The Bank of Japan (BOJ) will go ahead with its plan to experiment with blockchain technology, with the goal of settling deposits that financial institutions park with the East Asian country’s central bank.
Governor Kazuo Ueda, while delivering the speech titled “The New Financial Ecosystem and the Role of Central Banks,” said that the process will be part of BOJ’s “sandbox project,” which will enable the use of central bank money for a range of settlements using blockchain.
“We intend to make further progress, with the support of external experts, exploring methods of connection with existing systems as well as examining use cases such as domestic interbank settlement and securities settlement,” Kazuo Ueda said.
“The rapid proliferation of artificial intelligence (AI) over the past few years has enabled speedy analysis and transition of big data, which, combined with blockchain, opens the scope for further enhancement to financial services. While various payment instruments co-exist, central bank money – such as cash and current account deposits – fulfils its role as the ‘anchor of trust’ for the economy by connecting all payment instruments, and functioning as the safest, most liquid settlement asset,” the governor added.
The BOJ currently manages intrabank settlement, liquidity and monetary policy through commercial banks’ reserve accounts held at Japan’s central bank. According to analysts, introducing blockchain technology to settle such reserves will give BOJ the scope for pulling off instant settlements within 24 hours. Also, blockchain has the potential to enhance efficiency in financial transactions and settlements for a wide range of assets and services.
The BOJ began experiments with the central bank digital currency (CBDC) in 2021. In 2023, the East Asian country’s apex financial body started its pilot programme for retail CBDC that would be distributed via private banks or payment firms. However, no decision has been made yet on CBDC’s use in fulfilling the central bank’s affairs. The BOJ is also in touch with private financial institutions on using wholesale CBDC to streamline settlements.
Also, the central bank is now part of an international experiment to build a mechanism for monetary bodies to issue central bank money as tokenised deposits on blockchains, to streamline cross-border payments.