Public blockchains gaining acceptance at Bank of Japan’s Payment and Settlement Forum

A summary of the Bank of Japan Forum on Payment and Settlement systems, released on Friday, revealed that public blockchains were discussed in a positive light. Banks and financial institutions typically focus on projects using private blockchains, where a greater amount of privacy and control can be held by the issuer. Their public counterparts, such as Bitcoin’s blockchain, are usually sidelined.

The Bank of Japan (BoJ) Forum was held on March 17 and 18, with 49 companies and organizations participating on the first day and 45 on the second. Kenji Hoki, a Senior manager at one of Japan’s leading audit corporations with approximately 5,600 professionals, KPMG AZSA LLC, delivered the opening presentation.

Using the term Distributed Ledger Technologies (DLTs) in place of blockchains, Hoki discussed the merits of “private-type” versus “public-type.” According to Hoki, private would be the “only feasible choice” for security settlement, adding that public would be “a bit too costly and take too much time in finalizing the settlements.”

While claiming that public DLTs are suitable for retail payments, it would be difficult to judge which is better for fund settlements, he argued.

“Public-type DLTs would be suitable especially for retail payments with huge volume and standardized procedures. Nonetheless, it would be necessary to overcome the possible flaws in public-type DLTs such as lengthy process of ‘mining’ that could hinder real-time settlements.”
— – Kenji Hoki, KPMG AZSA Senior Manager

The Senior Manager then discussed an increasing use of digital currencies, based on public DLTs, which “could prevail instead of sovereign currencies.”

“When digital currencies become to be widely used, people will not have to have bank accounts for payment purposes.” Commercial banks could become “unable to provide ‘finality’ to payments,” Hoki states.

In this scenario, non-bank financial intermediation “might become more pronounced,” he claimed, and the possibility of using public-type DLTs for fund settlements will subsequently be undeniable.

A discussion about financial blockchain applications followed Koji’s presentation. Ryu Takaki, an Associate Partner at IBM Japan, Ltd, raised various issues including anonymity, transparency, delayed finality, and maintaining mining incentives.

Takaki informed the Forum attendees of IBM’s various blockchain projects, such as the Open Block Chain and its participation in the Linux Foundation Hyperledger Project.

“In applying blockchain technologies to financial businesses, it would be important to ‘standardize’ those technologies so as to facilitate wider use.”
— – Ryu Takaki, IBM Associate Partner

The completeness of settlements was heavily discussed in Takaki’s presentation. “It seems that Japanese banks generally consider the ‘finality’ of settlements very strictly while overseas banks tend to grasp the ‘finality’ less strictly.”

“Public-type blockchain technologies, which are used in Bitcoin, do not provide ‘100 percent finality’ in a strict sense due to the possibility of ‘forks’," the Associate Partner added.

“Frontiers of applying DLTs to businesses” was the next topic at the meeting, presented by Yuzo Kano, CEO and founder of one of Japan’s largest bitcoin exchange, bitFlyer. Kano revealed that bitFlyer has been conducting research and analysis into the application of the technology over the past two years, and is developing its own blockchain.

The CEO cited “the management of credit history and real estate transactions” as examples of blockchain use. “I believe that our technologies, if applied to financial transactions, would enable high-speed processing of transactions, which the existing blockchain technologies cannot bring about,” Kano claims. Bitcoin and the prospects of digital currencies were also discussed during his presentation.

“In developing countries where confidence towards own currency is low, Bitcoins may substitute the sovereign currencies in the future.”
— – Yuzo Kano, bitFlyer CEO and founder

Currency Port CEO, Yasunori Sugii, presented next. Currency Port provides various payment APIs as well as Point of Sale (POS) contactless payment solutions for vendors. One of Japan’s largest financial holding companies, Mizuho Financial Group (MFG), announced a collaboration with three companies, including Currency Port, in February. Mizuho is investigating Microsoft’s Azure Blockchain as a Service (BaaS) for it’s syndicated loan business.

Sugii started his presentation with the benefits of blockchains, beyond financial and the certification of content, highlighting industries that use automatic transactions and the Internet of Things (IoT).

Advocating for the best of both worlds, the CEO proposed linking private and public blockchains, for example, when newly issuing values. “Those values can be kept on the public-type blockchains that excel in external auditability, while their transactions can be managed on the private-type blockchains that are good at high-speed processing.”

“It is necessary to provide opportunities for matching engineers from major research institutes with those specialized in blockchain technologies,” he proposed.

“Public-type and private-type blockchains have respective advantages and  disadvantages. It is therefore important to come up with ideas for linking these two types of blockchains and complementing characteristics of respective types.[…]it is also important to link the blockchain technologies with those in other fields.”
— – Yasunori Sugii, Currency Port CEO

Sugii also discussed digital currency usage and credit card payments, highlighting obstacles from both the direction of credit card payment infrastructure as well as customers: “I do not think that [card payment companies] are very willing to invest in new infrastructure unless the direction of future settlement measures is clearly seen.” On the other hand, the CEO states that consumers will not be willing to switch to the settlement measures that are not accepted by many stores.

The discussions on March 17 ended with closing remarks from the Assistant Director-General of BOJ Monetary Affairs. Shuji Kobayakawa briefly summarized the points of discussions, as well as offering the Bank’s view.

“If such technology that allows real-time validation is used, consideration will be promoted in the future not only on administrative work of issuance and custody of securities more efficient, but also on possibility of simultaneous settlement of securities and funds,” Kobayakawa said, adding it’s “essential to promote standardization and commonalization of technologies as well as to improve externality of the network.”

The second day of the Forum discussion, March 18, started with presentations on the current state of the Japanese financial system. The fourth presentation for the day returned to the subject of blockchain, when Deloitte Touche Tohmatsu LLC Senior Manager, Taketoshi Mori, gave his presentation.

Asserting that blockchain technology made a non-centralized system possible, with “real-time and low-cost settlement with improved accuracy in transaction handling and reduced transaction risks,” Mori cautioned that “major changes are required.”

Mori explained that numerous issues are likely to emerge, such as different securities laws in different countries and “supervisory power on browsing of the books.” To that end, he highlighted the necessity of “demonstration experiments with relevant parties.”

The Senior Manager also rekindled the subject of public versus private blockchains. After acknowledging the efficiency and cost reduction of private blockchains, he added “this may overshadow the advantages of the public-type.”

“If the private-type blockchain is excessively sought after, it is true that the advantages of the public-type blockchain, such as Bitcoin, may be lost. I think it is sufficient to select the public, private or hybrid types according to the use.”
— – Taketoshi Mori, Deloitte Touche Tohmatsu LLC Senior Manager

Mori proceeded to describe his vision of an “ideal settlement system,” where “transactions are settled on an RTGS (real-time gross settlement) and DVP basis and central banks cooperate across the border to completely eliminate the settlement risk.” He added that blockchain technology makes this future feasible.

“I do not think it necessary to replace everything with the blockchain, such as exception handling of securities transactions,” Mori states. The Senior Manager referenced the Australian Securities Exchange (ASX), an entity in the process of reviewing everything from laws and regulations to market practices in contemplating of using blockchain technology to replace existing systems.

ASX recently announced that it has completed a successful blockchain prototype that could replace its existing settlement system, CHESS. The company is currently working with Blythe Masters’ Digital Asset Holdings to develop a settlement system that could potentially handle all of the Exchange’s transactions.

Following Mori’s presentation were the closing remarks from BOJ Director-General, Hiromi Yamaoka. He summed up the points raised by the participants and gave the Bank’s view as well as a possible course of action.

“Blockchain and distributed ledger technologies try to enable a system free from an "entrusted third party to manage a centralized ledger." In applying those technologies to various practices, it would be important to examine to what extent the current institutional framework such as legal systems are based on the concept of a "centralized ledger managed by an entrusted third party," and whether we need to modify those traditional framework so as to apply new technologies to the real world.”
— – Hiromi Yamaoka , BOJ Director-General

After acknowledging the benefits of and hurdles in applying blockchain technologies, Yamaoka asserted that the BOJ confirmed its commitment to maximize the benefit of financial innovations.

Citing the work at the new BOJ’s FinTech Center, he said the Bank will “enhance its research and analysis activities as well as public relations regarding financial innovations and relevant new technologies.” Furthermore, it is important to have interactive communications with a wide range of economic entities including non-banks and startups. His closing remark was “The Bank of Japan is ready to play the role of ‘catalyst’ of those communications, and to make its best possible contribution to the improvement of financial services.”