On June 3, 2022, Japan became the first developed country to recognize and legalize stablecoins, defining them as “digital currency”. The bill was originally drafted by the Japan Financial Services Agency (FSA) in December 2021. It then entered parliament in March 2022 before being backed by a majority vote on Friday. The main objective of the bill is the protection of investors and it will be implemented in 2023.
The move comes hot on the heels of the Terra UST disaster last month that uprooted billions of dollars from the crypto market. However, it appears the bill has been in the works for some time now, with the FSA already stressing the need for a “higher level of regulatory discipline” in one of its articles last year.
Stablecoins, by design, are pegged to fiat currency such as USD, GBP, etc., or even gold. They are inherently stable, which is why traders use them to enter or exit positions in other cryptocurrencies on token exchange protocols like Curve or Uniswap.
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The Terra UST was an algorithmic stablecoin, meaning a complex code helped the token maintain stable parity with the US dollar. However, UST was backed by its sister token, LUNA, instead of USD. Therefore, when new USTs were created, LUNA tokens were burned and vice versa. The algorithm took care of this under the hood, but it failed miserably when the system couldn’t keep pace with flipped investor sentiment and bearish trades. The Japanese took this vulnerability into account.
The bill incorporates lessons from the Terra UST collapse and requires all stablecoins to be backed by Japanese yen or legal tender. They must also give owners the right to a fair exchange of tokens for fiat currency at face value.
It also states that only registered money transfer agents, licensed banks, and trust companies will be allowed to issue these stablecoins. The FSA has revealed that regulations for stablecoin issuers will be rolled out in the coming months.
Will the bill signal a revival for stablecoins and the crypto industry?
Japan’s latest legislation resonates with the FSA’s earlier push to recognize Bitcoin as a currency in April 2017. Japan was also the first economy to grant licenses to 11 companies to operate as crypto exchanges in September 2017. Therefore, it is fair to say that the nation has led the curve before and may well do so now. Their move could help boost investors’ declining confidence in the crypto markets.
After the Terra crash, investors are increasingly wary of stablecoins. Conversations regarding these digital assets have been shrouded in fear and speculation. However, this may change with the introduction of the latest Japanese stablecoin bill.
The bill could also pave the way for other nations to recognize and legalize stablecoins. “We view Japan’s historic law as a normative example of smart policy. It promotes innovation and economic development while providing guidelines to keep stakeholders safe. This is exactly the kind of leadership and balanced approach to stablecoin legislation that we hope to see in other countries,” said Dante Disparte, Chief Strategy Officer and Head of Global Policy at Circle, in an interview with Decrypt.
The bill could also support the introduction of new Japanese stablecoins. Mitsubishi UFJ and Banking Corp. are already waiting for the new legislation to come into force before releasing their stablecoin. It has been dubbed “Progmat Coin” and will be 100% backed by the yen. The fiat currency will be parked in a trust account, according to Mitsubishi’s banking arm UFJ Financial Group.
The current development also coincides with an extended crypto winter that has wiped out billions of dollars in investment over the past six months. The very moment left many wondering if Japan sees the crypto markets recovering soon.