Japan Passes Legal Framework for Stablecoins

Japan’s parliament passed a landmark investor protection bill Friday that sets a legal framework for stablecoins, characterizing the assets as digital currencies. 

The law states stablecoins, which are generally backed by one or more reserve assets, must be pegged to the yen or another legal tender, according to reports by Bloomberg and Financial Times. They must also guarantee redemption to the holder at face value.

Friday’s announcement follows the shocking crash of TerraUSD (UST), over which US Treasury Secretary Janet Yellen has expressed concern. However, the legislation in Japan was not in response to either algorithmic experiments or existing reserve-backed stablecoins from foreign issuers like Tether, Bloomberg reported.

Under Japan’s law, stablecoins can only be issued by established financial institutions such as registered banks, money transfer agents and trust companies.

The move to confine stablecoin issuance to licensed financial firms was expected. Joerg Schmidt, B2C2’s director of strategy, told Blockworks late last year that this would be in line with international developments, because the US too has proposed issuance only by federally insured banks.

Japan’s Financial Services Agency had been drawing up a framework around stablecoins even before the market’s recent downtrend. The new legal guidance will come into effect in 2023, and stablecoin issuers are expected to receive detailed information in the coming months.

Fiat-backed stablecoins are backed 1-to-1 by cash or cash-like assets held in reserve with an issuer. Meanwhile, non-collateralized algorithmic stablecoins aren’t fully backed by assets but are supposed to remain stable through mining and burning units combined with arbitrage incentives. TerraUSD was the largest such stablecoin, reaching a market cap of over $18 billion before it failed.

The UST collapse has put a fresh spotlight on stablecoins’ potential threat to financial stability, as seen in the UK’s recent move to line up new safeguards for the assets.

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