6 September 2017

BOJ/ECB joint research project on
distributed ledger technology

In December 2016, the Bank of Japan (BOJ) and the European Central Bank (ECB)
launched their joint research project entitled “Stella”, which studies the possible use ofDistributed Ledger Technology (DLT) for financial market infrastructures.
A DLT is a set of tools for recording data, such as asset holdings or financialtransactions, allowing a network of computers to verify and store updates without asingle central management system. Depending on technological developments andimplementation models, this technology could increase efficiency, for example byfacilitating the automation of record-keeping and streamlining complex processes, andpossibly lead to improvements in safety and resilience to a range of non-financial risks.
Both the BOJ and the ECB, in their capacity as providers of market infrastructureservices, are currently exploring DLTs. Their joint research is based on experimental
work with the technology and contributes to the ongoing broader debate concerning theusability of DLTs for financial market infrastructures. This work is not geared towards
replacing existing central bank services with DLT-based solutions.
In the first step of their cooperation, the BOJ and the ECB conducted in-depth
experiments on whether specific existing functionalities of their respective payment
systems could be run in a DLT environment in an efficient and safe manner. Specifically,
the liquidity saving mechanisms of BOJ-NET and TARGET2 (the Real-Time Gross
Settlement (RTGS) systems of the two central banks) were replicated in a publicly
available DLT application, Hyperledger Fabric version 0.6.1, and a number of tests wererun.

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The findings of the joint analysis have just been published:Experiments using liquidity saving mechanisms found that DLT-based solutions
could meet the current performance needs of an RTGS system. Within therestricted test environment, both average and peak payment traffic consistent withthat of BOJ-NET and TARGET2 was processed without difficulty.

The study also confirmed the expected pattern of a DLT environment, however.
The bigger the network (i.e. the higher the number of nodes) and the longer thedistance between the network nodes, the longer it takes for a payment to beprocessed and the more likely it is for messages sent by one or more nodes to beignored in the transaction processing. Network configuration is relevant in thisrespect.

The tested DLT solutions were also found to be resilient to the failure of individual
network nodes and able to withstand a high number of incorrectly formatted
messages. Although the test scenarios were not exhaustive, it is worth noting thatthe test series performed had a limited impact on the availability of the overallsystem. However, the design of the platform used in the tests includes a certificate
authority, which could become a single point of failure that could undermine thebenefit of distributed validation.

In conclusion, while the test series produced promising results, it should be taken into
account that no direct conclusions can be drawn from the test set-up with respect to apotential usage in production. Given the relative immaturity of the technology, DLT is
not a solution for large-scale applications like BOJ-NET and TARGET2 at this stage ofdevelopment.

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