Japanese Government and Bank of Japan to Develop Blockchain Infrastructure for 24-Hour Settlement of Stocks and Bonds

Launch of a Public-Private Joint Project for 24-Hour Instant Settlement by the Japanese Government and Bank of Japan

It has been revealed that the Financial Services Agency, the Ministry of Finance, the Bank of Japan, and major private financial institutions will embark on the construction of a blockchain (distributed ledger technology) infrastructure to enable the settlement of stock and government bond transactions to be completed instantly and around the clock.

The Japanese government and the Bank of Japan have made a significant shift towards the historic modernization of the domestic financial market. A joint study group is expected to be established this summer, with plans to formulate a development plan that includes the basic design of the blockchain, the division of roles between the public and private sectors, and an implementation roadmap by early 2027.

If officially approved, the plan aims to incorporate this into a multi-year investment framework starting in the fiscal year 2027, with the goal of commencing operations in the early 2030s. Until now, the use of blockchain in Japan has been limited to isolated pilot projects, but this marks the first time a concrete operational schedule has been presented, attracting significant interest from both domestic and international markets.

Challenges of the Current System and Benefits of Instant Settlement

Currently, in Japan's financial market, settlements for stocks occur two business days after a transaction, while government bonds are settled the next business day, resulting in a time lag between the completion of a transaction and the transfer of funds and securities.

If the new blockchain infrastructure is realized, the transfer of ownership of assets and the settlement of funds will be processed simultaneously with the agreement of the transaction. This is expected to bring about the following major benefits:

Immediate Reinvestment of Sale Proceeds :
Investors will be able to utilize the funds obtained for the next investment immediately without waiting for several days.
Reduction of Risks :
Minimization of counterparty risks and settlement delays.
Improvement of Liquidity Efficiency :
Funds that are tied up during the settlement period will be released, significantly enhancing the efficiency of financial institutions' fund management.

Tokenization of Bank of Japan's Current Account Deposits and Private Sector Initiatives

The core of the new system will involve converting a portion of the current account deposits that banks hold at the Bank of Japan into digital tokens and circulating them on the blockchain (utilizing wholesale CBDC).

The Bank of Japan is already advancing discussions aimed at 24/7 operations through initiatives such as a DLT (Distributed Ledger Technology) collaborative sandbox, and Governor Kazuo Ueda has also mentioned the verification of settlements using central bank money. Additionally, there are active movements in the private sector as well.

Tokenized Deposit Pilot Projects :
About 40 regional banks and online banks are conducting interbank transfer tests using blockchain.
Actions by Major Banks :
Mitsubishi UFJ Bank, Mizuho Bank, and Sumitomo Mitsui Banking Corporation are conducting pilot projects for instant settlement of government bond repo transactions and collateral utilization using stablecoins and tokenized deposits.

By connecting these public and private projects, a comprehensive financial ecosystem will be formed where funds and securities are seamlessly linked.

Impact on Cryptocurrency Regulation and International Expansion

The Japanese government is advancing legal frameworks in parallel with infrastructure development, moving towards the financial productization of cryptocurrencies and the introduction of separate taxation at a rate of approximately 20%. Additionally, there is a high degree of compatibility with the cross-border payment Project Agorá promoted by the BIS (Bank for International Settlements), and this infrastructure development is expected to contribute to the acceleration and efficiency of future international remittances.

Challenges to Achieving Continuous Operation and Market Outlook

As major exchanges like the NYSE (New York Stock Exchange) explore 24-hour trading of tokenized assets, Japan's initiative is characterized not only by "trading" but also by the continuous operation of the "settlement process" itself.

However, challenges remain to be addressed, including securing collateral and funds outside of business hours, cybersecurity measures, responses to system failures, and legal arrangements for settlement finality. Attention will be focused on whether Japan can move beyond being "just an experiment" and enhance Tokyo's international competitiveness as a financial center with one of the largest government bond markets in the world, as concrete plans are developed in the future.

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