The Current Status and Prospects of the Japanese Stablecoin Market

The stable development of Japan's stablecoin market is mainly due to a clear regulatory framework. Government support and the ruling party's relevant policies have further promoted the development of the Web3 industry. Compared to many countries' uncertain or restrictive attitudes towards stablecoins, Japan has shown a positive and open stance, which fills people with anticipation for the future of Japan's Web3 market. This article will explore the current state of stablecoin regulation in Japan and analyze the potential impact of yen-supported stablecoins.

I. Regulatory Push for the Development of Japan's Stablecoin Market

In June 2022, Japan amended the Payment Services Act to establish a regulatory framework for the issuance and brokerage of stablecoins. These amendments officially came into effect in June 2023, marking the formal beginning of stablecoin issuance. The new law provides a detailed definition of stablecoins, clarifies the issuing entities, and stipulates the licenses required for related businesses.

1. Definition of stablecoin

According to the amended "Payment Services Act", stablecoins are classified as "electronic payment instruments" (EPI), which can be used to pay for goods or services to an unspecified number of recipients.

It is worth noting that not all stablecoins fall into this category. According to the revised Article 2, Item 5, Clause 1 of the PSA, only stablecoins backed by fiat currency can be considered electronic payment instruments. This means that stablecoins based on cryptocurrencies (such as Bitcoin or Ethereum) like MakerDAO's DAI are not regarded as electronic payment instruments. This distinction is an important feature of the Japanese regulatory framework.

2. Stablecoin Issuer

According to the revised PSA, stablecoins can only be issued by three types of entities:

• Bank
• Fund Transfer Service Provider
• Trust Company

Each type of stablecoin issued by entities has functional differences, such as transfer limits and recipient restrictions.

Among them, the trust-type stablecoins issued by trust companies are the most noteworthy, as they are expected to best align with Japan's current regulatory environment and are very similar in characteristics to common stablecoins like USDT and USDC.

Stablecoins issued by banks will be subject to certain restrictions. As banks need to maintain the stability of the financial system, regulators have indicated that stablecoins issued by banks need to be carefully considered and may require further legislation.

Funds transfer service providers are also subject to certain restrictions, with a maximum transfer amount of 1 million yen per transaction. It is currently unclear whether transfers can be made without KYC verification. Therefore, this type of stablecoin may require further regulatory updates. Based on these conditions, the most likely form of stablecoin to emerge will be the stablecoins issued by trust companies.

3. Stablecoin related licenses

To conduct stablecoin-related business in Japan, entities must register as Electronic Payment Instrument Service Providers (EPISP) and obtain relevant licenses. This requirement was introduced after the amendment of the Payment Services Act in June 2023. Stablecoin-related activities include buying, selling, exchanging, brokering, or acting as an agent for stablecoins. For example, virtual asset exchanges that support stablecoin trading or custodial wallet services that manage stablecoins for others must register. In addition, these businesses must also comply with user protection and anti-money laundering (AML) requirements.

2. Yen Supported Stablecoins

With the improvement of Japan's stablecoin regulatory framework, several projects are actively researching and testing yen-backed stablecoins. The following will introduce several major stablecoin projects in Japan to help understand the current status and characteristics of the yen stablecoin ecosystem.

1. JPYC: Prepaid Payment Tool

JPYC is the first digital asset issuer in Japan linked to the Japanese yen, established in January 2021. However, JPYC is currently classified as a prepaid payment instrument rather than an electronic payment instrument as defined after the revision of the Payment Services Act, and thus is not considered a stablecoin. The use of JPYC is restricted; for instance, it only supports converting fiat currency to JPYC (listing), but cannot convert JPYC back to fiat currency, which is akin to a prepaid card, thereby limiting its use cases to some extent.

However, JPYC is actively working to issue stablecoins that comply with the new legal requirements, planning to issue fund transfer stablecoins by obtaining a fund transfer license and expanding their use, such as exchanging them with electronic currency issued by a certain bank.

In addition, JPYC plans to register as an EPISP to operate its stablecoin business. In the long term, the company also plans to issue and operate a trust-based stablecoin based on Progmat Coin to support cash or bank deposit-related business activities.

2. Tochika: Deposit-supported digital currency

Tochika is Japan's first digital currency supported by bank deposits, launched by a certain bank in 2024. Tochika is backed by bank deposits, allowing users to easily access it through a dedicated application and use it at partner merchants in specific regions.

Tochika is characterized by its simplicity and ease of use, with a merchant fee of only 0.5%. However, it is currently limited to specific regions, with only one free withdrawal opportunity per month; additional withdrawals will incur a fee. Furthermore, Tochika operates on a private blockchain, with limited applicability.

In the future, Tochika plans to expand its service offerings, including account links with other financial institutions, broadening its geographical coverage, and introducing peer-to-peer remittance features.

3. GYEN: Offshore stablecoin

GYEN is a yen stablecoin issued by a subsidiary of an internet group based in New York. It is regulated by the New York State Department of Financial Services and is on the state's green list. GYEN is pegged to the yen at a 1:1 ratio, but it cannot circulate domestically in Japan because it is not issued through a Japanese trust company.

However, GYEN may be included in Japan's regulatory framework in the future, becoming part of compliant stablecoins.

Feasibility Analysis of Stablecoin Business

Although stablecoins have been legally approved for over a year, progress on stablecoin projects in Japan has been limited. Stablecoin projects similar to USDT or USDC are still scarce in the Japanese market, and currently, no company has completed EPISP registration.

In addition, requiring stablecoin issuers to manage all reserves as demand deposits poses significant restrictions on commercial operations. Demand deposits can be withdrawn at any time and yield very little profit, making it difficult to generate revenue for stablecoin operations. Although the Bank of Japan recently raised interest rates from 0%, the short-term rate of 0.25% remains low, undermining the profitability of stablecoin operations. As a result, there is an increasing demand in the market for competitive stablecoins backed by other assets such as Japanese government bonds.

Despite these challenges, Japan's large financial institutions and corporate groups are still actively participating in the stablecoin business. This includes several major banks and well-known corporate groups.

Conclusion

In recent years, Japan has been working hard to address the issue of the weak yen and has implemented various strategies to enhance its competitiveness. Stablecoins are part of this effort, as an attempt to enhance the scalability and competitiveness of the yen. By adopting advanced stablecoins, it is expected that Japan can not only apply them domestically but also explore new application scenarios in the global payment field, which will provide new opportunities for Japan to expand its influence in the international financial market.

Although the regulatory framework for stablecoins has been established for some time, the influence of the yen in the stablecoin market remains limited. There are few practical use cases for stablecoins, and no company has completed EPISP registration. The decline in government support has also made it difficult to promote strong Web3-related policies. Nevertheless, the establishment of a regulatory framework is a meaningful progress. While progress may be slow, the changes it will bring are worth looking forward to.