Summary:

The Bank of Japan will experiment with blockchain technology for central bank settlements.
Governor Kazuo Ueda said the BOJ is developing a sandbox to test whether central bank money can operate on blockchain-based systems.
The initiative aligns with Bank for International Settlements-led Project Agora, which explores cross-border settlement using tokenized central bank money.

In a Tuesday speech at the FIN/SUM conference in Tokyo, Kazuo Ueda, Governor of the Bank of Japan, outlined how central banks must adjust to what he described as a "new financial ecosystem." According to Ueda, tokenization, programmability, and blockchain-based settlement could reshape payments and securities markets in the years ahead. While stressing that the BOJ remains cautious, Ueda confirmed that the central bank will begin experimenting with its current account deposits - the reserves that financial institutions hold at the BOJ. These reserves form the backbone of Japan's interbank settlement system, making the experiment particularly significant.

The central bank is developing a sandbox project to test whether central bank money can function within blockchain-based systems. In simply, a sandbox allows regulators and institutions to test new technologies in a controlled environment before broader deployment. Such experiments, Ueda said, could help improve the efficiency of interbank transfers and securities settlement, especially when paired with smart contracts. Smart contracts are automated programs that execute transactions once predefined conditions are met. If applied to central bank money, they could speed up processes that currently require multiple manual steps. Ueda made clear that the BOJ is focused on research, collaboration, and gradual testing. He said,

"We intend to make further progress while gaining the support of external experts, exploring methods of connection with the existing system as well as examining use cases such as domestic interbank settlement and securities settlement." Source

This statement highlights two priorities: ensuring compatibility with Japan's current financial system and identifying practical use cases before any structural changes are considered.

Project Agora and the Global Push for Tokenized Central Bank Money

The BOJ's blockchain testing is part of a broader international discussion about how central bank money might function in tokenized financial markets. Japan is a participant in Project Agora, an initiative led by the Bank for International Settlements (BIS). The project brings together multiple central banks and major private-sector financial institutions to explore cross-border wholesale settlement using tokenized central bank money. Wholesale settlement refers to large-value transactions between banks, rather than payments made by individual consumers. Improving the speed and reliability of these transfers is crucial for global trade, securities markets and financial stability.

Ueda explained that participants in Project Agora are studying how central banks could issue central bank money as tokenized deposits on a blockchain. This model could allow reserves traditionally recorded in centralized systems to exist in programmable digital form. He said:

"Project Agorá is an international experimental project that brings together multiple central banks and major private-sector financial institutions. Participants in this project, with a view to processing cross-border payments between banks, 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." Source

The emphasis on cross-border payments is very notable. International transfers between banks can be complex, often passing through multiple intermediaries so a blockchain-based system using tokenized central bank money could potentially reduce delays and improve transparency, though many technical and legal questions remain.

For the BOJ, participation in Project Agora allows it to test ideas in coordination with other major jurisdictions.

A Strategic Shift in Japan's Monetary Infrastructure

Over the past decade, digital assets and distributed ledger technology have moved to mainstream discussion among regulators. Central banks are increasingly studying how tokenization - the process of representing traditional assets in digital form on a blockchain - could enhance efficiency without compromising stability.

Japan has traditionally taken a careful approach to financial innovation, balancing openness with strong oversight. Governor Ueda's remarks reflect this mindset. He acknowledged the potential of blockchain-based systems while underscoring the importance of connecting any new technology to existing frameworks. The focus on current account deposits is particularly important. These reserves underpin liquidity management and monetary policy transmission. Testing them in a blockchain environment suggests the BOJ is exploring whether core settlement functions can operate on more flexible digital rails.

At the same time, the central bank has not announced plans for immediate structural reform. The sandbox approach indicates a phased process like research, experimentation, consultation with experts, and only then possible expansion. If successful, the trials could lay the groundwork for more efficient domestic interbank settlement and securities settlement in Japan. Combined with international coordination through Project Agora, the initiative may also position Japan to play a role in shaping cross-border digital settlement standards.