Japan to study blockchain settlement for stocks and JGBs

Japan’s Financial Services Agency, Finance Ministry and the Bank of Japan plan to form a study group with financial institutions to design a blockchain-based settlement system for stocks and Japanese government bonds, aiming for operational use in the early 2030s.

The proposal would convert part of the reserve balances that commercial banks hold at the Bank of Japan into digital tokens. Those tokens would act as a wholesale central bank digital currency used by banks for interbank settlement on a ledger-based platform. The agencies have not selected any technology and have not published a formal plan.

Under the concept, equity trades that currently settle two business days after execution and government bond trades that settle the next business day would be processed near-instantly. Faster finality of payments and securities would reduce the time between trade and settlement and could remove the need for daylight overdrafts, temporary intraday credit banks use to cover settlement flows at the central bank.

The study group will work with banks and other market participants to assess technical designs, operational procedures and legal changes that would be required. Tasks include examining how to tokenize reserve funds at the BOJ and how to link tokenized cash with securities records so delivery-versus-payment can occur in real time.

Market participants warn that near-instant settlement changes how banks manage liquidity. Banks would need the full cash and securities required for each trade at the moment it is executed rather than relying on end-of-day batch processing, which could increase intraday liquidity demand and require adjustments to funding practices and collateral management.

Regulators describe the study group as an early step that does not commit them to a specific design or timetable. The group is intended to identify benefits and risks, test technical options and consider changes to market rules and infrastructure before any possible rollout in the early 2030s.

Background: Japan’s current settlement cycles are stocks on a T+2 basis and government bonds on a T+1 basis. A wholesale central bank digital currency is a digital form of central bank money used only by financial institutions for large interbank payments. The proposed infrastructure would combine tokenized central bank reserves with ledger-based records to synchronise cash and securities movements and shorten the interval between trade execution and final settlement.