Last month’s collapse of the TerraUSD token thrust stablecoins into the worldwide spotlight, and Japan became one of the first large economies to build a legal framework around them.
With these move, Japan is no longer just the land of rising sun, it is also the land of rising cryptocurrency regulations.
On Friday, Japan’s parliament enacted a bill clarifying the legal status of stablecoins, essentially establishing them as digital money. According to the new law, stablecoins must be tied to the yen or another legal money and guarantee holders the ability to redeem them at face value.
Stablecoins can only be issued by licenced banks, registered money transfer agents, and trust businesses, according to the legal definition. Existing asset-backed stablecoins from offshore issuers like Tether, as well as their algorithmic counterparts, are not covered by the Act. Stablecoins are not listed on any Japanese cryptocurrency exchanges.
After the implosion of TerraUSD, which resulted in multibillion-dollar losses from a theoretically safe asset, governments around the world are scrambling to create guardrails around stablecoins, a critical aspect of the cryptocurrency business. According to data gathered by CoinGecko, such tokens have a combined market value of around $161 billion, led by Tether, Circle’s USD Coin, and Binance USD.
Japan yet to regulate stablecoin issuers
In a year, the new legal framework will take effect. In the coming months, Japan’s Financial Services Agency plans to create laws controlling stablecoin issuers.
Once the legal structure is in place, Mitsubishi UFJ Trust and Banking Corp. aims to issue its own stablecoin, named Progmat Coin. The bank, a subsidiary of Mitsubishi UFJ Financial Group Inc., stated that the token will be fully backed by yen held in a trust account and that redemption at face value will be guaranteed.
When the combination of algorithms and trader rewards meant to safeguard the link failed to work as planned in early May, TerraUSD, or UST, began slipping from its intended 1-to-1 peg to the US dollar. The crisis triggered a massive selloff across all cryptocurrencies, ultimately bringing the Terra blockchain, which underpins UST and its sister currency Luna, to a halt.
The collapse harmed faith in other stablecoins as well, with Tether sliding from its dollar peg at one point. Since the event, the value of Tether has decreased by more than $20 billion.
The Terra community voted in late May to support a plan to create a new blockchain that does not include the UST token. The stablecoin is still based on the outdated Terra Classic network and has lost nearly all of its value.