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On June 3, the Japanese parliament passed a bill that lays down the legal framework for stablecoins, cryptocurrencies whose value is pegged to a currency, commodity, or other financial instruments. Japan has now become one of the first major countries to introduce a law for stablecoins, defining them as digital money, in a bid to safeguard investor interests after last month’s crash of the TerraUSD token.
Stablecoins in Japan now must be linked to the yen or some other currency and can only be issued by licensed banks, registered money transfer agents and trust companies. As per the new law, investors in stablecoins will be guaranteed the right to redeem the token at its face value.
However, the legislation does not define existing asset-backed stablecoins, such as those issued by Tether, or algorithmic stablecoins. The new legal framework will come into effect in 2023, and Financial Services Agency (FSA) will introduce regulations for Japan’s stablecoin issuers in the coming months.
Significance of Japan’s stablecoin law
After the multi-billion-dollar crash of cryptocurrencies over the past few weeks, the legislation from a major economy like Japan is likely to increase confidence in cryptocurrency investments. Japan’s stablecoin frameworks had been in the works for the past few months and the bill was introduced in late 2021.
The country has been the first mover when it comes to cryptocurrencies. In 2017, Japan recognized Bitcoin as a legal tender and then was the first government to license crypto exchanges.
Stablecoins have a combined value of about $160 bn, led by Tether’s USDT, Circle’s USDC and Binance’s BUSD. Last month’s TerraUSD crash has led to heightened regulatory concerns and uncertainty around stablecoins. Japan’s new legislation is in line with last year’s FSA whitepaper that said: “a higher level of regulatory discipline” was required for assets that have a significant impact on financial stability.
“We see Japan’s landmark law as a standard-setting example of smart policy,” Dante Disparte, chief strategy officer and head of global policy at USDC-issuer Circle, told Decrypt. “It fosters innovation and economic development while providing guidelines to keep stakeholders safe. This is exactly the kind of leadership and balanced approach to stablecoin legislation we hope to see from other countries.”
Meanwhile, Mitsubishi UFJ Trust and Banking Corp. will be issuing its own stablecoin, called Progmat Coin, after the FSA announces the legal framework. It is likely that the barriers to entry into Japan’s stablecoin space will increase with regulations, which will affect the ability of small start-ups to issue such tokens.
Earlier this month, Fitch Ratings in a report said, “Greater regulatory certainty over the status of SCs (stablecoins) and their issuers could create market opportunities for the operating entities as well as for other financial institutions, many of which have so far been deterred from engaging with SC operators due to regulatory risk.”
