Progress Reportof the Digital
Currency Forum
January 2023

Digital Currency ForumIndex03

Introduction

1. Past activities of the Digital Currency Forum 05
2. Two-tiered Digital Currency Platform

10

3. Concrete steps toward11

the realization of digital currency[1] Electric Power Transaction Subcommittee[2] Settlement in Industrial Distribution Subcommittee 17[3] Retail and Distribution Subcommittee

19[4] Wallet Security Subcommittee

24[5] NFT Subcommittee

26[6] Security Token Settlement Practice27

and System Study Subcommittee[7] Regional Coin Subcommittee

29[8] Administrative Affairs Subcommittee

31

Column “Centralization” and “Decentralization”

33

Conclusion

35

Appendix37

in Finance

About the name of the Digital Currency
The digital currency being developed by the Digital
Currency Forum is tentatively called “DCJPY”.
The Forum will continue considering how its digitalcurrency should be entitled.

02

Introduction
The Digital Currency Forum was established in 2020 by leading Japanese companies
and financial institutions in order to contribute to the development and to enhance theefficiency of the economy and industry through the digitalization of Japan’s financial
infrastructure. Since then, the number of companies participating in the Forum has
steadily increased and now stands at 100.
The Digital Currency Forum publishes the details of its activities through “Progress
Reports” from the viewpoint of ensuring the transparency of its activities, widely
sharing the knowledge obtained, and contributing to the development of the economy
and society. This is the second Progress Report, following the first report issued in
November 2021.
This report focuses on describing the activities of each subcommittee, such as Proofsof-Concept (PoC), desktop validations, and promotions based on implementation,
which involved the participation of more than 40 companies, local governments, andorganizations in the forum subcommittee use cases announced in the previous report.
Looking back at the economic and financial situation in 2022, as global inflationarypressures intensified, major developed countries took countermeasures such as
raising interest rates. As interest rates on government bonds have risen, the price of
crypto assets and stable coins that are not adequately backed up by assets value, has
fallen sharply. Financial infrastructure helps economic entities deal with a variety ofuncertainties and risks, but when payment and settlement methods themselves are
unstable in terms of value, they cannot perform such intrinsic functions. Various asset
market movements in 2022 have reminded us of this.
The digitalization of the economy is accelerating further in countries around theworld including Japan. There is a growing demand for the use of information and data
in various aspects, such as high value-added transactions and the revitalization ofreginal economy. In this context, there is a strong demand for payment and settlement
instruments whose value is stable and which can take advantage of new technologies
such as blockchain and distributed ledger technology and contribute to the use of
information and data. Moreover, now decarbonization has become a global issue,
and there is growing interest in carbon pricing and emissions trading. Decentralized
digital technology is expected to be effective for facilitating transactions of various
new assets including decarbonization-related assets.
The two-tiered digital currency platform DCJPY (tentative name), which the Digital
Currency Forum is building, is expected to meet such needs of the economy and society.
In order to stabilize the value in yen, DCJPY is preparing to issue digital currencies
as bank deposits. Decentralized digital technology such as blockchain and distributed
ledger technology can be incorporated in these digital currencies so that it can facilitate
the utilization of information and data.

03

Recently, various private entities in overseas are also making efforts to realize digitalcurrency platforms that can stabilize the value in fiat currency such as USD andincorporate decentralized technology. Those initiatives include the Regulated Liability
Network (RLN), which consists of banks and corporations in the United States, andOnyx operated by JPMorgan. Private initiatives to utilize new digital technologies
to realize payment and settlement infrastructure that can facilitate sophisticatedtransactions efficiently and in a stable manner are expanding worldwide.
A number of countries are studying and making experiments about central bankdigital currencies (CBDCs). The interest in CBDCs is also based on the needs of theeconomy and society to seek payment and settlement instruments whose value isstable and which can contribute to facilitating sophisticated transactions. In thestudies on CBDCs, the importance of the role of the private sector in the payment andsettlement infrastructure is more widely and deeply recognized. Although the pros
and cons of issuing central bank digital currencies is still uncertain in most countries,
each country has stated that cooperation and collaboration with the private sector
is indispensable for building and operating payment and settlement infrastructure
regardless of whether CBDCs are issued or not. Many countries also argue that private
economic entities will continue to play a major role in payments and settlements.
DCJPY is designed to be able to coexist with CBDCs if they are issued. At the Digital
Currency Forum, we will proactively work on what can be done by the private sector
to achieve best-possible payment and settlement infrastructure, so that economic
entities do not fall into the “wait-and-see” phase of deliberations on CBDCs and do
not delay the digitalization of the financial infrastructure. We hope that discussions at
the Forum and those on CBDCs bear positive synergies and lead to the innovation ofJapan’s financial infrastructure.
The Digital Currency Forum will actively promote private initiatives to contribute to
the digitalization of financial infrastructure and the development of the economy. We
will share the knowledge obtained from these activities through progress reports andother communication tools, and contribute to digital innovation in an open manner.
Through these efforts, we will make our best effort for upgrading Japan’s payment
and settlement infrastructure into the most advanced in the world, which will be theprerequisite for the digital economy in the coming future.

Hiromi Yamaoka
Chairperson,
Digital Currency Forum04

Part 1

Past Activitiesof the Digital Currency Forum- More than 40 companies, local governments,and organizations participated in the use cases
implemented by the forum subcommittees announced
in the previous report, and conducted PoCs anddesktop validations including trial issuance by banks -The Digital Currency Forum aims to achieve:(1) Innovation of payment infrastructure using digital technology(2) Contribute to the promotion of digitalization of
the Japanese economy as a whole and to the realization ofvarious associated forms of value creation(3) Digital Payment as a Service*1
As such, the Digital Currency Forum started activities in December 2020 to take overthe predecessor Digital Currency Study Group.
The circle of activities is expanding, and companies in industries such as ICT, digital
securities, information and communications, railways, and manufacturing, as well
as regional financial institutions and local governments, are increasingly making
inquiries and asking to participate.
At present, the number of members of the Digital Currency Forum has increased
from 74 in the previous report by 26, reaching 100 companies. A broad range oforganizations including financial institutions, retail companies, transportationcompanies, information and communication companies, electric power companies,
trading companies, local governments, ICT companies, railway companies, andmanufacturing companies participate in the forum. These organizations participate
in the Forum as they consider their own DX and new business creation.
In addition, continuing on from the Study Group, relevant Ministries and Agencies
as well as the Bank of Japan have continued to participate as observers, and we arepromoting initiatives for the social implementation of digital currencies under the
all-Japan system.
*1 The ability of various business and economic activities to provide payment and settlement services
as one of a wide range of services by incorporating the functions of digital currency in accordancewith their respective needs.

05

Figure 1: Trends in the Number of Digital Currency Forum Members

Figure 2: Organization of the Digital Currency ForumThe activities of the Digital Currency Forum are largely divided into two parts. The
Common Area Subcommittee has been actively engaged in organizing workflows andrequirements related to the transfer of funds, which is the core function of digitalcurrencies. The various subcommittees have also been actively engaged separately inthe study of the utility and use cases of digital currencies for specific issues in eachindustry and field, the study of security issues for the safe handling of digital currency
platforms, and efforts to respond to various economic and social needs.
As a result of these activities, Proofs of Concept (hereinafter referred to as “PoCs”)
and desktop validations were carried out for the use cases of each subcommittee
published in the previous report *2, and more than 40 companies (total number ofparticipating companies) participated. In the PoCs of the Regional Coin Subcommittee
and Administrative Affairs Subcommittee, banks were able to implement test issuanceof the digital currency DCJPY (hereinafter referred to as “DCJPY”). Each subcommittee
is taking advantage of the results and knowledge gained from the PoCs and desktop
validations to make the study of the social implementation of digital currencies more
concrete.
*2 Progress report issued in 2021:
https://www.decurret-dcp.com/.assets/forum_20211124pr_en.pdf

06

List of PoC and Desktop Validation in 2022

The main evaluations of DCJPY from PoC participants were as follows:• Since programs such as use limitations can be incorporated in smart
contracts in the Business Process Areas of the two-tiered platform, it canbe confirmed that they can be used for specific measures by companies
and local governments, and we want to consider commercialization.
• There was no major difference versus existing payment methods and usage,and it was easy to handle. Being able to connect to the digital currency
platform without any technical problems was a big step forward.
• We did not feel much discomfort in using multiple applications such as the
DCJPY issue/send/burn screen and wallet application.

07

• In inter-firm settlement, DCJPY is a deposit, so it can be cashed out
immediately, and the accounting affairs/accounting of accounts receivable/
payable can be made more efficient, so these significant labor savings
can be expected.
• I was able to purchase products using DCJPY at a general store, and I could
use the store terminal with my smartphone. We were able to confirm that
there is no need for a dedicated terminal in the store while POS interlocking
is something to consider as a future matter.
• In actual operation, it is necessary to select applications in consideration of
normal business/UX (user experience).
Each subcommittee is taking advantage of the results and knowledge obtained by these
PoCs in the operation of the subcommittee. The subcommittees that consider practicaluse are also considering use cases aimed at implementation and cooperation withstakeholders for the implementation, and are formulating plans for FY2023 onwards
including these topics.
In the use case proposals, PoCs, and desktop validations being considered in eachsubcommittee, it was also confirmed that digital currency is not limited to being asettlement problem-solving tool as an alternative to cash, but will bring unprecedented
added value to payment activities, enabling advancement from the stage where only thevalue of money is exchanged to the stage where information related to the payment andsettlement in addition to the value as money (such as who bought the product, when,
where, and what) is created, and money with new added values such as environmental
value is created.
With such steady progress, DCJPY is also considering the use of digital currencies ina wide range of fields such as inter-firm settlement, supply chain, digital securities,
regional revitalization, government, carbon neutrality, and mutual distribution in eachfield. From February to March 2023, DCJPY plans to implement PoCs in the ElectricPower Transaction Subcommittee, Regional Coin Subcommittee, and Administrative
Affairs Subcommittee. The third Progress Report, including the results report, and thewhite paper are scheduled to be published in the first half of 2023.
The Digital Currency Forum will continue to actively work with participating companies
to digitize the role of all currencies and values and contribute to the creation of aprosperous society.

08History of the Digital Currency Forum

Figure 3: History of the Digital Currency Forum09

Part 2

Two-tiered Digital Currency Platform
DeCurret DCP Inc., the secretariat of the Digital Currency Forum, is developing thetwo-tiered digital currency platform*1, and obtained a patent for it (Patent No. 7089143)
on June 14, 2022.
*1 Reference: 2021 White Paper:https://www.decurret-dcp.com/.assets/forum_20211124wp_en.pdf

As described in the “Past activities of the Digital Currency Forum” in the previous
chapter, we have been able to confirm the practical needs and feasibility of this platformby conducting PoCs with business companies, including the test issuance of DCJPY
by banks. Therefore, in FY2023, we are planning to conduct detailed validations forpractical use, customer implementation preparations, and pre-implementation testing,and continue to work toward practical application in 2024.
We have summarized the basic structure of the platform such as architecture andinfrastructure that organizes the specifications, business flows, and necessaryfunctions such as various functions required for the issuance of DCJPY, and presented
these to the private banks that are going to be issuing entities of DCJPY, as theconnection specification *2, and conducts specific consultations.
*2 Overview of details• Digital currency platform service overview• Business process related diagrams• Key business use case diagram• Systematization business flow
• Business processing definition• Screen image• External interface• Architecture• Infrastructure• Glossary
The Digital Currency Forum provides a Sandbox environment for forum participants tomore specifically study the use of digital currencies in a wide range of fields, includinginter-firm settlement, supply chain, digital securities, regional revitalization, government,
and carbon neutrality.
As a prototype of the core functionality of the two-tiered digital currency platform, theSandbox environment was developed and released in June 2021. Since then, the Sandbox
environment has been updated in line with the development of the two-tiered digitalcurrency platform, including the addition of an account signature generation tool andthe addition of API request items by October 2022. The Sandbox environment provides
an environment where almost all services in the Common and Business Process Areas
provided by the two-tiered digital currency platform can be tested.
For more information on the two-tiered digital currency platform, we are planningto publish a white paper in the first half of FY2023, as well as Progress Report No. 3.

10Part 3Concrete Steps Toward
the Realization of Digital Currency[1] Electric Power Transaction Subcommittee- Examining the digital currency usage model for carbon neutrality Purchase of clean energy
The Electric Power Transaction Subcommittee of the Digital Currency Forum is
examining new business models for decarbonization through the use of DCJPY for
settlements associated with the purchase and sale of electricity, the automatic additionof proof that renewable electricity is being used, and proof of purchase of goods anduse of services in stores using DCJPY obtained through the purchase and sale ofelectricity and environmental values.
By applying blockchain and distributed ledger technology, it will be possible to track
how electricity is produced and how it is valued. The Electric Power Transaction
Subcommittee has been studying the possibility of exchanging electricity fromrenewable energy sources for “electricity tokens” that are programmed to be able
to purchase clean energy using the Business Process Area, thereby making energy
procurement that is compatible with decarbonization more efficient.
This is expected to allow companies to choose and procure clean energy and to
streamline the administrative work involved in such procurement. It will also be easierfor them to prove that their corporate activities are consistent with carbon neutrality,
and to expand into areas of corporate financing such as green finance. These efforts
will become even more important in the near future as countries, including Japan,
work toward achieving carbon neutrality.

Specific use case:Use of digital currency in a peer to peer “P2P” electricity trading
Since November 2019, the end of feed-in-tariffs (“post-FIT”) and lower prices for solar
power have accelerated discussions on electricity trading and environmental value
trading. In this context, there is a growing interest in Peer to Peer (“P2P”) platforms
that match power generators (hereafter, “prosumers”) with consumers (hereafter,“consumers”), and in the creation of new businesses through the use of electricity
data.

11

Figure 4: Future vision of electric power platform using next-generation technologies
Source: Ministry of Economy, Trade and Industry, "8th Study Group on New Electric Power Platform
Using Next-Generation Technologies” (Japanese version only)

In the use of P2P platforms, the key is to have an efficient mechanism for settling theprice associated with the purchase and sale of electricity and environmental value. In
this respect, the use of DCJPY, which is programmable, is expected to make it possible
to “purchase electricity that meets certain requirements and settle it automatically,”
thereby increasing the efficiency of trading operations.
The Electric Power Transaction Subcommittee of the Digital Currency Forum is exploringa mechanism to use yen-denominated bank-issued digital currency for the trading ofelectricity and environmental value on the electricity P2P trading platform to makepayments seamless in real time.
In FY2021, it demonstrated the use of digital currency as a means of payment andsettlement for P2P electricity and environmental value transactions, and the use caseof digital currency earned by prosumers as income through trading for payment andsettlement of product purchases.

12Figure 5: Proof-of-Concept for using digital currency for electricity P2P trading

In order to seamlessly settle electricity P2P transactions in digital currency, real-time
payment of consideration is realized by linking the electricity and environmental value
P2P trading platform and the digital currency platform with an API.

Figure 6: Linkage diagram between electricity P2P trading system and digital currency settlement system13In addition, for the purchase of goods based on the income from electricity trading,the subcommittee has demonstrated that a prosumer can actually purchase goods at
a convenience store and make payments in digital currency. In order to do this withDCJPY, the prosumer needs to issue a “Common Area Coin (a deposit in the Common
Area, a digital currency entity)” from his or her own “bank deposit”, and mutually convert
the “Common Area Coin” and “Business Process Area Coin (a token that poses as aCommon Area Coin in the Business Process Area)” at the time of product purchase.
These functions have been realized on smartphones using the “Business Process
Area App” provided by DeCurret DCP Inc.

Figure 7: Photos of product purchases, digital currency payments, and settlement demonstrations

By demonstrating the application of digital currencies to the settlement of electricity
and environmental value transactions and the purchase of goods through the income
generated, it will be possible to develop the scheme in the future and develop
various complex services beyond the boundaries of the industry. Since payments
and settlements are recorded through the transfer of digital currencies, it is also
expected that it will be possible to prove the efforts towards carbon neutrality on thepart of those who procure electricity and environmental value, and to award points
according to environmental value.

Use of electricity transaction data for green financeIn addition, the Electric Power Transaction Subcommittee of the Digital Currency
Forum is studying use cases in which data on renewable energy and environmental
values acquired by consumers of electricity is used for the business and financing of
the companies concerned.
For example, it may be possible to accumulate electricity transactions from renewableenergy, environmental value, and elements that are environmentally friendly on a
blockchain and use them for financial aspects such as fundraising.
In FY2021, the subcommittee used virtual data to obtain, score, and visualize electricity
transaction results and electricity supplier information, and validated use cases
utilizing them. This scheme uses the electricity transaction platform developed by
ENERES Co., Ltd. and validates the support in terms of information and correspondence
resources and financial support. In order to use virtual data, virtual numerical values
are also used for evaluation.

14

[Implementation Details](1) Consumers (assuming small and medium-sized enterprises) acquire
electricity transaction performance data, as well as power source type,power generation area, and power plant information of the supplier(2) Scoring based on electricity transaction performance data and supplierinformation is performed to visualize the environmental impact,sustainability, additionality, and regionality(3) Based on the evaluation of SMEs’ renewable energy purchase performanceand supplier, financial service providers will consider the possibility ofproviding financial services such as loans(4) Also add carbon neutral information such as renewable energy usage
rate to products
As a specific usage method, banks could use such data to evaluate the decarbonization
efforts of the companies they lend to and reflect this outcome in the terms of theirloans. It is also possible to evaluate decarbonization efforts in the value chain, such as
the contribution to decarbonization of the products procured by the lending company
and the companies with which the lending company does business. These data arealso expected to provide useful information to consumers in their evaluation of acompany’s products and services.

Figure 8: Proof-of-Concept scheme to apply electricity trading records to financial business

In FY2021, the subcommittee was able to validate the use cases that utilize electricity
transaction data, and is studying the materialization of these use cases in FY2022.
In particular, we hope that it will be possible to create a cycle that promotes thedecarbonization of companies with financial services and creates consumers’ own
decarbonization actions using electricity transaction performance data as a key.

15

The subcommittee will continue to study business models using DCJPY, with a focus
on The Kansai Electric Power Company, INC. and ENERES Co., Ltd., and will continue topromote the integration of DX (Digital Transformation) and GX (Green Transformation)in the energy field, aiming to develop practical services for corporate carbon neutral
support.

Figure 9: World view of the Electric Power Transaction Subcommittee16[2] Settlement in Industrial Distribution Subcommittee
PoC of BtoB trading smart contracts in linkage with digital currency
The Settlement in Industrial Distribution Subcommittee, led by Mitsubishi Corporation,is planning and promoting a PoC to acquire a wide range of knowledge on digitalcurrencies and smart contracts using blockchain. The settlement of various fees intrade transactions faces various issues such as duplication of work between contracting
parties, complexity of operations from billing to settlement, and long time lag for
financing.
Therefore, this subcommittee conducted technical validation and confirmation of
the implementation effects in order to contribute to the problems of complexity andthe long time required to deliver funds using digital currencies and smart contracts,
through a PoC of automatic execution of contracts using digital currency in the settlementof demurrage charges, etc. related to trade transactions conducted by Mitsubishi
Corporation.
Overview of PoC
From October 2021 to January 2022, Mitsubishi Corporation conducted a PoC on theautomatic calculation and settlement of expenses for the marine transportation of
biomass fuel handled by the Petroleum and Chemical Solutions Group.
In this PoC, the subcommittee recorded sample data such as results on the blockchain
foundation for a series of tasks from contract conclusion to ship allocation, loading,discharging, billing, and settlement, and conducted experiments on automatic
calculation and settlement of expenses using these data. The implementation was
carried out with the cooperation of Industry One, Inc.
Flow of work under this experiment17

Participants and roles

Mitsubishi Corporation, NIPPON TELEGRAPH AND TELEPHONE CORPORATION :Use and validation of digital currency payments
Industry One, Inc. :Overall planning, smart contract infrastructure construction,
promotion and evaluation of PoC
DeCurret DCP Inc. :Provision of system for issuing two-tiered digital currency
Results of the PoC and next steps
In the scenario of the smart contract validated in this PoC, when the actual valueof fuel cost, demurrage time, etc. is agreed between the parties concerned (trading
company, shipping company, producer, consumer), the billing amount is automaticallycalculated at the same time. The settlement is also completed automatically when thecalculated charge is approved. If this scenario is realized, not only can all communication
history and performance data be checked and managed on one platform, but also it isexpected to reduce the back-office work related to payment by up to 80%.
The Settlement in Industrial Distribution Subcommittee aims to provide smart contracts
that can be deployed in a wide range of industries in Japan, and will promote service
development and provision.

18

[3] Retail and Distribution Subcommittee
Conducted a PoC using real transaction data, blockchain technology,
and digital currency between retailers and wholesalers
The Retail and Distribution Subcommittee began its activities in December 2020 todiscuss the utilization and potential of digital currencies in the retail and distributionsector in Japan, which has sales of some 550 trillion yen (2021), and to form anagreement within the subcommittee on the identification of possible issues thatcan be solved by digital currencies, the organization of requirements for social
implementation, and the direction of solutions based on these.
Since the implementation and spread of EDI*1, which exchanges purchase orders,delivery notes, and invoices, etc. between retailers and wholesalers/manufacturers inJapan electronically, the method of recording and exchanging information within theindustry has been standardized.
Based on these trends, the subcommittee considered combining EDI data, which is theindustry standard for electronic information exchange in commercial transactions,with a distributed ledger and a digital currency with functions that can transfer
instructions on a distributed ledger.
As a result, based on the fact that payment operations that normally involve manual
confirmation in a series of business processes can be completed with less or nolabor, and that it is technically possible to pay the retail to wholesale price incurred in
the transaction (pay for each delivery without a deadline), triggered by the recording
and transmission of delivery completion information to EDI in the EDI information
linkage process, the subcommittee decided to conduct a PoC with the aim of solving
the problems of business operators involved in transactions while utilizing existing
EDI services.
With the cooperation of each company participating in the subcommittee and relatedcompanies, a PoC was carried out from June 9 (Thu) to 24 (Fri), 2022. The overview
of the PoC is as shown in the figure “PoC Overview.” The subcommittee recorded theactual EDI data generated between the retail company and the wholesale company
on the blockchain and carried out the payment using digital currency on a daily basis
based on information linkage of the product receipts (deliveries). In addition, under theenvironment of the PoC, it confirmed whether results could be obtained that contributeto the automation of payment processing and the efficiency of accompanying payment
operations.
*1 EDI: Abbreviation of Electronic Data Interchange. Refers to the electronic exchange of business documents
such as purchase orders, delivery notes and invoices over a network.

19

PoC Overview:

Figure 10: Flow diagram of the PoC (compared to the current flow)

20Figure 11: Overview figure of PoC

21

Role of each company in the PoC

As a result of the PoC, the subcommittee was able to confirm the following three points:(1) Confirmed the unmanned operation and labor-saving effect in payment
operations(2) Payments from the retailer to the wholesaler that used to take 30 to 120
days were completed in one business day(3) Perspectives (1) and (2) are feasible using existing technologies anddigital currencies
These results will lead to the adoption of blockchain technology in the retail anddistribution industries in the future and have enabled the subcommittee, which aims
to adapt digital currencies, to obtain useful knowledge.

22

On the other hand, through this PoC, it was found that there are two major issues forthe popularization of digital currencies (automation of administrative processing).

1. Supporting transaction patterns that occur in practice(1) Expansion of the scope of application to transactions and items such as
fresh food, rebate treatment fresh food, and rebate treatment, etc.
(2) Expansion of target business partners (e.g. logistics companies andmanufacturers)(3) Improvement of processing capacity and security, etc. of each system

2. Consideration of how to handle the funding aspectsof payers and the increase in transfer costs due tothe increasing frequency of payments(1) Allowances for funds due to shortening the number of days until payment
from retail to wholesaler/manufacturer(2) Fees that may be incurred when transferring funds in digital currency orburning funds from a bank account

The issues identified in this PoC are recognized as issues for the future popularizationof digital currencies, and we believe that this is an important step for future progress.
Through its future activities, the Retail and Distribution Subcommittee will work tosolve these issues and contribute to the streamlining and development of economic
activities throughout the supply chain.

23

[4] Wallet Security Subcommittee
Activities and next steps of the Wallet Security Subcommittee
Activities and purpose of the Wallet Security Subcommittee
The Wallet Security Subcommittee is working with the goal of formulating basic security
basic requirements centered on the management of private keys (signing keys), softwarethat uses signing keys, and users so that the companies and organizations participatingin the Forum can handle digital currency platforms safely and securely.
Preparation of a security review report centered on key management
Since December 2020, the subcommittee has been discussing points and issues
related to security, including the management of signing keys in the Business Process
Area, which handles the digital currency platform, and measures to address them. The
security discussions focus on the challenges specific to digital currency platforms,
with a broader view of security in general.
Therefore, the subcommittee held discussions in a team that investigated various
existing standards, industry standards, and guidelines, including user authentication,
security systems, and cybersecurity measures, and a team that explored the system
for the digital currency platform and considered threats related to signing keys inparticular.
These were separated from the first phase of the activity, and the results of thisstudy were compiled into a security review report in August 2022 and shared with theForum participants. The report organizes the types of signing keys required for eachsoftware configuration and application related to the unique distributed ledger in thedigital currency platform, analyzes the threats and risks related to the Business
Process Area system centered on signing keys, and summarizes the possible
countermeasure policies.

24Figure 12: Model diagram for contents trading using a digital currency platform

Future activity policy
After the first edition of the security review report describing the results of the firstphase, the activities of the subcommittee have moved to the second phase. The modelof the Business Process Area system examined in the first phase assumed a similar
configuration to conventional systems in order to clarify the issues.
Considering the form of use of the digital currency platform in the future, including
the deliberations in other subcommittees of the Forum, it is also possible to linkwith another distributed ledger managed independently from the digital currency
platform. In this case, it is assumed that the processing is performed mechanicallythrough the smart contract by running the node of another distributed ledger inthe Business Process Area system or by running the software linked to an external
distributed ledger.
When examining the security of systems that handle distributed ledgers, it isnecessary to conduct discussions based on the characteristics of the distributed
ledger, such as distributed management by multiple organizations and people andmechanical processing by smart contracts. In addition, the differences in assumptions
and characteristics between permissionless and permissioned distributed ledgers
also have a large effect.
In the second phase, the subcommittee will organize technical characteristics basedon a representative distributed ledger model, and examine security issues and risk
mitigation measures related to distributed ledgers.

25[5] NFT Subcommittee
Validation of the functionality of settlement and digital currency
required in the NFT marketplace
The NFT Subcommittee was established to explore the possibilities of digital currency
in the entertainment field and is discussing the possibilities of DCJPY for content-based
NFT transactions given the excitement in the NFT market.
The current NFT market has calmed down temporarily and is seeking to expand intotransactions other than art and games. However, despite the high awareness of NFTs,
the holding rate is only a few percent, so we believe that there are major challenges
in purchasing and holding NFTs for future market expansion.
So far, we have organized the settlement issues in the existing NFT sales market
from the perspective of users, issuers, and distributors, and have considered thefunctionality required by DCJPY.
Among them, we believe that the realization of Delivery versus Payment (DvP) settlement based on smart contract control is useful for all stakeholders, and we are
studying the realization method using the connection with the existing marketplace
as an example.

Figure 13: NFT marketplace connection image26

[6] Security Token Settlement Practice andSystem Study Subcommittee- Consideration of DvP payments in digital currency
in the security token market Use of digital currencies in DvP settlement of security tokens
A security token (hereinafter referred to as “ST”) is a digitized security that is issued
and managed using a unique technological foundation utilizing advanced technologies
such as blockchain. In Japan, the number of ST issuance cases is increasing, andblockchain implementation has already been carried out in accordance with theoperational flow that complies with various laws and regulations. However, the payment
method is limited to legal tender settlement using the existing framework.
In the future, it is believed that if payment methods in decentralized finance thatcan shorten the payment period and improve the efficiency of post-trade operations
are developed, there will be benefits not only for the financial industry but for all
stakeholders.
The Security Token Settlement Practice and System Study Subcommittee wasestablished to examine the feasibility of efficient and secure payments between ST
and digital currencies, and we believe that the realization of Delivery versus Payment(DvP) payments between ST and digital currencies will be an important factor inpromoting the use of ST and expanding the market. In order to examine various issues
to achieve this, from 2021 to 2022, the subcommittee conducted a desktop validationof DvP payments using digital currency and summarized the issues for realization.

Validation content
The following points were validated assuming the use of DCJPY advocated by
DeCurret DCP Inc.

Source: May 27, 2022 Future Architect, Inc. and Nomura Holdings, Inc. Press Release27

Validation results
With regard to DCJPY DvP settlement using STs, the subcommittee summarized theresults of the validation from three perspectives: business use case, technology, andchallenges.

Source: May 27, 2022 Future Architect, Inc. and Nomura Holdings, Inc. Press Release“DvP settlement of ST and DCJPY” has utilization value and is considered to betechnically feasible. However, issues such as business methods and cost benefits
are expected on the route to realization, and it is necessary to further investigate thenature of DvP settlement to determine whether or not it can be realized.
The Security Token Settlement Practice and System Study Subcommittee believes
that when such issues are resolved, the settlement of ST and digital currency may
spread in society.

28[7] Regional Coin Subcommittee- Aiming to solve regional issues and revitalize regionswith digital currency Use of DCJPY as regional coin
As of the end of December 2022, more than 40 companies and local governments haveparticipated in the Regional Coin Subcommittee, which has been actively working for
more than two years since its establishment with the aim of solving regional issues
and revitalizing regions using DCJPY.
In February 2022, it published the Interim Report - Possibilities of Digital Regional
Coins. In terms of the features of the new “Digital Regional Coin” utilizing DCJPY, thesubcommittee defined three points: (1) Data utilization and tracking/traceability canbe secured as a digital payment and settlement method; (2) The coin is programmableand detailed currency design can be made in line with administrative efficiency andimplementation purposes; and (3) The coin is issued as private bank debt, and canbe used in all payment scenes without restrictions.
In order to validate these features specifically, through confirmation of the behavior
of DCJPY’s core two-tiered platform function and the function of the regional wallet
as a user interface, the subcommittee conducted a small-scale PoC in March 2022 in
Aizuwakamatsu City and Kesennuma City, which were participating municipalities,
together with the Administrative Affairs Subcommittee (See figure below. For details
on the PoC scenarios, see the Administrative Affairs Subcommittee page.)29

Through this experiment, the three features of the “digital regional currency” using
DCJPY were validated, and issues for future practical application such as walletusability and security measures were also identified. The effectiveness of DCJPY in
resolving regional issues and revitalizing regions including the control of coupon use,
the use of sales data, and instant merchant settlement, was also clarified.
In FY2022, Aizuwakamatsu City applied for a grant under the Digital Garden City
Nation Initiative in order to develop and deepen “Smart City Aizuwakamatsu.” In thepayments field, the introduction of a digital regional coin foundation aims to reducethe burden on stores of settlement fees and cashless advance payment settlements,
which are hindering the shift to cashless transactions in regions.
Starting in the second half of FY2022, the city will start introducing digital coins in theretail, services, food, and agriculture sectors, making transactions more convenient
for citizens and stores and promoting the use of data for applications such as usingpurchasing behavior data for health advisory services via a data linkage platform
based on opting-in. The Regional Coin Subcommittee is also working with local financial
institutions to conduct a PoC using DCJPY for some of the above-mentioned retail,services, and food and agriculture settlements.
In FY2022, the activities of the subcommittee are entering a new stage with theparticipation of regional financial institutions that have already developed regionalcoin services, leading local companies, and local governments aiming to build new
regional payment platforms to enhance regional DX. The subcommittee will continue
to work with participating companies and local governments to accelerate its studies
and realize digital regional coins that are sustainable in regions and contribute to theresolution of regional issues through the use of DCJPY.

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[8] Administrative Affairs Subcommittee- Promotion of administrative affairs DX based on digital currency -Use of DCJPY in administrative affairs
The Administrative Affairs Subcommittee is examining how DCJPY can be used tosolve issues and improve the efficiency of administrative procedures involving thetransfer of funds, such as tax payments and the delivery of various benefits andsubsidies.
As a result of examining use cases together with participating companies that takeadvantage of the unique characteristics of DCJPY, such as programmability andtraceability, as well as improving administrative efficiency through digitalization, in
March 2022, the subcommittee conducted a PoC related to the “delivery of coupons
using DCJPY” assuming temporary special benefits for child-rearing households in
Aizuwakamatsu City and Kesennuma City together with the Regional Coin Subcommittee(See figure below). The following shows a summary of the PoC scenarios.

(1) Using a message distribution service for mobile phones, perform identity
verification and coupon acceptance confirmation procedures from city
hall to the resident’s smartphone.
(2) Download a wallet on residents’ smartphones, and give coupons toresidents who want to receive them from city hall.
(3) Residents use the coupons in stores to purchase childcare products. Also
prepare stores that sell alcohol and confirm that coupons cannot be used
there. Purchase information is anonymized and returned to city hall tovalidate the effectiveness of the measures.
(4) Utilize a two-tiered platform to issue DCJPY backed by the bank’s ordinary
deposit account and settle sales to the store according to the usage statusof the coupon.
(5) After the experiment, city hall and the store each burn the DCJPY theyown and deposit them into their ordinary deposit accounts.

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The above workflow was tested on about ten city hall employees who assumed theroles of city hall, store, and residents. As a result of the validation, it has become
possible to issue coupons efficiently in a short period of time by digitizing benefits
operations that were traditionally conducted by mail, such as confirming intention toreceive and sending coupons.
The coupons were restricted in use, and information such as when and what was used
was returned, so it was easy to confirm the achievements and effects of the measures.
By performing settlements with DCJPY, stores can monetize sales in real time, andboth the speed from implementation to penetration and the digitalization of benefits
has been dramatically improved, and the scheme has been shown to contribute togovernment efficiency.
Following this PoC, in FY2022, the subcommittee will continue to study PoC scenariosand schemes to make them more concrete, focusing on three use cases: (1) Tracking
grants and subsidies for corporations and external payments by eligible businesses(2) Using DCJPY to pay taxes and various fees to local governments (3) Linking
medical care and nursing care over a wide area and automating payments.
It is believed that DCJPY can contribute in many ways to the DX of the administrative
affairs in Japan, where the need for it has become apparent due to the COVID-19
pandemic. We will continue to come up with ideas together with the participatingcompanies.

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Column“Centralization” and “Decentralization”
in Finance
Finance consists of sophisticated information processing, and up to now this information
processing has been realized by combinations of “centralized” and “dispersed” methods
and structures reflecting the available technologies of the time.
For example, in a cash transaction, each recipient checks whether the cash handed
over is the agreed amount, and whether it is not a counterfeit banknote or counterfeit
coin. When paper and metal technologies were dominant, it was difficult to process
the huge amount of payment and settlement data related to people’s daily transactions
through a centralized system. The cash mechanism generated in this way has successfully
utilized each recipient’s incentive to securely obtain the agreed amount, and has realized
efficient information processing while incorporating a decentralized structure.
On the other hand, if the value of cash is unstable, the transaction party will be at risk
stemming from the volatility of the value of cash, which is typically inflation. Therefore,
since the 19th century, countries have centralized sovereign currency issuance rights intheir central banks under the mechanism of the modern nation-state. Those countries
have also introduced banking regulations and deposit insurance for commercial
banks and bank deposits in order to stabilize the value of bank deposits, which should
be used widely as instruments for payments and settlements. In other words, themodern monetary system has utilized a centralized framework based on the modern
nation states in order to stabilize the value of payment and settlement instruments,
while utilizing also a decentralized mechanism for information processing related to
payments and settlements. As such, the combination of centralized and decentralized
structures has been utilized to achieve both stability and efficiency of modern
monetary system.
With technological innovation, computers became able to process a lot of information,
and with this came the development of electronic financial transactions under acentralized structure. For example, securities that were traditionally handed over as
pieces of paper have been de-materialized and digitized, and the transactions of them
are now processed as electronic data under a centralized structure of book entry
systems. Regarding such structural changes in securities trading, initially, the systemused the legal concept of assuming the existence of “paper” in the book entry system,
such as “global notes,” “commingled storage,” and “transfer of possession by instruction,”owing to the constraints of the legal systems at that stage. However, since then,legal frameworks have been updated so as to facilitate digitized transactions undera centralized framework, as shown in the establishment of the “Act on Book Entry of
Corporate Bonds and Shares” (2001).

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The emergence of blockchain and distributed ledger technology in 2009 has opened up
the new possibilities of combinations between “digital technology” and “decentralization”
for financial and economic transactions.
Initially, in terms of the application of blockchain and distributed ledgers, “crypto-assets”(at the time called “virtual currencies”) tried to stabilize the value of those assets
through “computational competition” and other means under a decentralized structure,
instead of the centralized framework of the state and central banks. Although suchattempts attracted public attention, however, the value of crypto-assets have continued tofluctuate significantly. This suggests that mankind has still not found a more efficientmechanism than the nation-state to stabilize the value of the means of payments
at this stage. “Stable coins” that appeared later, backed by government bonds, bankdeposits, and other assets, can be regarded as partially utilizing the framework of thenation state in order to stabilize their value.
The potential of blockchain and distributed ledger technology is broader and not limited
to crypto-assets. They can create new added value in wide-ranging financial transactions
and economic activities through combinations of “digital” and “distributed” technologies
and structures. For example, we can radically improve the efficiency and added-valueof transactions through the application of smart contracts, create new digital assets,
and realize “decentralized finance” (DeFi) and “decentralized markets” (DEX).
Relying on a centralized framework to implement these new economic activities
can also create problems, such as limiting transaction time to a specific computer’s
uptime, or the specific computer becoming an “SPF” (Single Point of Failure) in theinfrastructure, meaning that the failure of the computer may risk the operation of
the whole infrastructure. With the widespread use of PCs, however, the use of new
decentralized digital technologies has made it possible to operate 24 hours a day,365 days a year, without relying on a centralized computing center, while preventing
counterfeiting and duplicated transfers.
In order to facilitate such new financial and economic transactions, financial infrastructurewith payment and settlement instruments whose value is stable and which can utilize
decentralized digital technology is strongly needed. Moreover, in order to maximize thepotential of such new technologies, it is important to create institutional frameworks thatcan fully utilize the new benefits created by the combination of “digital and distributed.”
In this regard, the Digital Currency Forum will continue making contributions by way ofconstructive suggestions to relevant entities.

References: Noriyuki Yanagawa, Hiromi Yamaoka, Law and Economics of Blockchain and Distributed Ledger Technology(Bank of Japan Working Paper, 2017)https://www.boj.or.jp/research/wps_rev/wps_2017/data/wp17j01.pdf(Available only in Japanese)34

Conclusion
The Digital Currency Forum holds a monthly plenary meeting remotely, where theactivities of each subcommittee are shared and questions are answered. When I
attend this meeting, I often feel that this is where the revival of the Japanese economy
may begin. Let me explain a little bit further.
The Japanese economy has long been mocked as being a “lost 20 years” or “30 years.”
In order to revitalize the economy, the government has been implementing economic
measures with a large supplementary budget every year, but unfortunately, nobody inJapan feels that the economy has embarked on a new growth trajectory. Everyone isaware of the major structural changes in the socio-economic environment, including
the decline in the population, but it is impossible for a government to respond to themrobustly, whose main goal is to create annual budgets that do not upset conflicting
interests. Structural challenges require long-term “strategies” with a view to the
future rather than short-term “tactics.”
I believe that it is only private sector entities that formulate long-term strategies, andwhen the government identifies certain trends in the private sector, it should support
them. In addition, I believe that the formulation of long-term strategies requires theunity of private companies. The dynamism of capitalism lies in competition, but it
is not possible to create a new economy and society from the endless competition
in production of goods and services that are imitated immediately and become redoceans. Companies with the same problem consciousness and dreams for the future
should work together to create a large framework of products and services that will
fundamentally change people’s lives. Within that framework, each company should
work hard to bring out better individual products and services to the world. That is thedesirable type of approach.
The era of the digital society in which Web 3.0 is trumpeted is approaching. Looking
back on history, the semiconductor, IC and Internet technologies that have evolved
over the past half-century after their birth have created giant companies such as
GAFAM in the United States, the place of their development, surpassing the large
Japanese companies that enjoyed prosperity in the late 1980s. Since the collapse of
the bubble in the 1990s, Japan’s macro economy has been plagued by deflation andlow growth, and individual companies have suffered from low productivity, low profits,intensified global competition, and regional economic exhaustion. However, althoughvarious problems still remain, Japanese companies are increasing their willingness
to take on the challenge of building new business models using digital technology thatis equal around the world.

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The seriousness of Japanese companies can be well understood by looking at theactivities of the Digital Currency Forum. Since the last Progress Report in November
2021, the number of participating companies has reached 100, and many PoC anddesktop validations involving more than 40 companies have been successfully carriedout. I invite you to read about the PoCs and desktop validations in “Part 3 Concrete
steps toward the realization of digital currency,” but these initiatives do not only
remind us of the challenges that must be overcome in order to build a digital society
ecosystem, but also demonstrate many results that can make us hopeful about therealization of a new economy and society through digitalization.
As we continue to move forward, we come up with new ideas. In 2023, Forum participants
will continue to confirm the feasibility of such ideas through the implementation of
PoCs. At the same time, we hope to gradually realize implementation of the fields
that have been studied in society, and concretely demonstrate the value of the digitalsociety to the world. We will execute the “strategies” described by the forum subcommittees
in the real world using “tactics.” I believe 2023 will be a year of major challenges for us.

Toshihide Endo
Senior Advisor
Digital Currency Forum36

Appendix
The Digital Currency Forum Members
Companies and entities participating from the Digital Currency Study Group
Chairperson
Hiromi Yamaoka, Director, Future Corporation(Former Head of the Payment and Settlement Systems Department, Bank of Japan)

Observers• Financial Services Agency, Japan• Ministry of Internal Affairs and Communications, Japan• Ministry of Finance, Japan• Ministry of Economy, Trade and Industry, Japan• Bank of Japan

Participating from the Digital Currency Forum• Aioi Nissay Dowa Insurance Co., Ltd.
• Aizuwakamatsu City
• Accenture Japan Ltd.
• Asukoe Partners, Inc.
• AEON Co., Ltd.
• AEON Financial Service Co., Ltd.
• Internet Initiative Japan Inc.
• Industry One, Inc.
• INTEC Inc.
• Intelligent Wave Inc.
• ANA Group (ACD Inc.)• SBI Holdings, Inc.
• ENERES Co., Ltd.
• NTT Group• Future Innovation Group, Inc.
• au Kabucom Securities Co., Ltd.
• au Jibun Bank Corporation• au Financial Holdings Corporation• Osaka Digital Exchange Co., Ltd.
• Kao Group Customer Marketing Co., Ltd• KATAOKA & KOBAYASHI LPC.
• The Kansai Electric Power Company, Incorporated• Keychain GK• Payments Japan Association, Incorporated• Kyushu Financial Group, Inc.
• KYOCERA Corporation• Kumamoto Prefectural Government• xID Inc.
• KDDI CORPORATION• Kesennuma city
• CYBERLINKS CO., LTD.
• SATUDORA HOLDINGS CO., LTD.
• JCB Co., Ltd.
• JPX Market Innovation & Research, Inc.

• SIGMAXYZ Inc.
• Super City AiCT Consortium• SUMITOMO CORPORATION• SUMITOMO LIFE INSURANCE COMPANY• Securitize Japan K.K.
• SECOM CO., LTD.
• Seven Bank, Ltd. (Seven & i Holdings Co., Ltd.)• SOHGO SECURITY SERVICES CO., LTD.(ALSOK)• SocioFuture, Ltd.
• Sony Bank Incorporated• Sony Payment Services Inc.
• SoftBank Corp.
• Sompo Holdings, Inc.
• DAIICHIKOSHO CO., LTD.
• DAIDO LIFE INSURANCE COMPANY• Dai Nippon Printing Co., Ltd.
• Daiwa Securities Group Inc.
• Daiwa Institute of Research Ltd.
• Chubu Electric Power Co., Inc.
• TSURUHA HOLDINGS INC.
• TIS Inc.
• DENTSU INC.
• Tokio Marine & Nichido Fire Insurance Co., Ltd.
• Tokyo Kiraboshi Financial Group, Inc.
• Tokyo Financial Exchange Inc.
• TOKYO METROPOLITAN GOVERNMENT• Toppan Inc.
• TOPPAN FORMS CO., LTD.
• THE NISHI-NIPPON CITY BANK, LTD.
• West Japan Railway Company• NS Solutions Corporation• The Mortgage Corporation of Japan, Limited• Japan Securities Clearing Corporation• NEC Corporation• Nomura Research Institute, Ltd.
• Nomura Holdings, Inc.
• HashPort Inc.
• Hamamatsu City
• Hankyu Hanshin Holdings, Inc.
• PwC Consulting LLC• East Japan Railway Company• Hitachi, Ltd.
• BIPROGY Inc.
• The Hiroshima Bank, Ltd.
• FamilyMart Co., Ltd.
• Fintertech Co. Ltd.
• BOOSTRY Co., Ltd.
• Future Architect, Inc.
• Payroll Inc.
• Mizuho Bank, Ltd.
• Mitsui Sumitomo Insurance Co., Ltd.
• Sumitomo Mitsui Banking Corporation• Sumitomo Mitsui Trust Bank, Limited• Mitsubishi Corporation• MUFG Bank, Ltd.
• Mitsubishi UFJ NICOS Co., Ltd.
• Mitsubishi UFJ Research and Consulting Co., Ltd• MIRAI Inc.
• Meiji Yasuda Life Insurance Company• Mori Hamada & Matsumoto• YAMATO HOLDINGS CO., LTD.
• JAPAN POST BANK Co., Ltd.
• Rakuten Edy, Inc.
• Resona Holdings, Inc.
• Lawson, Inc.
• Laurel Bank Machines Co., Ltd.
(100 companies, municipalities, and organizations)

Advisors

Senior Advisor• Masakazu Masujima Partner, Mori Hamada & Matsumoto• Tetsuya Inoue Chief Researcher, Nomura Research Institute, Ltd.
• Shunji Kobayakawa Professor, School of Political Science and Economics Meiji University• Kenji Saito Professor, Graduate School of Business and Finance Waseda University• Chikako Suzuki Certified public accountant• Toshihide Endo
(Former Commissioner of Financial Services Agency)

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