Most major countries have yet to regulate stablecoins. One exception is Japan, a trailblazer in this area.
A stablecoin law took effect in the world’s third-largest economy in June. Japan’s example is important because it shows that stablecoin regulation is indeed possible. This would seem obvious, but it’s not. In the United States, for example, Congress is still fighting over this issue and no stablecoin bill has made it into law. The European Union’s stablecoin regulations take hold next year, but gray areas remain.
But Japan also shows that regulating stablecoins is not easy. Until recently this flavor of cryptocurrencies, which are designed to hold their value against a real-world asset like the U.S. dollar or the yen, were essentially banned in Japan. Now issuers are starting from scratch. On top of the regulatory hurdles, there is also a business challenge: How do you create a system that allows for stablecoins that are both secure and profitable to issue?
The stakes are high. Total stablecoin market cap is estimated to be over $124 billion. Big players are involved: PayPal recently issued its own stablecoin. There are various use cases. Investors in countries struggling with currency devaluation and high inflation use dollar stablecoins as a store of value. Other investors simply use them to trade for other cryptocurrencies.
At the same time, stablecoins’ prominence in the crypto industry has led to widespread concerns about their so-called stability. In May of 2022, the algorithmic stablecoin project Terra Luna collapsed, leading to losses of billions of dollars in value. There has long been widespread concern about the world’s dominant stablecoin, Tether, which the New York Times called “The Coin that Could Wreck Crypto.” The fear is a run on the bank scenario in which investors en masse try to redeem their stablecoins for dollars, for example, only to find that there are not enough dollars to make them whole.
Japan’s stablecoin regulations attempt to address some of the biggest fears about major stablecoins: Do issuers really have the assets to back them? And even if they do, how do you ensure that assets are easily accessible and not tied up in opaque and risky investments?
Now, we wait
These are not easy problems to solve, which means that launching a stablecoin in Japan will not be quick. In fact, Japan’s first stablecoins will likely launch next June at the earliest, said Tatsuya Saito, founder and CEO at Progmat, a software platform for issuing and managing digital assets. It can take at least a year to complete the requirements for the license and have it approved by Japanese regulators, Saito said.
In September, Binance Japan (the local arm of the world’s largest crypto exchange), Mitsubishi Trust Bank and Progmat announced a partnership exploring the creation of a new stablecoin.
Saito told CoinDesk that he is in conversation with ten different projects that want to launch stablecoins in Japan. All ten want to issue both a dollar-based and a yen-based stablecoin. Several of the projects he is consulting with are overseas companies, he said. None of these projects have officially begun the licensing process, according to Saito. They are just in the exploration stage.
Circle, issuer of USDC, the world’s second-largest stablecoin by market cap, has publicly said that it is looking at the Japanese market.
Only banks, trust companies and fund transfer services may issue stablecoins in Japan. Stablecoin issuers might establish a trust inside Japan, and issue the stablecoin through that vehicle. The assets backing the stablecoins trading on Japanese exchanges would need to be held in this trust.
For foreign stablecoin issuers, this would seem to be an unusually strict requirement. But according to Saito, there is a more practical way to stay in line with regulations.
By partnering with Japanese trust banks, issuers can issue their own branded stablecoins without having to obtain a special license in Japan.
Issuers can outsource to the trust the domestic custody and administration of the underlying asset in accordance with regulations.
Cryptocurrency exchanges that want to list stablecoins will have to apply for licenses as well, Saito said, but none have officially started the process. "They are still preparing.”
Japan’s regulation has some strict provisions to protect the assets underlying stablecoins. If a domestic stablecoin is issued under a trust structure, which is expected to be a common way to issue stablecoins, “100% of the legal currencies (e.g, dollars or yen) backing a stablecoin must be kept in a trust inside Japan, and can only be invested in bank deposits inside Japan,” says Keisuke Hatano, partner at the law firm of Anderson Mori & Tomotsune.
But while this requirement might help ensure the security of assets, it can make it harder for stablecoin issuers to make money. “This poses a challenge for domestic yen-based stablecoins, as the interest rate for Japanese bank deposits is currently very low (in most cases below 0.1%).”
It’s slightly better for dollar-based domestic stablecoins, Hatano notes. “You still have to keep all the dollars in bank deposits in a bank in Japan, but you can get a higher interest rate for dollar deposits.”
Others in the Japanese stablecoin scene also said issuers face a real business challenge.
“Will stablecoins succeed in Japan? It's hard to say,” said Fumiaki Sano, partner at the law firm of Kataoka and Kobayashi LPC. “You can't invest the underlying assets, and if the transaction fees are too high, no one will use them. So what is the business model? Compliance costs are high as well, which means you have to find a way to monetize them.”
Sano cites other ways new regulations could introduce business challenges. “For exchanges that handle foreign stablecoins, there is a one million yen limit per transaction with those stablecoins,” he explains.
“If a foreign stablecoin issuer wanted to build its own entity in Japan through a trust, for example, it wouldn't have that limit. But then the stablecoin issued in Japan would be different from the stablecoin circulating globally. For example, it would be like if Circle issued USDCJ instead of USDC -- there wouldn't be the same liquidity."
Striking the right balance between security and profitability is just one reason why it takes time to get stablecoin regulations in place, and help explain why various other jurisdictions have yet to see stablecoin regulations become law. Japan is worth watching as it navigates these challenges in real time.
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