The Bank of Japan (BOJ) has announced plans to experiment with blockchain technology for the settlement of reserve deposits held by financial institutions at the central bank.
This follows an announcement where the BOJ will conduct experiments aimed at exploring the use of blockchain technology in settling deposits that financial institutions hold in reserve accounts, as part of a broader evaluation of distributed ledger infrastructure within the existing financial system.
The unveiling was made during a speech titled ‘The New Financial Ecosystem and the Role of Central Banks’. These experiments are integrated into an ongoing BOJ sandbox project aimed at assessing whether central bank money can support a wider range of blockchain-based settlements.
Focus and Technical Direction
The BOJ intends to examine methods for connecting blockchain infrastructure with existing settlement systems, particularly focusing on domestic interbank settlement and securities settlement. The project will involve collaboration with external experts as it progresses.
Given that the BOJ manages intrabank settlement, liquidity, and monetary policy through commercial banks’ reserve accounts, applying blockchain technology to these reserves could theoretically enable continuous settlement around the clock and mitigate risks during financial stress periods.
The governor also highlighted the convergence of blockchain with artificial intelligence, suggesting that AI-driven data processing combined with distributed ledger technology might further enhance financial services. However, specific implementations arising from this combination were not detailed.
It was reiterated that central bank money, encompassing cash and current account deposits, remains the foundational ‘anchor of trust’ in Japan’s payments ecosystem, serving as the most liquid and secure settlement asset despite evolving payment instruments.
CBDC and Wholesale Settlement Context
The BOJ’s exploration of blockchain for reserve settlement complements its ongoing efforts on central bank digital currencies (CBDCs). In 2021, the central bank started CBDC experiments, and in 2023, a retail CBDC pilot program was launched via private banks or payment firms. No decision has been made regarding issuing a retail CBDC, and some analysts doubt its necessity due to Japan’s robust digital payments infrastructure and continued public preference for cash.
In parallel, the BOJ continues discussions with private financial institutions on the potential use of wholesale CBDCs to streamline interbank settlements. Additionally, it is part of an international experiment exploring a mechanism by which central banks could issue central bank money as tokenized deposits on blockchains, aimed at enhancing cross-border payment efficiency.
The latest announcement signifies a progressive expansion of the BOJ’s distributed ledger ambitions, from retail CBDC testing to infrastructure-level experiments with reserve settlement. If successful, this area is expected to form the core of Japan’s financial infrastructure.
