TOKYO, March 3 : The Bank of Japan will conduct experiments for using blockchain technology to settle deposits that financial institutions park with the central bank, Governor Kazuo Ueda said on Tuesday.
The experiments will be part of a “sandbox project” under way at the BOJ to enable the use of central bank money for a range of settlements using blockchain, Ueda said in a speech titled “the New Financial Ecosystem and the Role of Central Banks”.
“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,” Ueda said.
The BOJ manages intrabank settlement, liquidity and monetary policy through commercial banks’ reserve accounts held at the central bank.
Introducing blockchain technology to settle such reserves would allow scope for instant settlement 24 hours a day and reduce gridlock risk in stress events, analysts have said.
Blockchain technology has the potential to enhance efficiency in financial transactions and settlements for a wide range of assets and services.
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 scope for further enhancement to financial services, Ueda said.
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, he said.
The BOJ began experiments for issuing a central bank digital currency (CBDC) in 2021. It started a pilot programme in 2023 for retail CBDC that would be distributed via private banks or payment firms.
But no decision has been made on whether to issue CBDC. Some analysts have cast doubt on the need for retail CBDC in Japan, which has a well-developed private digital payment system and a public still fond of cash usage.
The BOJ has also continued dialogue with private financial institutions on using wholesale CBDC to streamline settlements.
Aside from such moves, the BOJ has joined an international experiment to build a mechanism for central banks to issue central bank money as tokenized deposits on blockchains which, if successful, would streamline cross-border payments.
