Japan has become the first country in the world to enact a framework regulating the issue, distribution, and use of stablecoins, and protecting users from money laundering.
Stablecoins refer to cryptocurrencies that are directly pegged to fiat currency. For example, one USDC reflects one United States dollar. Stablecoins primarily facilitate trading on cryptocurrency exchanges and ensure appropriate price denomination. Stablecoins cut down transfer time, fees, and potential privacy infringement and are integral in bridging the gap between traditional and decentralised finance.
Japan’s new law will amend the Payment Services Act to permit the lawful use of stablecoins in Japan and allow private entities to issue stablecoins if granted permission. Private entities are currently only limited to licenced banks, registered money transfer agents, and trust companies. The regulation also contains a new registration requirement for previously unregulated intermediary companies that wish to transfer, distribute, or manage validly issued stablecoins.
The framework will regulate any stablecoin (or digital currency) as an electronic payment instrument that can be used for remittance and settlements and can be transferred using electronic information processing. This has given stablecoins the effective label of digital money but must be linked to the Yen or another legal Japanese tender to guarantee holders the right to redeem the stablecoin at face value. Interestingly, the amendment does not reference blockchain technology or even a digital ledger. The legislation also does not address asset-backed stablecoins or algorithmic stablecoins.
Regulating stablecoins will arguably benefit Japan’s economy and increase consumer and financial sentiment toward cryptocurrency. This in turn is projected to stimulate greater adoption across the country. The amendments are proposed to come into force around 2 June 2023.