Market's Response to Stablecoin Legalization in Japan

Japan took the step to legalize digital assets back in 2014. Since then, cryptocurrencies like Bitcoin, Ethereum, and others have been recognized legally and can be utilized as fully-fledged methods of payment across Japan, on par with the yen.

This new law has distinguished stablecoins as a unique category, and set out specific requirements for the issuers, operators, and intermediaries of these stablecoins. Simultaneously, the Japanese lawmakers have stipulated that only digital assets pegged on a 1:1 ratio with fiat currencies are to be deemed stablecoins. Algorithmic stablecoins, along with those tethered to a mix of digital or other non-fiat assets, remain classified as crypto assets.

This strategy, as Japanese parliamentarians and regulators perceive it, is aimed at protecting investors and further reducing the potential risks associated with stablecoins, which as a market has already drawn near to a total capitalization of $130 billion.

The new law stipulates that licensed banks, registered money transfer agents, and trust companies are eligible to issue stablecoins. Local merchants who wish to accept stablecoins as a form of payment must be registered with the Financial Services Agency (FSA). Japan intends to introduce a clear and transparent registration process for all stablecoin market participants, as well as enhance oversight on their compliance with anti-money laundering (AML) rules, to prevent potential future market crashes, such as the case with TerraUSD.

Under this new legislation, issuers are accountable for the release and auditing of stablecoins, while intermediaries are responsible for their circulation. The stipulations for obtaining licenses are such that only reliable entities with a spotless reputation and long-standing market presence stand a chance of receiving one. Experts argue that this could potentially be unfavorable for startups eager to issue their own stablecoins.

Intermediaries are required to register, oversee transactions, and enforce other measures to combat money laundering, for which the requirements have now become stricter than before.

Mitsubishi UFJ Financial Group (MUFG), the largest financial institution in Japan, was among the first to express its intention to issue stablecoins. MUFG has plans to oversee the issue of stable coins through their proprietary blockchain platform, Progmat Coin. The banking group aims to extend the opportunity to other banks and organizations to issue their own stablecoins, pegged to the yen and the US dollar, while also supporting numerous blockchains (such as Ethereum, Polygon, Avalanche, Cosmos, and so on).

At present, over 200 Japanese companies, including major banks such as Mizuho, SMBC, and SBI, along with the Japan Exchange Group (JPX), have expressed interest in issuing stablecoins on the Progmat Coin blockchain platform.

This prominent Japanese financial conglomerate is also manifesting interest in the issuance of stablecoins. As far back as 2022, it formed a subsidiary in collaboration with the cryptocurrency exchange Bitbank, called Japan Digital Asset Trust (JADAT), with the aim of managing digital assets, stablecoins included. Now, the decision lies with Sumitomo Mitsui Trust: should they certify JADAT for the issuance of stablecoins, or should they involve the bank that falls under their holding company, the Sumitomo Mitsui Trust Bank?

Digital banking entity Minna Bank, in partnership with Tokyo Kiraboshi Financial Group and Shikoku Bank, has issued and conducted beta testing of stablecoins on the Japan Open Chain blockchain. This platform was devised by the Tokyo-based startup, G.U. Technologies. With the recent legislative changes, both issuers and intermediaries will now need to acquire a license.

Jeremy Allaire, the CEO of Circle, has indicated that the company is currently keen on issuing stablecoins in Japan and is examining potential avenues to join the local market.

The leader of Circle is optimistic that the legalization of stablecoins will enable Japan to bolster its global standing as one of the most cryptocurrency-accommodating jurisdictions.

Allaire also highlighted that Circle’s interest in the local market was piqued after the Japanese regulator, the Financial Services Agency (FSA), abolished the prohibition on the distribution of foreign stablecoins last year.