This post is an English translation of the original Japanese post published on July 30, 2024, prepared in response to requests for an English version.

Introduction

For the purpose and background of this blog, please refer to the post titled “[Digital Yen Blog] Welcome to the Digital Yen Blog!” As noted in the post, this blog refers to the central bank digital currency (CBDC) currently under consideration in Japan as the “Digital Yen” for the sake of clarity and readability.

This post covers the first one from the upcoming topics below:

1. How Might the Digital Yen Be Used, and What Would Its Legal Tender Status Mean?
2. Intermediaries in the Digital Yen Ecosystem: Who Might Be Involved and How They Could Be Regulated
3. Can the Digital Yen Balance Privacy with AML/CFT Requirements?
4. What Kinds of Value-Added Services Could Be Built Around the Digital Yen—and Who Would Provide Them?
5. Should There Be Limits on Digital Yen Holdings or Interest-Bearing Features?
6. What Is the Legal Nature of the Digital Yen? A Claim, a Property Right, or Sui Generis?
7. Should “Digital Yen Counterfeiting” Be Treated as a New Criminal Offense?

 

Basic Use Cases of the Digital Yen — Putting Cash into Your Smartphone

Let us begin by looking at a basic use case of the Digital Yen, with reference to the Interim Report by the Relevant Ministries and the Bank of Japan Liaison Meeting on Central Bank Digital Currency (CBDC) published in April 2024 (the “Interim Report”).
The Interim Report provides the following description of how the Digital Yen is expected to be used:

“Japan’s CBDC examined by the Liaison Meeting is (1) a digital currency that is expected to be used for payments in a similar way to private digital payment services, such as electronic money and QR code payments via smartphone apps or physical cards. Just like cash (e.g. 10,000-yen banknotes (bills) and 500-yen coins), CBDC would be available for day-to-day transactions, including shopping at stores. It would function as a means of payment even for online shopping, where cash is hardly used.
There are some differences between private digital payment services and CBDC. (2) In contrast to private digital payment services which may not be accepted in every shop and remittance across different payment services is not always available, CBDC will be designed as a payment means anyone could use anytime and anywhere.
Another significant difference is that CBDC would be issued and circulated as a liability of the BOJ, the central bank in Japan, while private digital payment services are not. Therefore, users can safely use CBDC without credit risk, as is the case with cash. Settlement can be completed immediately, and users can receive CBDC securely.”
(Section 1. (2); underlining and numbering added by author)

The two main takeaways are points (1) and (2). Put simply, the Digital Yen is envisioned as a way to “put cash into your smartphone.”
In other words, as noted in point (1), the Digital Yen can be used much like existing electronic payment means—such as IC cards used for public transportation (e.g., Suica or Pasmo) or QR code payment apps (e.g., PayPay)—enabling payments via smartphone or card.
From a usability standpoint, it does not introduce fundamentally new features compared to current digital payment methods (although it holds potential for innovation and value-added services driven by the private sector, which will be explored in future posts). That said, it still marks a significant step forward when compared to physical cash, which typically requires face-to-face transactions (with limited exceptions, such as postal money orders).
Furthermore, as highlighted in point (2), the Digital Yen is designed to have the distinctive feature of universal availability — it can be used by anyone, anytime, anywhere.
This sets it apart from many private-sector digital payment options, which are often accepted only at certain stores or within specific platforms (i.e., merchants). By contrast, cash is generally accepted everywhere without the need to ask, “Do you accept this?”—with a few exceptions, which will be discussed later.

In this way, the Digital Yen combines the ease of use found in existing digital payment means with the universal acceptance of cash. It essentially offers the best of both worlds — a realization of the idea: “putting cash into your smartphone.”

If your child or someone else ever asks, “What’s the Digital Yen?” — you might explain it like this:
“The Digital Yen is a system that uses technology to turn physical money — which normally takes up space as paper bills or coins — into something invisible, storing it electronically in your smartphone or on a card.”

 

Basic Understanding of “Legal Tender” under the Current Law – Usable by Anyone, Anytime, Anywhere

Let us now turn to some legal aspects of the issue.
As mentioned earlier, the Digital Yen is designed to be used by anyone, anywhere, anytime—just like cash. But while the universal usability of cash feels natural to people in Japan, what is the legal basis for it?
The reason for this lies in the fact that cash (banknotes and coins) is officially recognized as legal tender.
According to Article 46(2) of the Bank of Japan Act, “Banknotes issued by the Bank of Japan shall be legal tender and shall be accepted for payment without limitation.” And under Article 7 of the Act on Currency Units and Issuance of Coins (the Currency Act), “Coins shall be legal tender up to an amount not exceeding twenty times the face value of each coin.”
The two provisions mentioned above don’t fully explain what it actually means for something to be legal tender.
To get a clearer picture, we can look at Article 402(1) of the Civil Code, which says:
“When the object of a claim is money, the debtor may, at their discretion, make payment using any kind of currency.”
Here, “currency” refers to banknotes and coins that have compulsory acceptance—in other words, legal tender status. And what does that mean in practice? It means that if a debtor uses such currency to pay a monetary debt, the creditor has no right to refuse it. The payment is automatically considered valid and the claim is discharged (see Cabinet Response No. 186-39, Section 3-1 [Japanese only]).
To put it simply, cash carries the legal effect that, when used to pay a monetary debt, the creditor cannot refuse the payment—it constitutes proper discharge of the obligation.

 

Two Exceptions to Legal Tender – “We don’t accept cash” and the “20x Rule”

However, there are two notable exceptions to the legal tender status of cash. (Strictly speaking, it would be more accurate to say that “two exceptions have been identified so far,” since, as will be discussed in the next post, there may be a need to recognize further exceptions in the future.)

The first exception comes from the fact that Article 402(1) of the Civil Code is a default rule, not a mandatory one.
A default rule is a legal provision that applies only when the parties haven’t agreed otherwise. For example, even if the law says “A,” if the parties may agree to “B” in their contract, then the rule is considered a default. So, if Article 402(1) of the Civil Code is a default rule, it means the parties can agree to exclude the compulsory acceptance of legal tender—either entirely or partially.
This idea is reflected in a statement from a parliamentary session, which said: “We do not currently intend to require the acceptance of legal tender regardless of party agreement, considering the necessity of such a requirement and the principle of freedom of contract.” (Cabinet Response No. 200-13, Sections 3 and 4 [Japanese only])
In fact, more and more businesses are putting up signs saying “We don’t accept cash” (Tokyo Dome City is a well-known example [Japanese only]). Legally speaking, this practice can be understood as follows: based on the default nature of Article 402(1) of the Civil Code, these businesses require customers to agree to use non-cash payment methods (e.g., digital payment services) as a condition for entering into a contract. If the customer doesn’t agree, no contract is formed in the first place.

The second exception is the quantitative limit on coins.
Some of you may have picked up on this when reading Article 7 of the Currency Act above: “Wait, do coins have a limit on their compulsory acceptance, unlike banknotes?” Others who are more familiar with the topic may have known this even before reading this post.
As set out in Article 7 of the Currency Act, coins are legal tender only up to twenty times their face value.
That means, for example, that with ¥100 coins, only up to 20 coins (¥2,000 total) must be accepted. If a debtor tries to pay ¥2,100 using 21 ¥100 coins, the creditor can legally say, “Please use bills instead.” (Technically, the debtor could also use a ¥500 coin, so this request isn’t entirely accurate.)
In such a case, the creditor may be entitled to refuse the payment. Legally speaking, this means the debtor may not yet have properly performed the obligation.
Please note that this doesn’t mean the creditor cannot accept more than 20 coins—it just means they’re not required to. If the creditor voluntarily accepts all 21 coins, that’s perfectly fine. However, strictly speaking, this constitutes a different legal situation from a payment made with 20 coins or fewer.

 

Coming Up Next – What It Means for the Digital Yen to Become Legal Tender, and the Challenges Ahead

Earlier in this post, I mentioned that the Digital Yen is expected to be usable “by anyone, anytime, anywhere”—just like cash. So, by now, you may have guessed that the Digital Yen is also intended to become legal tender.
In fact, the Interim Report has already indicated this direction:
“In the currency legal framework, CBDC should be designated as legal tender founded by the law hence to be convertible with cash and accepted widely as a means of payment.” (See 3.(4) (i))
So in the next post (Part 2), building on what we’ve covered so far, let’s take a closer look: What does it really mean for the Digital Yen to be legal tender? What would be the implications? And how might it differ from physical cash?