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Japan is the world’s third-largest economy, and most transactions involve cash. In this respect, Japan differs significantly from China and South Korea, where most transactions take place with different kinds of electronic payment schemes. Even in the West, credit and debit cards are used much more widely.
Japan has a lot more than 200,000 ATMs in addition to cash registers and fleets of vehicles for moving money. This amounts to an estimated $18 billion a year in costs, mostly borne by the financial industry.
The problem? Tokyo's 2020 Olympics. Hundreds of thousands of foreign visitors, who are used to using plastic instead of cash will arrive in Tokyo for the Olympics, expected to spend billions of dollars during the event. However, Japan’s financial system isn’t ready to handle it, and hundreds of millions could be left on the table.
Shinzo Abe, Japan’s Prime Minister, says he wants 40% of payments to be cashless by 2025. In August, the government introduced plans to offer tax breaks and subsidies for companies that move in this direction. Credit card payments and the use of QR codes all qualify, but some of the country’s biggest financial players believe blockchain technology could be the best way to move Japan toward a cashless society.
The country’s largest bank, Mitsubishi UFJ Financial Group (MUFG), which is the fifth largest in the world by total assets has joined forces with American internet company Akamai to build a blockchain-based consumer payment network that will be ready for the Olympics. If all goes well, it could be the fastest and most powerful consumer payment network to date.
They claim that during testing it’s been able to handle over a million transactions per second, with each transaction confirmed in two seconds or less. What’s more, they said it could eventually process 10 million transactions per second. (In comparison, Visa’s credit card network, only deals with several thousand transactions per second. While Bitcoin maxes out around seven transactions per second, and each transaction can take up to an hour to validate.) The system is engineered to handle all kinds of payments, from automated highway tolls to payment-card swipes to in-app purchases.
Mizuho Financial Group is another large holding company that has also been experimenting with blockchain technology for several years as part of a project known as “J-Coin.” They intend to release their own digital currency for retail payments in March. Furthermore, SBI Holdings, a large financial-services firm, stated that they are also building their own token for retail payments, which will be called S Coin.
Fortunately, Japan is a relatively technologically savvy country. Cryptocurrency trading is prevalent in Japan and has been for years, plus the country’s financial regulators are more familiar with blockchain technology than any others in the world. With the government’s incentives to go cashless, and little competition from credit cards and other forms of e-payment, Japan could move straight to blockchains.
If the experiment is successful, Japan’s economy might be reinvented. Everything from large transactions between banks to small retail purchases could be performed with almost no delay and at a fraction of the current cost; even today’s credit cards would be slow and expensive by comparison.
As Japan works towards this goal, they will become the world’s biggest test bed for the decade-old idea that a cryptographic ledger and a network of computers can be used to build an electronic form of cash. The country might even regain its position as a global leader in both finance and technology—something it has lacked for decades.
One good reason to believe blockchain-based cash can succeed in Japan is that retail investors there already love cryptocurrency.
Apparently, this fondness for crypto comes from their affinity for trading foreign currencies. Japanese traders make up more than half of all global margin trading in the foreign exchange market. And they’ve recently expanded to cryptocurrency trading, benefiting from Japan’s bustling (and now regulated) exchange scene. It’s hard to get a feel of the Japanese cryptocurrency market’s exact size, but it has become Asia’s largest market since China suppressed trading in 2017. Moreover, Japanese retail investors were a big reason why Bitcoin’s price skyrocketed to nearly $20,000 in late 2017, according to analysts at Deutsche Bank.
Although cryptocurrency trading is widespread in many countries, it isn’t used much in retail payments anywhere. So why would Japan be any different? Its retail sector is decidedly low-tech, and most stores don’t even accept credit or debit cards. When it comes to online shopping, people commonly print out a bar code at home and take it to a convenience store, where they pay in cash.
But the country is not entirely opposed to electronic payments. Prepaid card services are popular, such as Suica, sold by the country’s major railway companies. Grocery and convenience stores also tend to accept Suica cards. Andy Champagne, CTO of Akamai, explained that Japan is an extraordinarily technical society and a society that’s very interested in transacting digitally. With the government’s incentive to quickly go cashless its a unique opportunity at a unique time.
So, why blockchain? Current cryptocurrencies are often volatile unless they’re backed by fiat currency in a bank account. It is also hard to use them and keep them safe from hackers. Once a blockchain transaction turns out to be fraudulent it can’t be reversed. Plus, the most popular blockchains are slow and need mass amounts of computing power to secure the ledger, which gives them substantial carbon footprints.
But, the systems Japan’s banks are working on could change that. MUFG’s blockchain will run on Akamai’s servers. The company is skilled at creating proprietary algorithms to deliver web content to users worldwide, its core business. That expertise will help them run a network that’s more energy efficient, faster, and cheaper to operate than a public blockchain, according to Champagne. In fact, MUFG thinks, that even payments too small to make sense with traditional credit card networks will be feasible on these new systems.