Regulation and Future Prospects of Stablecoins in Japan

Stablecoins have become a prominent topic in Japan, with ongoing efforts to establish legal regulations while considering aspects like Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) regulations and economic sanctions.

What are Stablecoins?

Stablecoins are categorized into digital currency-like and cryptocurrency-like types. The former is linked to a fiat currency’s value, promising redemption, and is regulated as an electronic payment method. The latter may not fall under the former category and might be regulated as cryptocurrencies. One of the most well-known stablecoins in Japan is JPYC, which falls under the digital currency-like type. JPYC has strengthened its partnership with the renowned USDC organization.

Legal Developments:

The amendment of the Payment Services Act Japan in 2022 defined digital currency-like stablecoins as “electronic payment methods,” subjecting operators to regulations. Amendments to laws related to banking and financial business cooperatives also introduced regulations for issuers and intermediaries, allowing them to issue stablecoins by obtaining licenses for fund transfer and banking operations.

AML/CFT Regulations:

Issuers and intermediaries of stablecoins are subjected to AML/CFT regulations, aimed at preventing the transfer of proceeds from criminal activities. These regulations strengthen the prevention and surveillance of illicit fund transfers. While digital currencies might be susceptible to money laundering, blockchain technology can actually enhance transparency and monitoring, which is critical to combating such activities.

Economic Sanctions:

Issuers and intermediaries of stablecoins could also fall under regulations related to economic sanctions, based on foreign exchange and foreign trade laws. Economic sanctions restrict transactions with specific countries or entities due to international political and economic pressures. It’s debated to what extent stablecoins issued on public blockchains comply with economic sanctions, which also depends on the issuer’s structure.

Future Prospects:

Risk Mitigation and Transparency Enhancement: With stricter regulations, stablecoin issuers and related entities must implement proper AML/CFT measures. This will enhance fund transparency and reduce the risk of misuse.

Ensuring Stability:

Stablecoins of the digital currency-like type, linked to fiat currency, require issuers to maintain redemption capabilities, ensuring user trust and stability. Organizations with a strong foundation, such as those rooted in banking like JPYC, are expected to thrive.

Enhanced Trust and Adoption:

Beyond 2025, stablecoins might serve as secure assets for corporate finances. Their global adoption as a widespread payment method is also anticipated.

Asset Management Tool:

The idea that holding stablecoins might be more advantageous than physical cash could spread. This could be due to the interest earned and the ability to utilize stablecoins in blockchain-based investment trusts and other asset management tools.

Challenges Ahead:

The introduction of cryptocurrency-like stablecoins and emerging technologies may lead to new legal challenges. Regulations must adapt to technological advancements to maintain a stable financial system.

Conclusion:

In Japan, stablecoins are expected to flourish under the umbrella of legal regulations, focusing on transparency and stability. The potential of stablecoins, including JPYC, is highly anticipated as they play a crucial role in the evolving financial landscape.