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THE MITSUBISHI UFJ Financial Group Inc (MUFG) is tapping into the potential of blockchain technology, hoping to carve a piece of the estimated 50 trillion yen (S$600 million) market in blockchain-enabled services in Japan alone.
The efforts by Japan's largest bank come amid a strategic thrust set out in May. MUFG is pushing itself to "re-imagine" banking by investing in digital technology that can improve customer service, re-engineer processes and reform customer interface channels in Japan and globally, said Hirofumi Aihara, general manager of MUFG's digital transformation division.
"At MUFG, we recognise the potential of technologies like blockchain, AI and robotics, and are fully focused on harnessing them for our strategic business efforts.
"In the case of blockchain, we want to develop practical applications that can improve the banking experience of our customers everywhere, and make enhancements in the areas of process and service improvements, such as cross-border payments and settlements," he said.
In a survey by Japan's Ministry of Economy, Trade & Industry that was published in April 2016, it was estimated that the potential market size of blockchain-enabled services in Japan that would include supply chain management and automation of contracts and processes can exceed 50 trillion yen.
MUFG does not have estimates for savings to be had from the use of blockchain, but the bank "certainly expects" its digital innovation efforts to reduce cost. One of the key objectives of MUFG's strategic review is to cut cost by 120 billion yen by 2023.
The bank is also clear that the blockchain technology is still work in progress.
"Much of our blockchain work is currently at the proof-of-concept or pilot testing stage. The initial results have been promising, but we will still need to work out various technical, legal and practical considerations before we can see anything concrete happen," said Mr Aihara.
MUFG has raised the bar in working to develop a digital coin that has been tested by the bank's staff through a pilot in May. Mr Aihara noted that the MUFG coin is meant to be low-cost and a convenient form of digital payment for retail and corporate users in time.
"Featuring abilities for instantaneous transfer and micropayments in decimal value increments, the MUFG Coin is designed with the convenience of the retail customer in mind, while also providing corporate users with a cheaper and faster way of making cross-border payments."
Other Japanese banks are following MUFG's lead, with reports in September saying a group of Japanese lenders plans to offer a new digital currency in time for the 2020 Tokyo Olympics. The J Coin would be convertible into yen and can be used as digital currency stored in an e-wallet, with the banks now eyeing the spending data in return for this free service.
In the US, MUFG has invested in bitcoin exchange Coinbase to seek out collaborations. It has also tied up with Chain to develop a blockchain proof-of-concept for promissory notes. It is also the first Asian bank to join the seven-member RippleNet Advisory Board of the US blockchain start-up Ripple, and is working on developing a more efficient cross-border funds transfer and settlements platform.
In October, MUFG was part of the first consortium in South-east Asia to successfully complete a proof-of-concept for a know-your-customer blockchain. MUFG worked with Singapore-based partners OCBC Bank and HSBC, and Singapore's Infocomm Media Development Authority on using blockchain technology to make one of the key financial processes more efficient and secure. This is aimed at improving means to fend against money laundering and the financing of terrorism.
MUFG is also part of a global grouping of banks partnering software startup R3 to apply blockchain technology to financial markets. It has joined a UBS-led initiative as well to develop a digital cash system that would allow financial markets to make payments and settle transactions quickly.
The proposed system comprises a "utility settlement coin" (USC), a digital cash equivalent of each of the major currencies backed by central banks. The USC would be convertible at parity with a bank deposit in the corresponding currency, making it fully backed by cash assets at a central bank. A limited go-live date has been set for late 2018.
MUFG is also a member of the Ethereum Enterprise Alliance, a global partnership aimed at developing innovations using the Ethereum blockchain platform. It has participated in several inter-bank payments experiments at home and abroad. It is part of a consortium of Japanese banks established in October 2016 that is working with Ripple to implement real-time payment and settlement solutions for local market.
MOBILE APP FOR ALL
This domestic consortium, with 61 members and representing over 80 per cent of total assets in Japan - plans to launch later this year a common mobile app for all the member banks' customers later. It is the only Japanese bank in the proof-of-concept project led by the Monetary Authority of Singapore to conduct inter-bank payments using distributed ledger technology. The project, concluded in March, has spun off into further blockchain projects focusing on securities settlement and cross-border payments.
It has also participated in similar projects testing domestic fund transfers in Japan, one of which was held last November in partnership with other Japanese financial institutions.
The cooperation in the area of blockchain has extended to corporate clients. In August 2016, it said it would work with Hitachi in Singapore on proof-of-concept trials using blockchain to digitalise cheques. The bank is currently entering the later phases of testing, which would explore the security, functions, and operations, of the project.
MUFG is partnering IBM to use blockchain to design, manage and execute contracts and service level agreements among business partners using blockchain - slated to be implemented by end 2017.