Bank of Japan expands blockchain settlement sandbox and says CBDC efforts are ongoing

• The Bank of Japan has launched a blockchain-based sandbox project to test settlements using central bank reserves held as current account deposits.
• The project will explore how blockchain systems can connect with existing infrastructure for use cases such as domestic interbank and securities settlement, which analysts say could enable instant, round-the-clock transactions and reduce gridlock risk.
• Governor Kazuo Ueda said the BOJ's retail central bank digital currency pilot remains underway, while Japan also participates in Project Agorá to test tokenized wholesale central bank deposits for more efficient cross-border payments.

The Bank of Japan (BOJ) announced expansion of its blockchain experimentation for settling central bank reserves, while highlighting that efforts for a retail central bank digital currency (CBDC) are ongoing.

The BOJ rolled out a “sandbox project” to experiment settlements and bank deposits using central bank money, Governor Kazuo Ueda said on Tuesday in a speech titled “The New Financial Ecosystem and the Role of Central Banks.”

“In this experimental project, the Bank will conduct technical experimentation on settlement using central bank money in the form of current account deposits on a system that uses blockchains,” Ueda said.

The bank intends to explore “methods of connection with the existing system as well as examining use cases such as domestic interbank settlement and securities settlement,” he added. Analysts say introducing blockchain for reserves settlement would allow for instant round-the-clock settlement and reduce gridlock risk in stress events.

Ueda emphasized that the retail CBDC project is ongoing. “First, the ongoing pilot program for retail central bank digital currency (CBDC) involves the bank's continued conduct of technical experiments, which will make it possible to provide … a digital form of cash when in demand by the wider public.”

Japan began CBDC experiments in 2021 and launched a pilot program in 2023. But the central bank has not committed to issuing a digital yen. According to a prior report, the BOJ this year will decide whether to issue a retail CBDC.

Ueda also spoke of Project Agorá,” an international experiment involving multiple central banks and major private financial institutions. He said its participants are considering “building a mechanism that would enable central banks, including the Bank of Japan, to issue central bank money as tokenized deposits on the blockchain.” If successful, he said, the effort “may bring innovation in terms of streamlining cross-border payments.”

Unlike a retail CBDC, which would function as a digital form of yen for the general public, tokenized central bank deposits would represent wholesale central bank money used by financial institutions on blockchain-based infrastructure, according to Ueda’s speech.

The move to use blockchain technology to settle reserves follows decisions in the U.K. and Hong Kong to issue sovereign debt on the blockchain.

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