MUFG to Demonstrate On-Chain Government Bond Repo Using Canton Infrastructure in Collaboration with Progmat and Digital Asset

Key Points of This Article

• Legal nature of government bonds remains unchanged, updated in conjunction with existing ledgers.
• Exploring settlements using tokenized deposits, part of a demonstration supported by the Financial Services Agency's PIP.

Collaboration for On-Chain Government Bond Repo

On the 13th, Mitsubishi UFJ Financial Group (MUFG) and three other companies announced the start of a demonstration experiment to process Japanese Government Bond (JGB) repo transactions on the blockchain, in collaboration with U.S. Digital Asset and Progmat.

They will utilize the blockchain "Canton Network," designed specifically for financial services targeting institutional investors.

Participants include MUFG, Mitsubishi UFJ Morgan Stanley Securities, Mitsubishi UFJ Trust and Banking Corporation, and Mitsubishi UFJ Bank. The demonstration will be conducted in two parts, as part of a project supported by the Financial Services Agency's "Payment Improvement Project (PIP)" decided in February 2026. They are also considering collaboration with market participants, including domestic and international financial institutions.

Linking to Transfer Account Ledger While Maintaining Transfer Bonds

The first demonstration involves simultaneous settlement (DvP) of JGBs and digital money.

Most Japanese government bonds are issued without physical certificates and transfer rights through a ledger record managed hierarchically by the Bank of Japan at the top, along with banks and securities companies (account management institutions) in the form of "transfer bonds." While maintaining this legal nature, the ledger corresponding to the transfer account will be updated in conjunction with transaction results on the blockchain. For digital money used in settlements, they are considering tokenized deposits that allow bank deposits to be handled on the blockchain and the use of stablecoins.

According to the Bank of Japan, over 99.9% of domestic government bond settlements are conducted under the "Government Bond Transfer Settlement System," with the Bank of Japan as the transfer institution. Coexistence with existing infrastructure has been a challenge for tokenization. Tatsuya Saito, representative of Progmat, explained in a note published on the same day that this demonstration aims to enhance within the framework of the government bond transfer settlement system.

In the demonstration, both JGBs and digital money will be handled on the Canton Network, initially verifying DvP on a single chain. An "intermediate device" connecting the existing system for managing transfer securities with the blockchain will also be implemented within the minimum necessary scope for the demonstration.

The goal of the demonstration is to verify whether it can connect to an on-chain common infrastructure, focusing on post-trade areas such as clearing, settlement, and collateral management after the transaction, based on the heavy infrastructure of the existing financial market. It does not aim to immediately replace the functions of clearinghouses that mediate transactions and handle participant defaults but rather to incorporate effective processes gradually.

The second demonstration focuses on the on-chain lifecycle of repo transactions.

They will connect to a lending protocol provided by Secured Finance AG, which automates collateralized borrowing on the blockchain, to verify whether post-transaction matching, fund and collateral transfers, interest calculations, maturity management, and collateral returns can be linked through smart contracts. The company provides the foundation for collateral utilization for UBS's tokenized mutual fund (MMF) "uMINT."

Scale of the Repo Market and Expected Effects

Repo transactions refer to transactions where institutional investors, such as financial institutions, borrow short-term funds using government bonds as collateral. According to a survey by the Financial Stability Board (FSB) in February 2026, the global repo market using government bonds as collateral is expected to reach approximately $16 trillion by the end of 2024, with Japan accounting for about 10% of that, and the domestic market estimated to be between 250 and 270 trillion yen. Transactions are typically settled on the next business day after the agreement, known as "T+1."

When repo transactions are conducted on-chain, it is generally expected to enable 24/7 trading and immediate settlement. This would facilitate daytime transactions where funds are borrowed for just a few hours and allow foreign investors to participate without being constrained by Japanese market hours. The ability to transfer both government bonds and funds simultaneously within the same transaction is also seen as a way to mitigate the principal risk of transferring only one side.

The announcement materials also highlighted expected effects such as operational efficiency through automation of the entire lifecycle and improved fund and capital efficiency due to the realization of daytime repo transactions and extended settlement times.

The handling of collateral may also change. Collateral is often fragmented by location, corporation, and trading platform, and it is customary for market participants to hold extra collateral in preparation for shortages. If real-time tracking of location and usage is possible, it is believed that the need to hold "excess collateral" can be reduced.

However, if all individual transactions are settled immediately, the amount of funds and securities required, which was compressed through "netting" where sales and purchases offset each other, may actually increase. It is considered more realistic to implement this complementarily from daytime transactions and after-hours trading for the time being.

In terms of roles within MUFG, Mitsubishi UFJ Morgan Stanley Securities and Mitsubishi UFJ Bank will act as market participants, while Mitsubishi UFJ Bank and Mitsubishi UFJ Trust and Banking Corporation will serve as account management institutions, with Mitsubishi UFJ Bank handling deposit-taking financial institutions. MUFG plans to collaborate with its strategic capital partner, Morgan Stanley, and stated in the announcement materials that it wants to work with various market participants.

Overseas Precedents and Cross-Industry Considerations

The on-chainization of repo transactions is being led by Europe and the U.S. A report published by the International Capital Market Association (ICMA) in June summarized that the benefits of distributed ledger technology (DLT) are expected in post-trade areas such as settlement and collateral management.

Broadridge in the U.S. announced that the average daily transaction amount for repo transactions using distributed ledger technology reached $362 billion in May 2026, with monthly processing amounts reaching $7.2 trillion. The U.S. Depository Trust & Clearing Corporation (DTCC) is scheduled to launch a service for tokenizing U.S. government bonds in October.

Domestically, Progmat established the Digital Asset Co-Creation Consortium (DCC) in May, which includes a "Tokenized Government Bond and On-Chain Repo Working Group." In addition to the three megabanks, BlackRock Japan, and JPX Research Institute, Secured Finance, which is participating in this demonstration, has also joined since May, aiming to publish an interim report by October.

This demonstration is a separate individual project from the working group, but Saito explained that it is positioned to verify the examination of systems and practices being promoted across the industry with concrete systems and transaction flows.

In financial transactions, there is a gap between demonstration and commercialization, and functional requirements and processing during communication failures need to be designed individually. This verification is positioned as a step toward commercialization for not only MUFG but also domestic financial institutions.

In his note, he stated that he wants to verify whether the JGB market, which has one of the world's largest scales and liquidity, can connect to an on-chain financial market that operates 24/7 without breaking existing trust.

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