This post is an English translation of the original Japanese post published on August14, 2024, prepared in response to requests for an English version.

Introduction

For the purpose and background of this blog, please refer to [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 article is the second part of the first topic listed below (You can read the first part here):

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?

 

Summary of the First Part: “Putting Cash into Your Smartphone” and the Legal Tender Status of Physical Cash

In the first part, 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”), I described the image of how the digital yen would be used in a single phrase: “putting cash into your smartphone.” The digital yen, in essence, allows payments to be made via smartphones or cards, just 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). So, in terms of user experience, it is comparable to current digital payment methods. However, unlike private-sector digital payment services that can only be used at specific merchants—those displaying signs like “We accept XYZ Pay”—the digital yen offers the universal usability of physical cash, serving as a “best of both worlds” payment option that can be used “by anyone, anytime, anywhere.”

The reason why physical cash can be used “by anyone, anytime, anywhere” lies in its legal status as legal tender. As legal tender, cash carries the legal effect that if a debtor uses such currency to pay a monetary debt, the creditor has no right to refuse it.

However, there are two notable exceptions to the legal tender status of cash:

1. Contractual Agreement – The parties may agree to settle a debt using a method of payment other than cash.
2. Quantitative Limit on Coins – For coins, the legal tender effect applies only up to 20 times the face value (e.g., up to ¥2,000 when using ¥100 coins).

With this legal background in mind, this second part explores what it would mean, in concrete terms, for the digital yen to be recognized as “legal tender,” and how that would differ from the case of physical cash.

 

What the World Would Look Like if the Digital Yen Became Legal Tender

As mentioned at the end of the first part, the Interim Report states that “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 Section 3.(4)(i)), indicating a policy direction that the digital yen will be treated as legal tender alongside physical cash. So what exactly would be the effects of the digital yen becoming legal tender?

To reiterate, “legal tender” carries the legal effect that “if a debtor repays a monetary debt using that means of payment, the creditor may not refuse to accept the payment”—in other words, it constitutes a valid discharge of the debt. Therefore, if the digital yen is granted the status of legal tender, creditors will no longer be able to refuse payments made in digital yen by debtors. In short, people will be able to use digital yen as payment—in principle—at any store or with any individual. Moreover, since payments can be made using only a smartphone, there would no longer be any need to carry a wallet filled with cash. And because the digital yen would be legal tender, it would be accepted everywhere. Once the digital yen is issued as legal tender, it will likely begin to replace cash, ushering in an even more convenient world where people can go out carrying only their smartphones. (While cashless options are on the rise, there are still quite a few “cash-only” stores, so going out without a wallet still feels a bit risky, doesn’t it?)

Furthermore, it could help reduce societal costs. There are significant expenses associated with printing banknotes, implementing anti-counterfeiting measures (on July 3, 2024, new banknotes featuring cutting-edge anti-counterfeit technologies were introduced), installing ATMs, transporting cash, and preventing theft. According to estimates by the Ministry of Economy, Trade and Industry, the cost of maintaining the cash settlement infrastructure amounts to as much as 2.8 trillion yen annually. In addition, the cost of wallets themselves—which can range from tens of thousands to even hundreds of thousands of yen (or more)—borne by consumers may also be considered part of this social cost. Major private banks in Japan have started introducing coin-handling fees.
Of course, the issuance of the digital yen would not immediately eliminate the circulation of physical cash. These costs will not vanish overnight. The Bank of Japan has clearly stated its intention to “continue to supply cash responsibly as long as there is demand for it” even after the introduction of the digital yen (see Section 3.(2)(ii) of the Interim Report). However, as cash is gradually replaced by the digital yen, these associated costs are expected to decrease over time.

 

Would the Legal Tender Status of the Digital Yen Cause Any Problems? — “We Don’t Accept Digital Yen.”

So, in a world where the digital yen is granted the status of “legal tender,” would no one face any difficulties? In fact, it cannot be said so unequivocally.
The digital yen is a “digital” means of payment, so using it requires digital technology such as smartphones or cards. For example, small businesses and similar entities may not have sufficient funds to install the necessary terminals to accept digital yen payments. (That said, proposals have been made to modify existing payment terminals to support digital yen payments— see page 13 of Central Bank Digital Currency Experiments Results and Findings from “Proof of Concept Phase 2” — and considering that the digital yen would be public infrastructure, some form of public funding for initial setup costs at such establishments may also be possible. See Section 3.(5)(i) of the Interim Report.) Furthermore, from the perspective of “Human-friendly digitalization: No one left behind,” consideration must be given to those who may not be able to fully utilize digital technologies — such as people without smartphones. (See Section 3.(5)(iii) of the Interim Report.) To make the digital yen legal tender, it will be necessary to take into account those who do not want to use or are unable to use it.

Here, let us recall that legal tender status has an important exception: “Parties may agree to settle debts using means other than cash.” Just like the Tokyo Dome City’s “We don’t accept cash” policy, one could similarly adopt a “We don’t accept digital yen” policy. This would likely allow individuals who do not wish to use or cannot use the digital yen to avoid suffering disadvantages due to its legal tender status. In other words, when entering into a contract that gives rise to a monetary obligation (e.g., a sales contract), one could simply make it a condition that payment be made using a method other than the digital yen (e.g., cash). If the other party does not agree, then the contract would not be concluded. For businesses (as creditors), it may suffice to display a notice such as “We Don’t Accept Digital Yen” at the point of sale. For consumers (as debtors), they could simply make a purchase while stating something like “I’ll pay in cash.” By doing so, the contract would effectively include a special provision that the payment shall be made using a method other than the digital yen (e.g., cash).

Here, a minor but relevant point: Article 402 of the Civil Code provides that “When the object of a claim is money, the debtor may, at their discretion, make payment using any kind of currency.” (emphasis added). Thus, for instance, a payment of 10,000 yen may be made using ten 1,000-yen notes or a combination of five 1,000-yen notes and one 5,000-yen note. (As previously noted, in the case of coins, there is a limitation that only up to 20 times the face value can be used.) If this rule is also applied to the relationship between digital yen and physical cash after the digital yen becomes legal tender, then debtors who cannot use the digital yen would not need to ask for a special agreement to pay in cash. This is because, just as one need not ask in advance, “Can I pay with a 10,000-yen note for this small amount?” when paying in cash (though kindly doing so might reduce troubles), a debtor would be allowed to choose between digital yen and cash after the contract has been formed — even without a prior agreement.

 

Would the Legal Tender Status of the Digital Yen Cause Any Problems? — The Limits of “We Don’t Accept Digital Yen.”

As explained above, those who do not wish to use or are unable to use the digital yen can generally avoid any disadvantages by adopting a “We don’t accept digital yen” policy. However, there are situations where this approach alone is not sufficient.
One such situation arises in the case of statutory claims. Statutory claims are obligations that arise not from agreements between parties (i.e., contracts), but by operation of law. Claims arising from negotiorum gestio (management of another’s affairs without mandate), unjust enrichment, or torts fall under this category.
Because statutory claims are not based on agreements between parties—for example, a claim for damages resulting from a traffic accident is not born of a contract between the parties—it is not possible to establish a special agreement that payment shall be made by means other than the digital yen (such as cash). This means that if the debtor were to say, “I want to discharge this statutory obligation using the digital yen” (and, as noted above, the debtor may have the right to choose which form of legal tender—such as cash or digital yen—to use for payment), then the creditor would not be able to refuse that payment. This is precisely the legal effect of legal tender. If the creditor does not have a smartphone or a card compatible with the digital yen, the payment cannot be completed, causing problems for both parties.

In contrast, if the payment were to be made in cash, even if the creditor of a tort claim says, “I don’t accept cash—pay me via PayPay,” the debtor can simply force discharge of the obligation by paying in cash. With the digital yen, however, one cannot make payment to a creditor who does not use the system, just as you cannot pay someone using PayPay if they are not a user.

As such, when a debtor attempts to pay a statutory claim using the digital yen but the creditor is unable or unwilling to accept it, several legal issues arise:

• Does this situation constitute creditor’s delay in acceptance (Article 413 of the Civil Code)? creditor’s delay in acceptance requires (i) that the debtor has offered a proper performance of the obligation, and (ii) that the creditor refuses to accept it or is unable to do so. Both elements may arguably be satisfied in such a case.
• If the case does constitute creditor’s delay in acceptance, the debtor is exempt from liability for non-performance (Article 492 of the Civil Code). However, if the debtor, from the perspective of preventing disputes, wishes to extinguish the obligation just to be sure, can they make a deposit with the Legal Affairs Bureau (kyotaku)? (Article 494(1) of the Civil Code.)

These concerns are reflected in the Interim Report as well. It states:
“When CBDC is characterized as legal tender, monetary obligations would be discharged by the tender of CBDC. Creditors cannot refuse to accept it even in the case of statutory claims in which the monetary obligations are not based on any contract.” (Section 3.(4)(i))

You might be thinking: “But is this really a problem? Couldn’t the parties simply agree after the statutory claim arises that payment will be made in cash or by other means?” If so, your insight is sharp. Indeed, in most practical cases, such post-claim agreements will likely be reached. If both creditor and debtor act rationally and amicably, they would typically agree to use cash or bank transfers upon realizing that one party is not a user of the digital yen.
However, not all parties act reasonably. For example, imagine a debtor who, in an attempt to cause inconvenience, stubbornly insists: “No. I will only pay in digital yen. The law allows me to use legal tender—either cash or digital yen. As the debtor, I have the right to choose which form of legal tender I use.” Such malicious behavior may be rare in practice, but since it is theoretically possible, the legal consequences of a situation where no agreement is reached after the statutory claim arises—yet the debtor insists on paying in digital yen to a creditor who is not a digital yen user—need to be clarified.

 

Can the Digital Yen Carve Out a New Exception to Legal Tender?

A particularly sharp reader may now wonder:
“Why not limit the legal tender status of the digital yen to situations where both the creditor and the debtor are users of the digital yen?”
Under this proposal, for example, the provision granting legal tender status to the digital yen might be drafted as follows:
“When the object of a claim is money, the debtor may, at their discretion, make payment using legal tender, either in the form of cash or digital yen. However, payment in digital yen shall be permitted only if the creditor is a user of the digital yen.”

If we consider the existing limit on coins—namely, that coins are only legal tender up to twenty times their face value—as a quantitative restriction on legal tender, then the above proposal could be described as a qualitative restriction, based on whether the creditor is a user of the digital yen. Introducing such an exception to the legal tender rule could resolve the previously discussed problem concerning statutory claims, where no agreement is made to use means of payment other than the digital yen. If this type of exception is established, then even if a debtor insists on paying in digital yen, the digital yen would not be considered legal tender from the outset in cases where the creditor is not a digital yen user.

 

Can a Currency That Can Only Be Accepted by a Limited Group of People Be Considered “Legal Tender”?

While this remains an uncharted area with no definitive answer, there is actually a relevant precedent that offers some insight. Around 2021, when the Republic of El Salvador was considering adopting Bitcoin as legal tender, a question was raised in the parliament: “If the Republic of El Salvador adopts Bitcoin as legal tender, would Bitcoin no longer fall under the definition of a crypto asset under the Payment Services Act?”
In response, the government stated (Cabinet response no. 204-114):
“Under Article 2, paragraph (5), item (i) of the Payment Services Act (Act No. 59 of 2009), the term ‘foreign currency’ is interpreted as referring to a currency that a foreign country recognizes as having legal tender status within its own jurisdiction. However, under the publicly available Bitcoin Law of the Republic of El Salvador, there are provisions allowing exceptions from the obligation to accept Bitcoin as a means of payment. Accordingly, Bitcoin does not qualify as a foreign currency under the Act and is still considered a crypto asset.” (Underline added.)

This exchange centered around whether Bitcoin would cease to qualify as a “crypto asset” under the Payment Services Act if it were designated legal tender by a foreign country. However, what is especially noteworthy is the underlined part of the government’s response. The government made two key points:

• A “foreign currency” refers to a currency that a foreign country has granted legal tender status within its own territory.
• Although the Republic of El Salvador designated Bitcoin as legal tender, since its Bitcoin Law includes provisions exempting certain parties from the obligation to accept Bitcoin as payment, Bitcoin cannot be said to possess legal tender status in El Salvador.

Point (i) presents no particular issues—it aligns with the Japanese view that only currency with legal tender status (i.e., banknotes and coins) qualifies as “currency” (as discussed in Part 1). Point (ii) is more nuanced, but can be interpreted as follows: Even if a particular payment method is in principle recognized as a valid discharge of monetary obligations (i.e., has legal tender status), if there are exceptions such that certain parties are not required to accept that method of payment, then overall, it cannot be said to possess legal tender status. In short, we may infer that, according to the Japanese government’s interpretation, a currency that can only be accepted by certain people or under limited circumstances cannot be considered “legal tender.”

In this regard, in an English version of El Salvador’s “Bitcoin Law,” Article 7 provides:
“Every economic agent must accept bitcoin as payment when offered to him by whoever acquires a good or service.”
However, Article 12 states:
“Those who, by evident and notorious fact, do not have access to the technologies that allow them to carry out transactions in bitcoin are excluded from the obligation expressed in Art. 7 of this law. The State will promote the necessary training and mechanisms so that the population can access bitcoin transactions.”
This legislative structure appears to be the basis for the Japanese government’s response above, which stated that “there are provisions allowing exceptions from the obligation to accept Bitcoin as a means of payment.” The response likely took into account the fact that the obligation to accept Bitcoin does not apply to those who lack access to the relevant technology.

As described above, while El Salvador did adopt Bitcoin as its legal tender, it did not compel individuals who lacked the technological means to use Bitcoin to accept it as payment. If the Japanese government’s interpretation is indeed based on this—namely, that “a currency cannot be considered legal tender if it is only accepted by certain people or in limited circumstances”—then the same logic may apply to the digital yen.

For instance, if the law were to provide:
“When the object of a claim is money, the debtor may, at their discretion, make payment using legal tender, either in the form of cash or digital yen. However, payment in digital yen shall be permitted only if the creditor is a user of the digital yen,”
such a provision would impose a qualitative restriction on legal tender status based on whether the creditor is a user of the digital yen. This would mirror Article 12 of El Salvador’s Bitcoin Law, which exempts those unable to access Bitcoin technology from the obligation to accept it. As such, this could be interpreted as a case where “there are provisions allowing exceptions from the obligation to accept Bitcoin as a means of payment,” and consequently, the digital yen, subject to such a qualitative restriction, might no longer qualify as legal tender. In short, legal tender status of the digital yen may be legally incompatible with such qualitative restriction.

Of course, the aforementioned government’s response addressed a different statute in a different context, so we must be cautious in interpreting its scope. However, even though the case involved Bitcoin in a specific foreign jurisdiction, the government response appears to articulate a general understanding of the concept of “legal tender,” which cannot be overlooked.

From a practical perspective as well, the view that “a currency that is only accepted by certain people or in limited contexts cannot be considered legal tender” seems reasonably sound. Even if the law provides that “payment in digital yen shall be permitted only if the creditor is a user of the digital yen,” it is not always easy for a debtor to determine whether a creditor is in fact a registered user. While face-to-face transactions at convenience stores may allow for straightforward confirmation, it may be difficult or even impossible to verify this in online transactions. Moreover, if a creditor falsely or mistakenly claims to be a user—for instance, due to an incomplete registration process—how should such a case be handled?

Whether the counterparty is a registered user of the digital yen is not always readily or reliably verifiable by the debtor. If this fact determines whether the digital yen qualifies as valid legal tender, then the system may lack legal clarity and stability. Ultimately, this could hinder the widespread adoption of the digital yen, even if it is granted legal tender status. (For reference, Bitcoin usage in El Salvador has not significantly expanded, though the reasons remain unclear.)

Personally, rather than imposing a qualitative restriction on the legal tender status of the digital yen based on whether the creditor is a registered user (as discussed above), I believe it may be more effective to introduce a restriction based on the nature of the debt itself, in order to address the issues raised in connection with statutory claims.
Specifically, a possible provision might be:
“When the object of a claim is money, the debtor may, at their discretion, make payment using legal tender, either in the form of cash or digital yen. However, payment in digital yen shall only be permitted in cases involving contractual claims.”

This would create a system in which the digital yen has legal tender status only for claims arising from contracts (i.e., agreed-upon obligations), and not for statutory claims. Such a framework would allow those who do not wish to use the digital yen—or who are unable to do so—to simply agree in advance to a “digital yen not accepted” clause at the time of contract. Conversely, in cases involving statutory claims where such a clause cannot be agreed upon in advance, the digital yen would not have legal tender status from the outset. As a result, the difficulties unique to statutory claims could be avoided.

What do you think is the ideal legal framework for the digital yen’s status as legal tender? What kind of rules should govern it? Considering such questions may add an extra layer of interest as we follow future discussions on the topic.

This brings us to the end of the first major theme, “How Might the Digital Yen Be Used, and What Would Its Legal Tender Status Mean?” Thank you very much for reading to the end.

 

Coming Up Next: Intermediaries in the Digital Yen Ecosystem: Who Might Be Involved and How They Could Be Regulated

In the next article, we will explore the role of so-called “intermediaries” that are expected to handle the circulation of the digital yen. We will consider the types of business entities likely to serve in this role, as well as the potential regulatory frameworks that may apply to them.