Stablecoins—cryptocurrencies tied to legal tender, a commodity, or another underlying asset (for example, the dollar, such as the most popular Tether or USD Coin)—are the driving force behind the cryptocurrency market. The current market capitalization of stablecoins is over $124 billion, yet this space remains largely unregulated. Investors are most concerned about the actual coverage of tokens in their respective means of payment. In May 2022, the collapse of the Terra Luna project shook the cryptocurrency market. After it was revealed that the project was essentially insolvent and the issued tokens were not backed by dollars, the value of the algorithmic stablecoin UST plummeted, generating billions of dollars in losses worldwide. It's worth noting that even at the peak of its popularity, UST was a far smaller coin than USDT (Tether), which never underwent a thorough audit process, and the New York Times explicitly dubbed it "The Coin that Could Wreck Crypto."
A number of central banks around the world are exploring the possibility of issuing their own digital currency (unfortunately, our own National Bank of Poland has still not identified the purpose of such issuance), as we reported in a previous article . It is expected that issuing a virtual currency in an advanced economy will take at least another three to four years, and stablecoins will most likely fill the gap until then. The current market capitalization of stablecoins indicates that it is significant and constantly growing. What exactly are so-called stablecoins used for? The simplest answer, of course, is a method of settlement between cryptocurrency investors, where essentially all significant virtual assets can be purchased or sold based on their value expressed in USDT. There is also a known mechanism where investors from countries experiencing high inflation, or more broadly, significant currency devaluation, flock to dollar-based stablecoins, which serve as a store of value for their assets. More complex answers would likely pertain to commercial transactions, where the entire mess of bills of lading and the transfer of payments between parties by a shipping company could be replaced by essentially instant cryptocurrency transfers based on blockchain ledgers. Corporate payment settlements are a huge market that organically strives for optimization, process acceleration, and cost reduction. In my opinion, with further regulations and the increasing standardization of stablecoins (and, at a later stage, the issuance of virtual currencies), entrepreneurs will become the main driving force behind the adoption of this settlement method.
The European Union, with its Markets in Crypto Assets regulation, was the first jurisdiction in the world to present a set of requirements and a clear regulatory path for stablecoin issuance, and Japan is now joining the ranks. The cherry blossom and world's third-largest economy by Gross Domestic Product adopted a law covering stablecoins in June 2022, while in December, the Financial Services Agency lifted the ban on operating stablecoins originating from abroad. The Japanese approach seems aimed specifically at eliminating the greatest concerns surrounding this particular type of cryptocurrency: Does the token issuer have the funds to cover the cost? Are these funds readily available? Have user funds been misappropriated or riskily invested? Who oversees issuers and to what extent? While business-wise, token issuers may have much to criticize from regulators in the Land of the Rising Sun, it is worth noting that this law is by far the most far-reaching in terms of user security.
According to the latest regulations, only banks, trust companies, and payment institutions can engage in the issuance and issuance of stablecoins. Furthermore, fully 100% of the legal tender received in exchange for issued stablecoins must be held in a Japanese-based fund and can only be reinvested in Japanese bank deposits. Although at first glance the regulations seem extremely restrictive, especially for investors outside Japan, a solution in this case may be establishing cooperation with a Japanese fund or bank, thereby bypassing at least part of the complex licensing process. The regulations will also affect cryptocurrency exchanges; listing a stablecoin will require a license, and trading in foreign stablecoins will be subject to a one million yen (approximately PLN 28,000) transaction limit. This is particularly significant because the most common currencies, USDT and USDC, are subject to significant trading restrictions. To be free from the burden of this limit, the issuers of the mentioned tokens would have to issue a token through a Japanese entity, for example in cooperation with a bank or a trust fund, and consequently issue a new token, for example USDTJ, which would not be able to use the liquidity and position developed by its predecessor.
Given such significant limitations in terms of user fund management, the coverage of issued tokens, and strict licensing requirements, do Japanese stablecoins have any chance of success? Finding the golden mean between assured security and potential profitability is an extremely complex task, especially in the context of such a specific commodity as stablecoins. On the one hand, regulatory requirements and relatively low rates of return (based on bank deposits) may be discouraging for the crypto world, accustomed to high risk and only slightly lower rates of return. On the other hand, individual users, and especially corporations, who typically require a multitude of guarantees and assurances, may be attracted by the security offered, turning to the Japanese market, generating the economies of scale so needed by issuers.
This alert is for informational purposes only and does not constitute legal advice.
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