Japan’s New Stablecoin Bill Sets a High Bar for Investor Protections

Japan’s parliament has passed legislation clarifying the legal status of stablecoins. The new bill also mandates that any entity providing stable crypto assets must guarantee holders the right to redeem their tokens at face value.

Japan Leads World on Stablecoin Regulation

Japan has become the first nation to ensure strict investor protections for stablecoins. 

Japan’s upper parliamentary house passed new legislation early Friday morning, clarifying the legal status of stablecoins in the country and defining them as a form of digital money. The bill goes beyond any measures enacted anywhere else in the world in terms of investor protections.

Under the new law, entities offering stablecoins in Japan must ensure that their tokens are linked either to the yen or another legal tender currency and that their stablecoins are always redeemable for fiat at their face value. Additionally, the new legal definition of stablecoins dictates they can now only be issued by licensed banks, registered money transfer agents and trust companies. 

The new legislation does not address existing asset-backed stablecoins from overseas issuers, such as Tether’s USDT, as Japanese crypto exchanges do not currently list them for trade. However, if companies like Tether want to enter the Japanese market in the future, they will need to ensure their stablecoins comply with the new regulations. 

The new rules are set to come into effect in 2023, with Japan’s Financial Services Agency expected to clarify details for stablecoin issuers over the coming months. Currently, Mitsubishi UFJ Trust and Banking Corp, one of the country’s leading financial services firms, plans to issue its own “Progmat Coin” pegged to the value of the Japanese yen. 

Japan is not the only country to focus on tightening stablecoin regulation in recent weeks. In the U.K., Her Majesty’s Treasury recently confirmed plans to regulate stablecoins as a form of payment in the country as part of the government’s commitment to cryptocurrency innovation. While many details are still unconfirmed, reports indicate that U.K. regulators are also primarily focused on investor protection.

The recent regulatory discussions concerning stablecoins have been dominated by the collapse of the algorithmic stablecoin TerraUSD. UST started to unravel at the beginning of May, breaking its dollar peg and sparking a bank run among holders. Eventually, UST’s algorithmic stabilizing mechanism crashed the network’s LUNA token by over 99% without managing to restore its peg to the dollar. The incident erased more than $40 billion of value from the crypto market and drew the attention of legislators worldwide. 

Japan’s new stablecoin bill will be the first to guarantee right-to-redeem protections for stablecoin investors. However, the current regulatory climate surrounding stablecoins and cryptocurrencies indicates it likely won’t be the last. 

Disclosure: At the time of writing this piece, the author owned ETH and several other cryptocurrencies.