In the previous column, I wrote about the view that floating exchange rate cryptocurrencies such as Bitcoin have no possibility of becoming a base currency. For the second column on cryptocurrencies, I would like to examine the "bank-version digital yen currency" currently being considered for adoption primarily by domestic commercial banks. To state the conclusion of this column upfront, it is as follows:

“The digital yen currency with a fixed exchange rate pegged to the yen being considered by the banking consortium has high development potential. If it truly comes to fruition, banks will inevitably face large-scale structural reform. However, opportunities for excellent CFO talent may arise for startup companies”

Currently in Japan, there are several digital yen currency concepts under research and development centered around megabanks, including J-Coin conceived by a consortium of city banks and regional banks led by Mizuho Bank, and MUFG Coin by the Mitsubishi MUFG Group.

Furthermore, the Financial Services Agency, as the supervisory authority, appears to dislike the risk of these digital yen currency concepts proceeding individually, with each camp forming bloc economies or the proliferation of different technologies reducing depositor convenience. They are requesting the industry to find a unified direction through broad collaboration among private commercial banks, and there are reports that the Mizuho camp and Mitsubishi camp may merge in the future.

The purpose of this column is to reorganize and examine the feasibility of such bank-led digital yen currencies, their impact if realized, and their differences from existing cryptocurrencies such as Bitcoin.

■Bank deposits are the original digital currency
As an introduction to this column, let us first consider what "bank deposit data" actually is. Without fear of misunderstanding, the position of this article is that bank deposit data is a respectable "original digital currency."

For example, the 30,000 yen I deposited from an ATM in Tokyo can also be withdrawn from a Seven-Eleven ATM in Miyazaki where I traveled. Obviously, the actual banknotes I deposited in Tokyo do not teleport to Miyazaki. The value of 30,000 yen stored in the banknotes deposited in Tokyo is first stored as electronic data on the bank's server. This value is then preserved as passbook ledger data, and when a call comes from the ATM in Miyazaki, the data is verified and converted back into banknotes equivalent to 30,000 yen for provision. Naturally, fees are added on top.

What this means is that banks are one type of digital currency issuer and manager that issues deposit currency by guaranteeing to always exchange 1 unit of cash (banknotes and coins) with 1 unit of deposit currency (deposit data) at a fixed rate of 1:1. (In macroeconomics, when defining money supply (currency circulation), deposits are counted as part of currency, which also indicates that deposits are a type of currency different from cash.)

However, very rarely, situations arise where this 1:1 exchange rate cannot be maintained. This is the phenomenon called bank default, where, for example, one deposits 1 million yen but only 700,000 yen is returned.

This means that deposit currency could not maintain its fixed exchange rate with cash currency, and the value of deposit currency depreciated against cash currency. When this spreads to distrust of other banks, depositors rush to exchange deposit currency for cash currency all at once (bank run), causing even healthy banks to fail. This is the so-called credit crisis and the collapse of the fixed exchange rate deposit currency system.

Guaranteeing the constant 1:1 exchange between yen and deposit currency (deposit data) without such situations occurring (fixing the exchange rate) is not an easy matter. Banks must construct and maintain all necessary systems at enormous cost for the safe management and operation of deposit data, while preparing a certain amount of cash currency (strictly speaking, maintaining Bank of Japan current account balances above the required reserve ratio) to ensure reliable 1:1 rate exchange at any time in response to any depositor's request. Banks need to generate sufficient revenue through lending and settlement services to cover these costs.

Banks have made enormous investments (human resource investment, control organization construction, and system investment) to maintain this fixed exchange rate and safely manage deposit currency. Particularly, core banking systems represented by ATMs must never stop, so repeated expansions and modifications had to be made to core systems that have continued for 30-50 years or more. Naturally, the architecture (technical foundation) used there, while stable, inevitably becomes extremely outdated. This is the typical occurrence of legacy costs.

Whether it is possible to operate and maintain the mechanism for maintaining the deposit currency fixed exchange rate system, which requires such enormous management and maintenance costs, in the medium to long term within the economic environment of negative interest rates, is the fundamental management challenge that our company believes is currently confronting banks.

■If deposit currency can be managed using blockchain technology, the maintenance costs of the deposit currency fixed exchange rate system may dramatically decrease
What has emerged in such an environment is digital currency utilizing blockchain technology. If blockchain technology is utilized, there is a possibility that the fixed exchange rate deposit currency management system, which has required enormous costs (personnel expenses, system investment) until now, can be operated at dramatically lower costs. Our company believes this is the essential meaning of commercial banks' engagement with digital yen currencies utilizing blockchain. In other words, names such as J-Coin and MUFG Coin refer to new forms of deposit currency with different names (colors) according to the types and methods of blockchain technology adopted by each camp.

■How should we perceive the structural reform that the realization of bank-version digital yen currency will likely bring about?

If the current digital yen concept progresses toward realization and the transaction costs of deposit currency and the maintenance and management costs of deposit databases (i.e., major commercial banking operations) decrease dramatically, banks will likely face large-scale structural reform.

Banks currently employ enormous personnel to maintain the aforementioned legacy systems. If bank-version digital yen currency becomes reality, the main investment target necessary for banks may no longer be large numbers of excellent human resources. Instead of human resources, the investment target may become hyper-power computing capabilities for performing enormous hash function calculation processing to record blockchain transaction records.

When this happens, banks may become more like database technology companies for maintaining and managing blockchain distributed ledgers. Of course, lending operations will remain to some extent. However, as a major trend, it seems unlikely that lending operations will expand significantly again to become a pillar of revenue. In that case, banks' main operations will inevitably become deposit management and settlement services derived from it. (Settlement service revenue is already one of the pillars of revenue alongside interest income from lending operations for many banks.)

Over the past few weeks, it has been reported that banks are embarking on significant efficiency improvements in existing banking operations through aggressive utilization of RPA (Robotic Process Automation), along with accompanying personnel reductions. If the trend toward realization of bank-version digital currencies is added to this movement, it will further accelerate.

While this trend may feel depressing when viewed negatively, when viewed positively, it can also be seen as a major opportunity to attract many excellent human resources, particularly for fintech-related ventures. If capable bank alumni increasingly join startups, the possibility of deepening collaboration between their former megabank affiliations and ventures will likely be high. Even beyond fintech ventures, it may become easier to hire excellent CFOs.

I believe that Japan's M&A Advisory business and investment fund operations were able to expand and develop rapidly because, during the economic crisis of the late 1990s, top elites from former long-term credit banks and Yamaichi Securities—first-class talent that would normally never emerge—came out continuously into the job market and startup market. The transformation of banking operations that will likely face major structural change again may also be a great opportunity that leads to the development of new industries when viewed from a broad perspective.

This time, I examined the possibilities of blockchain-utilizing digital yen currency conceived by megabanks. Next time (final installment), I would like to write about the possibility of digital cryptocurrency issuance by the Bank of Japan, said to be the ultimate ideal form of digital yen currency, and the risk of invalidating traditional monetary policy effects.