Japan brings more clarity to stablecoins

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The upper house of Japan’s parliament, the House of Councillors, enacted a bill defining the legal status of stablecoins in June, making it the first major economy to enact such legislation. The law takes effect in a year and defines stablecoins as digital money that must be tied to Japanese yen or another legal tender, ensuring the holders the ability to redeem the stablecoins at face value.

Japan brings more clarity to stablecoins
Yuri Suzuki

The Financial Services Agency (FSA) of Japan prepared the bill in late 2021 as part of a five-year effort to protect consumers investing in cryptocurrencies. This new law has taken a spotlight in the market following the collapse of a stablecoin called terraUSD and its sister token Luna in May, which reinforced calls for regulatory oversight on stablecoins.

“Under this stablecoin law, there is the ‘issuer’ who issues and manages stablecoins and the ‘intermediary’ who is responsible for their distribution,” Yuri Suzuki, senior partner at Atsumi Sakai in Tokyo, told Asia Business Law Journal. “Issuers are limited to banks, money transmitters and trust companies, which means that only licensed creditworthy companies are allowed to issue stablecoins.”

Further, Suzuki added, the intermediaries will be required to register with the regulator and to take strict anti-money laundering and counter-financing of terrorism (AML/CFT) measures. As this new law requires issuers and intermediaries to have a reasonable size and structure, startups and overseas businesses may face difficulties in entering Japan’s stablecoin market, while major Japanese companies have been developing and testing yen-denominated digital coins.

For example, Mitsubishi UFJ Trust and Banking aims to launch its own stablecoin, Progmat Coin, which will be backed by Japanese yen in a trust account, once the legal framework is in place. The FSA will regulate stablecoin issuers in the coming months.

Japan has been active in developing regulations on digital money. The country’s central bank, the Bank of Japan, has commenced the second phase of testing its own digital form of a fiat currency or central bank digital currency (CBDC) in April and will be ready to issue the currency called digital Japanese yen as soon as it deems necessary. However, Suzuki has seen no concrete plans so far on such an issuance.

“Therefore, I do not think this [stablecoin] regulation affects Japan’s effort in issuing its own CBDC,” said Suzuki.

She explained that AML/CFT compliance is the major focus of the new stablecoin law. The FSA is considering requiring the intermediaries of stablecoins (and the issuers, if necessary) to generate system development obligations that could prevent transfers to unidentified users and freeze balances that have been transferred to unidentified users through system specifications.

”However, system development for AML/CFT measures, including its cost problems, could be an issue for CBDCs as well as stablecoins,” said Suzuki. “The Bank of Japan’s CBDC has a two-tiered structure, where the central bank issues digital Japanese yen to intermediaries and users withdraw digital Japanese yen from and deposit the same to intermediaries.”

Although the bill has seen Japan lead the way among major countries in providing a legal framework for stablecoins, Suzuki noted that it also posed a risk where such a framework may not achieve international consensus if the legislation imposes an excessive burden on businesses.

“The domestic and international assessment against the legal framework for stablecoins may have an impact on the international competitiveness of the Bank of Japan’s CBDC in the future, and ultimately the Japanese financial industry,” said Suzuki. “Therefore, it is important to monitor whether the legislation imposes excessive burdens on businesses and to review it periodically.”

Japan brings more clarity to stablecoins
Joshua Chu

Joshua Chu, group chief risk officer at Hong Kong-based blockchain company Coinllectibles, agrees that the key to effective regulation is balancing consumer protection, and understanding the technology and the industry.

“As long as they are properly legislated and implemented, regulations will stand to benefit the entire market and is therefore complimentary,” said Chu. “By being able to label a stablecoin as being compliant, the benefits of such a status will undoubtedly drive up consumer confidence, which will in turn lead to greater adoption across the greater population.”

Through a number of cycles, Chu believed that cryptocurrency as an asset class is here to stay and industry players need to assist the regulators in understanding the nature of this sector, and set the standards for effective and safe use.

“The regulations being rolled out by regulators will undoubtedly serve in the longer-term to create a stronger ecosystem and it is crucial for industry leaders that have been built around responsible innovation to be part of the process to assist in shaping such regulations,” said Chu.

The Hong Kong Monetary Authority (HKMA) published its discussion paper on crypto-assets and stablecoins in January 2022 following the resurgence of cryptocurrencies in late 2021. Although this trend has jumpstarted many regulators across the globe in looking into how to regulate stablecoins, Chu believed that Hong Kong will take its time before following Japan’s step.

“With one of the best regulatory bodies amongst all of Asia’s premier financial centres, Hong Kong may also be poised to take the lead in rolling out regulations [on stablecoins],” said Chu. “However, it is unlikely for our regulators to rush such regulations as Hong Kong is not known for delivering ineffective laws or regulations.”