Assessing Japan’s stablecoin plan

Written by Kapronasia || April 17 2023

In Asia Pacific, Japan is taking a proactive position on stablecoin regulation much as it has other elements of cryptocurrency rules since 2017. New regulations are expected to come into effect in June, while Japanese banks recently began a stablecoin experiment on an Ethereum public chain. Though certain crypto fundamentalists decry Japan’s stablecoin regulations as overly restrictive, in reality, the alternative is unattractive. UST’s spectacular implosion last year and the subsequent criminal charges brought by the United States Securities and Exchange Commission against Terraforms Labs founder are a pointed reminder of what happens when stablecoins are left entirely to “market forces.”

Earlier this year, Japan’s Financial Services Agency (FSA) said that it expected new legislation that will let investors trade using stablecoin is set to be approved by June. Under the draft regulation, local distributors will be allowed to handle payments-focused stablecoins, which are cryptocurrencies stabilized against the value of sovereign currencies like the U.S. dollar, if they maintain sufficient assets.

The new legislation is expected to reverse a de facto ban on the local distribution of stablecoins Japan imposed in the wake of the UST debacle. In June 2022, Japan’s parliament passed a bill clarifying stablecoins’ legal status, defining them essentially as digital money. Under the bill, stablecoins must be linked to the yen or another legal tender and guarantee holders the right to redeem them at face value. The legal definition effectively means stablecoins can only be issued by licensed banks, registered money transfer agents and trust companies

Thus, the legislation effectively banned stablecoin issuance by any other entities.

However, which stablecoins will ultimately be approved by the FSA remains up in the air. It will make a big difference for the overall cryptocurrency ecosystem if the largest stablecoins by market capitalization are approved. These include Tether USDT, with a market cap of almost US$81 billion, USD Coin USDC (US$31.8 billion), Binance USD BUSD (US$7 billion), Dai DAI (US$5 billion) and and TrueUSD TUSD (US$2 billion).

Separately, in March three Japanese banks said they would use a system developed by Web3 infrastructure company GU Technologies to experiment with stablecoins backed by assets. The proof-of-concept project experiment led by Tokyo Kiraboshi Financial Group, Minna no Bank and The Shikoku Bank is being done on the Japan Open Chain, a public blockchain compatible with Ethereum and compliant with Japanese law.

Meanwhile, Japanese megabank Mitsubishi UFJ Financial Group and domestic blockchain firms Datachain, Progmat Coin and Soramitsu began working on a project of their own in March that aims to launch a stablecoin interoperability pilot. UJF and its blockchain partners said in a press release that the new pilot solution will allow parties to “boost efficiency” and “reduce fees for inter-bank, inter-company, and interpersonal remittances” when using stablecoins.