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A group of financial companies in Japan, comprising Mizuho Financial Group, Inc., Nomura Holdings, Inc., Japan Securities Clearing Corporation, and Digital Asset Holdings, LLC, has announced the joint launch of a proof-of-concept (PoC) trial. The program aims to enhance collateral management by leveraging the Canton Network.
An On-Chain Solution for JGBs
According to an announcement on Monday, the PoC targets Japanese government bonds (JGBs) with rights that are transferable under the Act on Book-Entry Transfer of Corporate Bonds and Shares (“Book-Entry Transfer Act”). The announcement noted that;
“The project will verify, from both legal and practical perspectives, whether the transfer of rights and updates to book-entry transfer records within a hierarchical structure involving multiple account management institutions can be executed seamlessly using blockchain technology.’
Beyond the above-mentioned enablements, the PoC, which introduces blockchain implementation into the management of Japanese government bonds via Canton, will evaluate the feasibility of achieving sophisticated, real-time, collateral transactions nonstop. It will achieve all these without tampering with the legal status of JGBs under the Book-Entry Transfer Act and the Financial Instruments and Exchange Act.
The financial group behind the PoC described Canton Network as the only blockchain purpose-built for institutional finance, and expects the product to extend even beyond Japan’s shores. Other functions that the PoC will perform include verifying use cases involving the transfer of collateral among financial entities and clearing houses.
What PoC Initiators Expect to Achieve
In the meantime, the parties have expressed significant confidence in the PoC’s ability to improve institutional finance. They stated that it will lead to a significant reduction in administrative tasks related to posting and substituting collateral. They also expect the innovation to improve operational efficiency and reduce costs for both financial institutions and investors.
With growing global interest in digital assets and non-stop trading, analysts expect the innovation to go a long way in meeting investor demand. Many people expect it to have a similar effect to the implementation of on-chain collateral for US Treasuries. For instance, a recent survey conducted by one of the partner firms in the JGB collateral project revealed improving sentiment in crypto assets among institutional investors.
There is A Growing Demand for Digital Assets
Nearly one-third of survey participants maintain a positive outlook on crypto for the coming year. Meanwhile, the ratio of those with negative things to say about digital assets dropped to 18% from around 23% as of June 2024.
Despite the growing demand, factors such as the lack of frameworks, high volatility, and regulatory uncertainty remain a concern for investors. However, it is worth noting that Japan’s Financial Services Agency is working on regulating the industry. In its February report, the agency emphasized the importance of fair price formation in trading and strong cybersecurity protocols around crypto assets.
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