Why financial institutions are pinning their hopes on on-chain government bonds — boosting capital efficiency by cutting excess collateral

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The main reason financial institutions are looking to put government bonds on-chain is to change how collateral is managed to secure transactions, thereby improving capital efficiency across financial markets. Currently, because collateral cannot be freely moved to where and when it is needed, institutions are forced to hold more than necessary. For example, simply swapping 10 billion yen worth of collateral temporarily requires having 20 billion yen on hand. If blockchain can be used to enable simultaneous delivery of collateral, it may be possible to reduce such excess collateral. On-chain solutions are also expected to alleviate the problem of collateral movements being restricted by the operating hours of existing financial infrastructure. Akio Nishizawa of Mitsubishi UFJ Trust and Banking pointed out that what can be cut is not operational costs but asset costs, and that reducing excess collateral would free up those assets for higher-yielding investments. The concept under discussion is not to create new government bonds that circulate only on the blockchain, but to use blockchain to manage the holding and transfer of bonds while keeping their rights and characteristics unchanged — an idea shared by both the United States and Japan. During the session, projections for the scale of on-chain government bonds by 2030 ranged widely from several trillion yen to 100 trillion yen, with the emphasis being not on outstanding balances but on how often they are reused as collateral.

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Mitsubishi UFJ Financial Group, Inc.
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Mitsubishi UFJ Trust and Banking executive discusses on-chain government bonds as a way to reduce excess collateral, improving capital efficiency for the group.

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