Current Situation of the Stablecoin Market in Japan: Regulation First, Development Awaiting Initiation

Author: Tiger Research Reports

Compiled by: Shenchao TechFlow

Key Takeaways:

• Japan has one of the most advanced stablecoin regulatory frameworks among major countries, thanks to government-led growth and a friendly Web3 policy.

• However, the use cases for stablecoins in Japan are limited. Currently, no stablecoin business has obtained EPISP registration, and no stablecoins are listed on local exchanges. This restricts the use of stablecoins in the retail sector.

• Nevertheless, the existence of a regulatory framework is significant as it provides greater certainty for businesses. We can foresee that large banks and corporations in Japan, such as Sony, will participate in the stablecoin market.

1. Introduction

Japan's stablecoin market has achieved stability, primarily due to the establishment of a clear regulatory framework. This growth has also been supported by government initiatives and the ruling Liberal Democratic Party's policy to accelerate the Web3 industry. Japan's actively open attitude contrasts sharply with the uncertain or restrictive stance taken by many other countries regarding stablecoins. As a result, there is optimism about the future of Japan's Web3 market. This report examines Japan's stablecoin regulation and explores the potential impact of stablecoins backed by the yen.

2. Japan's Stablecoin Market Expected to Rapidly Develop Due to Regulatory Progress

In June 2022, Japan prepared to amend the Payment Services Act (PSA) to establish a regulatory framework for the issuance and brokerage of stablecoins. These amendments took effect in June 2023. This marks the official start of stablecoin issuance. The amended law provides a detailed definition of stablecoins, clarifies the issuing entities, and lists the licenses required for stablecoin transactions.

2.1. Definition of Stablecoins

According to the amended Payment Services Act (PSA), stablecoins are classified as " Electronic Payment Instruments (EPI), meaning they can be used to pay for goods or services to multiple unspecified recipients.

Source: Tiger Research

However, not all stablecoins are classified as this type. According to Article 2, Paragraph 5, Item 1 of the amended Payment Services Act, only stablecoins that maintain their value based on fiat currency are recognized as Electronic Payment Instruments. This means that stablecoins backed by cryptocurrencies (such as Bitcoin or Ethereum), like MakerDAO's DAI, are not classified as electronic payment instruments under this law. This distinction is an important feature of Japan's regulatory framework.

2.2. Issuing Entities for Stablecoins

The amended Payment Services Act (PSA) specifies which entities are authorized to issue stablecoins. Stablecoins can only be issued by three types of entities: 1) banks, 2) money transfer service providers, and 3) trust companies. Each type of entity can issue stablecoins with different characteristics. For example, they may differ in terms of maximum transfer amounts and recipient restrictions.

Source: MUFG

Among these issuing entities, the most notable type may be trust-type stablecoins issued by trust companies. This is because they are expected to be most compatible with Japan's current regulatory environment and are very similar in characteristics to common stablecoins like USDT and USDC.

Japanese regulators have indicated that stablecoins issued by banks will be subject to certain restrictions. Banks must maintain the stability of the financial system under strict regulation, but unlicensed stablecoins are difficult to control and may conflict with this responsibility. Therefore, regulators emphasize that stablecoins issued by banks need to be carefully considered and may require further legislation.

Money transfer service providers also face some restrictions. The transfer amount for each transaction is limited to 1 million yen, and it is currently unclear whether transfers can be made to recipients who have not undergone KYC (Know Your Customer) verification. Therefore, stablecoins issued by money transfer service providers may require additional regulatory updates beforehand. Given these conditions, the most likely form of stablecoin to emerge will be those issued by trust companies.

2.3. Licenses Related to Stablecoins

In Japan, entities engaged in stablecoin-related businesses must register as Electronic Payment Instrument Service Providers (EPISP) to obtain licenses related to stablecoins. This requirement was introduced in the amended Payment Services Act (PSA) in June 2023. Stablecoin-related businesses refer to activities such as buying, selling, exchanging, brokering, or representing stablecoins. For example, virtual asset exchanges that list and support stablecoin trading or custodial wallet services that manage stablecoins on behalf of others also need to register. In addition to registration, these businesses must also meet user protection and anti-money laundering (AML) compliance obligations.

3. Yen-Backed Stablecoins

With Japan establishing a solid regulatory framework for stablecoins, various projects are actively researching and experimenting with yen-backed stablecoins. In the following sections, we will explore key stablecoin projects in Japan to better understand the current state and characteristics of the yen-based stablecoin ecosystem.

3.1. JPYC: Prepaid Payment Instrument

Source: JPYC

JPYC is Japan's first digital asset issuer associated with the yen, established in January 2021. However, the current "JPYC" token is classified as a prepaid payment instrument rather than an electronic payment instrument under the amended Payment Services Act (PSA), meaning it is not legally recognized as a stablecoin. Therefore, JPYC is more like a prepaid coupon, with its use and application being limited. Specifically, while fiat currency can be converted into JPYC (top-up), converting JPYC back into fiat currency (withdrawal) is not allowed, which restricts its use value.

However, it is noteworthy that JPYC is actively working to issue a stablecoin compliant with the amended Payment Services Act (PSA). First, it plans to issue a stablecoin by obtaining a money transfer license. Its goal is to expand its use by exchanging with the deposit-backed digital currency Tochika issued by Hokugin Bank. Obtaining a money transfer license will enable JPYC to legally conduct money transfers, thereby enhancing its competitiveness in the market.

JPYC is also preparing to register as an Electronic Payment Instrument Service Provider (EPISP) to conduct stablecoin business. In the long term, the company aims to issue and operate a trust-type stablecoin based on Progmat's Progmat Coin, which will allow it to support various business activities related to cash or bank deposits. Additionally, JPYC's integration with the infrastructure of USDC issuer Circle is expected to provide significant advantages in expanding its business, particularly in cross-border payments.

3.2. Tochika: Deposit-Backed Digital Currency

Source: Hokkoku Bank

Tochika is Japan's first deposit-backed digital currency. It is launched in 2024 by Hokugin Bank, a local bank located in Ishikawa Prefecture.** Tochika is supported by bank deposits and provides digital tokens to account holders of the bank as a deposit service. This digital token allows users to transact and manage funds more conveniently.

Users can easily use Tochika through the Tochituka app, which is co-developed by Hokugin Bank and Suzu City. The entire process is very simple: users register their bank accounts in the app, top up their Tochituka balance, and then can use it as a payment method at participating merchants in Ishikawa Prefecture. After topping up, users can conveniently make purchases and payments.

Tochika stands out for its simplicity and the attractive commission rate of 0.5% offered to merchants. However, it also has some limitations. Currently, it is only available within Ishikawa Prefecture, and only one free withdrawal of topped-up Tochika is allowed per month—after which a fee of 110 Tochika (equivalent to 110 yen) will be charged. Additionally, Tochika operates on a licensed private blockchain developed by Digital Platformer, which limits its use within a closed ecosystem.

Looking ahead, Tochika plans to enhance and expand its services. These plans include connecting with deposit accounts from other financial institutions, expanding geographical coverage, and introducing remittance features between individuals. Despite some current limitations, Tochika sets a good example for deposit-backed digital currencies. With its ongoing development efforts, Tochika's future potential is undoubtedly worth watching.

3.3. GYEN: Offshore Stablecoin

Source: GMO Trust

GYEN is a yen-pegged stablecoin issued by GMO Trust, a subsidiary of Japan's GMO Internet Group based in New York. The stablecoin is regulated by the New York State Department of Financial Services and is listed on the Greenlist, which authorizes certain cryptocurrencies to be issued in New York. GYEN is the only yen stablecoin that is traded physically on cryptocurrency exchanges and is currently available for trading on Coinbase.

GYEN is issued at a 1:1 ratio, pegged to the Japanese yen, and is therefore classified as a trust-type stablecoin. However, since GYEN is not issued by a trust company within Japan's regulatory framework, it cannot be distributed within Japan or to Japanese residents, which limits its domestic use. Nevertheless, Japanese regulators are discussing the specific requirements and compliance measures for GYEN, as well as for stablecoins like USDC and USDT. Notably, GYEN may be incorporated into Japan's regulatory framework in the future.

4. Is Stablecoin Business Really Viable?

Despite more than a year since the legalization of stablecoins, the progress of various stablecoin projects in Japan remains limited. Unlicensed stablecoins like USDT or USDC are still scarce in the Japanese market. Currently, no company has completed the EPISP registration required to operate stablecoin-related businesses.

Furthermore, the regulatory requirement for stablecoin issuers to manage all reserves as demand deposits poses significant restrictions on business operations. Demand deposits are typically unprofitable as they can be withdrawn at any time with almost no return. Although the Bank of Japan recently raised interest rates from 0%, short-term rates remain low at 0.25%, still below many other countries. This low-interest environment may reduce the profitability of stablecoin businesses. As a result, there is a growing demand for more competitive stablecoins backed by different assets, such as Japanese government bonds.

Source: (Left Image) Circle & Soneium, (Right Image) DMM Crypto & Progmat

Nevertheless, expectations for the future remain high as major financial institutions and corporate groups in Japan are actively participating in the stablecoin business. This includes the three major banks: Mitsubishi UFJ Bank (MUFG), Mizuho Bank, and Sumitomo Mitsui Banking Corporation (SMBC), as well as corporations like Sony and DMM Group.

Amid these expectations, calls for regulators to reassess their policies are growing louder. Although the legal framework has been in place for some time, the lack of tangible results may increase questions and concerns about its effectiveness. In this context, it will be interesting to observe how Japan's stablecoin market evolves in the future.

5. Conclusion

Source: Financial Times, Refinitiv

In recent years, Japan has been working to address the challenges of yen depreciation and has implemented various strategies to enhance the competitiveness of its currency. Stablecoins are part of this broader effort aimed at improving the scalability and competitiveness of the yen. The adoption of advanced stablecoins is expected to pave the way for a range of global use cases that go beyond domestic applications, including cross-border payments. This could enable Japan to expand its influence in the global financial market.

Source: rwa.xyz

However, despite the establishment of a regulatory framework for stablecoins for over a year, the yen's share in the stablecoin market remains small. Instances of stablecoins are still rare, and no businesses related to stablecoins have registered for EPISP. The declining approval ratings of the Kishida Cabinet and the Liberal Democratic Party have also made it difficult to push for strong Web3-related policies. Nevertheless, establishing a regulatory framework is an important step forward. Although progress may be slow, the changes it brings are worth looking forward to.