-hand experience with CBDC; third, financial literacy program about using CBDC; and fourth, public consultations to incorporate consumer opinions on CBDC.

 

MC Prof. Fahey (11:02~): We talked about other countries that are going through this process of introducing CBDCs or they’ve already reached a stage of having done so. How does their experience with public consultations and raising public awareness compare to Japan’s approach, and is there something there perhaps that Japan could learn from or implement here?

Guest Prof. Kubota: In the UK or the US and New Zealand, CBDC public consultations have served as platforms to engage citizens and foster transparency.

These consultations function as an “excuse process” to achieve higher engagement by, first, giving an opportunity to voice opinions and concerns; second, by addressing misconceptions of CBDC such as–this is a New Zealand case that people thought that CBDC adoption means the total abolition of cash, so they fear a lot so, such misconceptions will be addressed. And the third is by building trust as they feel included in decision-making. Therefore, Japan should also adopt public consultation and consumer pilots. Focus on rural and elderly communities will be effective to increase awareness and acceptance.

 

MC Prof. Fahey (12:22~): You mentioned that people have a misconception that a CBDC could mean the abolition of cash.

How do CDBCs and cash coexist alongside each other? Is there a conflict there?

Guest Prof. Kubota: No, I think there is not many conflicts because cash is not only used for payments, but also as a gift or, as in an Asian or New Zealand area, there is a ritual called money dance. So, in the wedding ceremony, the people throw their bills or banknotes to the guest to celebrate his wedding.

So these kinds of rituals are still popular in Japan. There are some people who are collecting banknotes coins for their hobby. Cash has several meanings for many variety of people.

Even if some part of the function, such as the payment functions of the cash, will be partly replaced by the CBDC, there are still needs for the cash. When I went to Sweden, Sweden is a highly digitalized society. Every textbook says that more than 90% of the payments will be done in credit cards or Swish (their credit card).

From my experience, even at the center of Stockholm in Sweden, there are the

shops of the flowers. I bought a flower, but I cannot pay by credit card. I did the payment by cash, Swedish cash.

Even if we try to abolish the cash, it is impossible.

 

MC Prof. Fahey (13:52~): So, it plays social and psychological roles as well as just economic roles. In your book, you mention that while governments can define and issue legal tenders, they can’t control the payment method that people use, which I suppose relates to these psychological and social roles that cash can have.

This means that public acceptance is crucial for the successful introduction of CBDCs. What kind of steps, aside from the education that we’ve been talking about, could be taken to build public trust in CBDCs?

Guest Prof. Kubota: Building trust in CBDCs requires transparency, public engagement, and privacy and security measures. Prioritize transparency – Article 3, paragraph 2 of the Bank of Japan Act requires that efforts should remain to clarify the content and process of the BOJ decision-making to the public.

The Bank of Japan should not only promote open disclosures, but also educate consumers to understand the basics of CBDC and other cryptocurrencies; and second, engage the public in decision-making through public consultation and in consumer pilots. As CBDC development requires a huge budget, the National Congress and the public should be involved with the CBDC decision-making under the fiscal democracy as stipulated in Article 83 of the Constitution. And third, addressing privacy and security concerns, the personal information and privacy obtained by CBDC must be properly processed in accordance with the Constitution and the Act on the Protection of Personal Information (APPI).

On the other hand, CBDC needs to be highly secure at all times to protect against fraud, theft, and cyberattacks from outside. When quantum computers are adopted in the near future, existing cryptography will be at risk of being broken and thus it is necessary to switch to quantum-resistant cryptography.

 

MC Prof. Fahey (16:04~) It feels like that privacy and security aspect could be particularly difficult for Japanese consumers.

I’m thinking here of problems with trust that we’ve seen over the My Number system and the introduction of this Social Security style system here. It seems that a lot of Japanese consumers have a lot of concerns about their private data and the security of that data.

 

MC Prof. Fahey: We mentioned China a couple of times before they’ve introduced the digital renminbi.

How has the public there responded to that introduction? And again, is there something that Japan can look at in how that was introduced and how people responded to it that can perhaps guide either as an example or as a counter-example how it should be done here?

Guest Prof. Kubota: So, when the Chinese retail CBDC called digital renminbi was first demonstrated four years ago, Western countries, including Japan, felt threatened to lose monetary hegemony to be collected their personal information by the Chinese central government and accelerated their own CBDC developments as a countermeasure. However, despite extensive pilot programs and government efforts, digital renminbi adoption has been slower than expected. Many users are already satisfied with the existing AliPay and WeChat Pay.

Japan can draw some important lessons to make retail CBDC widely used from China’s case. First, strong incentive, and two, integrating with existing systems such as PayPay or Rakuten Fay is needed. Three, privacy, accessibility, and security concerns should be addressed. And four, public awareness and engagement is necessary.

 

MC Prof. Fahey (17:50~): You emphasize the importance of central bank independence in ensuring a stable monetary policy, but at the same time you are discussing the need to protect a nation’s monetary sovereignty, which we’ve mentioned a couple of times, and this is especially in the context of cross-border CBDCs.

How can countries ensure that they maintain central bank independence and monetary sovereignty when they’re adopting digital currencies?

Guest Prof. Kubota: So, monetary sovereignty belongs to the government and not the central bank. However, the government policy to maintain currency sovereignty must be hand in hand with the central bank’s monetary policy. For example, the Central Bank of Cambodia launched Bakon, CBDC like electric payment means for the government to maintain its monetary sovereignty to combat against the future digital dollarization possibly caused by the digital renminbi.

Under Article 3 of the Bank of Japan Act, while the bank is granted independence in monetary and fiscal regulation to avoid interference in monetary policy by politicians, it is also required to ensure transparency in its policy decisions and the decision-making process. On the other hand, Article 4 of the same Bank of Japan Act requires the bank to maintain close contact with the government at all times and to communicate adequately with the government to ensure consistency with the government’s basic economic policy. Excessive respect for independence may lead to lax checks on the BOJ powers.

For example, courts may refrain from hearing claims for damages against the BOJ or parliament and the administration may not pursue BOJ policy failures. Therefore, it is necessary to clearly define a system of monitoring BOJ in order to maintain mutual checks and balances with judicial, congressional, and administrative powers in the state.

Further, the international law and initiatives for protecting monetary sovereignty are more important than domestic law. In April 2024, the BIS launched the Project Agora, a pilot project of global CBDC platform with major central banks, including BOJ, and private banks. I believe that it is desirable to incorporate goals in the future global CBDC platform that would ensure that monetary sovereignty is maintained. So under current international law contesting remedies for violation of monetary sovereignty in the International Court of Justice (ICJ) is, unfortunately, an ineffective solution because the requirements and effects regarding currency and currency sovereignty are not clear now.

So, it is also difficult, in reality, to enforce domestic law against digital currencies circulating domestically or to apply it extraterritorially to foreign central banks in order to eliminate infringement on monetary sovereignty based on domestic currency role. This is why norms should be automatically enforced through the court.

 

MC Prof. Fahey (21:15~): So, I mean, given there’s a lot of legal complexity involved both at subnational and at a national and supranational level here, in this case of Japan specifically, how does the distinction between cabinet legislation and legislation by ministers in the diet affect this consultation process for introducing CBDCs.

Guest Prof. Kubota: in Japan, cabinet legislation basically undergoes extensive public interagency consultations such as white papers, public hearings or forums.

While legislation by Diet members do not. Legislation by Diet members is less common for large-scale policies like CBDCs which require national coordination. Thus, cabinet legislation allowing consumers to voice opinions on CBDC design and implications through public consultation is desirable.

 

MC Prof. Fahey (22:11~): We mentioned earlier on that the Japanese public have a lot of concerns about privacy and about security. They take these things very seriously. And as various different countries are introducing new forms of digital currency, this does bring with it certain new risks.

What measures are generally being taken to address people’s concern about data privacy, about cybersecurity, about the integrity of the data that’s involved in this process of introducing digital currencies?

Guest Prof. Kubota:  First, private banks may no longer be needed by adopting CBDC. So, in order to solve that by adopting two tier systems, the BOJ issues CBDC to private banks first and the private banks issue the CBDC to the public.

And the second, privacy risk.The BOJ minimizes sensitive data storage and complies with protection of personal information (APPI). Third, cybersecurity and various pitfalls. The BOJ is actively involving domestic private sector expertise through its experiments and CBDC Forum and is aligning its CBDC design with international principles like the G7 principles and the IMF’s CBDC handbook.

 

MC Prof. Fahey (23:34~): As CBDCs are being developed, and of course each country is working on its own, there will be certain security measures that are essential across the board, such as cryptography. Do you think that countries will have to use a common framework for developing CBDCs or will they be able to depend on international organizations like the International Monetary Fund (the IMF) or the Bank for International Settlements? Will they be able to set standards for this? If they do have to rely on such international standards setting bodies how does that impact their ability to make independent monetary decisions? You know, how does that affect perhaps the overall economic independence of countries that are introducing these digital currencies?

Guest Prof. Kubota:  A global common framework such as proposed by the BIS, IMF, or the US NIST for post quantum cryptography: advantages are global trade interoperability, standardization of security protocols and pooling global expertise, while the challenges are restricting sovereignty to local needs and dependence on external systems which potentially undermine local control. On the other hand, country-specific framework approach: advantages are monetary independence and adaptability to local needs, while challenges are significant barriers to international transactions and higher development costs.

Thus, a hybrid approach may be ideal by carefully balancing international collaborations with national customization.

 

MC Prof. Fahey (25:12~) : We’re talking here about the introduction of new currencies in countries that could be in some places quite a few years down the line and of course predicting the future is a dangerous job at the best of times. But with your own long experience, both academic and working within the financial sector, and your knowledge of this, we can’t help but ask: what sort of impact do you see this is going to have on the future of monetary transactions?

Guest Prof. Kubota:  Before answering, there are three reservations.

First, CBDCs may not be widely acceptable by the public due to the limited use cases or not adopted in major economies due to the new US President Trump’s policy to deregulate crypto assets instead. And second, CBDCs may only be adopted in wholesale; and third, the fragmentation between China and Western countries may increase. However, let’s suppose that CBDC will be adopted worldwide.

CBDCs have the potential to alter the current commerce by its instantaneous settlements, reduced transaction costs, and programmable money which is linked to small smart contracts such as automated tax collection. Second, CBDCs may weaken the global US dollar hegemony and make the current financial sanctions ineffective and change the traditional correspondent banking system with the Swift Information Network’s obsolete. Cross-border CBDC may gradually shift to a triple polar of the US dollar, the euro, and Chinese renminbi. Third, new international laws or regulations will be necessary to ensure their proper use and the smooth transfer of digital currencies across borders. A global and domestic regulatory framework such as the IMF Handbook and the FATF recommendations internationally agreed upon standards for CBDCs such as the BIS framework for the interoperability of CBDCs across borders, including Project Agora and the UNIDROIT Digital Assets Principles for adopting domestic transaction laws.

It is urgent to make a global norm on ensuring data privacy in cross-border CBDC transactions, collaborating and coordinating system integration, financial stability, and the risk management among central banks with the help of the IMF and the BIS. I think it’s necessary.

 

MC Prof. Fahey (28:04~): Moving away from CBDCs and talking a little bit more about your own experiences. You have a lot of background in the financial sector. You have worked as a guest professor at many international universities. How has your time here at Waseda University really shaped your academic journey?

Guest Prof. Kubota:  During my 20 years at Waseda University, I’m grateful for the university’s convenient location in center of Tokyo, its research and teaching facilities, and the excellence of my colleagues and students and their intellectual curiosity. Unlike typical law scholars, I took expert interviews on current events from various perspectives of law, political science, economics, cryptography in English and Japanese.

Taking advantage of the friendship at the BOJ and as an observer at the Monetary Law Committee of the International Law Association, I have engaged in discussions with authorities all over the world and had many opportunities to publish my research results in a timely manner both in Japan and abroad.

 

MC Prof. Fahey: Thank you very much, Professor Kubota, for being with us and for sharing your insights on CBDCs. It’s a very complex and interesting topic, and obviously one that has huge potential to change a lot about the world’s economy and how business is done.

It’s been very fascinating to hear your thoughts on how Japan is going to navigate this rapidly evolving space, this balance that is required between the need for innovation with the preservation of privacy, monetary sovereignty, and of course, public trust.

For our listeners, we really hope this conversation has deepened your understanding of the future of money and the role of digital currencies in our changing world. For more such stories and insights from the corridors of Waseda University, don’t forget to subscribe and tune in on the next episode of “Rigorous Research, Real Impact.”

Until then, take care and stay curious.