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Japan has become one of the first advanced economies to introduce a legal framework for stablecoins, amid renewed focus from regulators following the collapse of TerraUSD.
On June 3, the Japanese parliament passed a bill into law that recognises stablecoins as a form of digital money.
To meet this definition, the law states that stablecoins must be pegged to the yen, and must guarantee holders the right to redeem each token at face value.
Additionally, stablecoins in Japan may only be issued by licensed banks, trust companies and money transfer agents.
In effect, this means there will be no legal standing for stablecoins such as Tether or USDC, both of which are issued outside Japan and are pegged to the US dollar.
Decentralised algorithmic stablecoins, such as TerraUSD or DAI, a US dollar stablecoin that can be minted using DeFi platform MakerDAO, are also left out by the new law.
These stablecoins, which can be launched by a developer anywhere in the world, will not be legally recognised under Japan’s new regulatory framework.
Bringing stablecoins in-house
The new law, which will come into effect within the next year, can be seen as an attempt by Japan to bring stablecoins in-house.
Although Japan’s Financial Services Agency (FSA) has said that it will introduce further regulations governing stablecoin issuers in the coming months, it is clear that the country is attempting to ringfence its stablecoin market from what it perceives as foreign influence.
Japan’s defensive posture applies not only to foreign issuers of stablecoins, whose solvency can be difficult to determine, but also to foreign currency-denominated stablecoins, which pose a risk of currency substitution.
This was highlighted by the Bank of Japan in 2019 in relation to Libra, Facebook’s would-be experiment in global, borderless currency, and has been reiterated more recently by other central banks, including Bank Negara Malaysia, as reported by VIXIO.
Japan is positioning itself for a new type of homegrown stablecoin developed and launched by Japanese financial institutions.
One such institution, which claims to be building Japan’s first “trust-based” stablecoin, is Mitsubishi UFJ Trust and Banking Corp., a subsidiary of Japan’s largest bank, Mitsubishi UFJ Financial Group.
In March, Mitsubishi UFJ Trust and Banking Corp. published an update on Progmat Coin, a proprietary stablecoin that it has been building since late 2019.
Progmat Coin will be fully backed by yen placed in a trust account; therefore, guaranteeing face-value redemption, and is set to launch once the new legal framework is in place.
Built using enterprise blockchain technology from Corda, Progmat Coin has been supported by Mitsubishi UFJ Morgan Stanley Securities since the project began in 2019, and has since gathered more supporters as the project has developed.
In March, the bank revealed that more than a dozen companies took part in Progmat 5.0, its latest trial phase, including LINE, Monex, Mizuho Securities and Matsui Securities.
Many of the same companies also took part in trials of a Progmat-based real-time gross settlement (RTGS) system.
All eyes on Japan
Regulators in other jurisdictions will be watching Japan carefully and taking notes, as they too seek to introduce similar legal frameworks for stablecoins.
Since the collapse of TerraUSD last month, many major regulators have opined on the crash and what it portends in terms of legislation, with the consensus being that stablecoins are now growing so large and are becoming so risky that future mishaps could produce contagion effects.
Consequently, regulators have said they will need more power to shut down or take over such stablecoins before the damage is done and before investors lose out, as happened to the tune of billions with TerraUSD.
Last week, for example, the UK Treasury published a consultation paper setting out a new strategy to mitigate risks to financial stability arising from the failure of digital settlement assets, including stablecoins.
Such measures included a proposal by which the Bank of England, after consulting with the Financial Conduct Authority (FCA), could take stablecoin issuers into administration, similar to when a commercial bank fails.
In the US, the Treasury, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CTFC) have been engaged in similar discussions.
Last week, CTFC commissioner Caroline Pham argued that stablecoins, being a type of derivative, ought to come under her remit at the CTFC.
She added that, as in Japan’s new law, investor protection should be made a priority, lest future stablecoin experiments go awry.
“What I’m worried about is that without appropriate customer protections in place, and the right disclosures, people are buying some of these crypto tokens thinking that they’re guaranteed to strike it rich,” she said.
She added that investors ought to know that, even with stablecoins, they might be buying the crypto equivalent of a lottery ticket.
“You might strike it big and get rich quick, but you might not,” she said.
