Regulatory landscape in Japan for stablecoins and
related payment services¹

Evolving regulatory landscape in Japan

There is a growing interest in the issuance of and processing payments in stablecoins in the Japan market since the Japanese regulator took the lead globally to bring clarity to stablecoin regulations, effective as of June 2023, against the backdrop of the Japanese government previously banning the use and distribution of foreign-issued stablecoins within Japan as a response to the Terra collapse in 2022. Japan has big ambitions to nurture home-grown Web3 companies as well as attracting international market players to tap into growth potential of the mass adoption of stablecoins in Japan, which could in turn unlock growth potential in other Web3 areas, such as DeFi and GameFi.

Stablecoins: cash equivalents?

The use cases for stablecoins have historically been to transact or trade in other crypto currencies, but globally stablecoins are becoming increasingly adopted as cash equivalents for faster transaction speed and lower transaction fees for merchants, whereas stablecoins usually by their nature have less price volatility, compared to other crypto currencies not pegged² to fiat currencies. A recent example of stablecoins’ use case as cash equivalents in e-commerce is PayPal’s issuance of its own stablecoin, PayPal USD, an ERC-20 token pegged to USD issued on Ethereum by Paxos.

Two types of “stablecoins” in Japan

Under Japanese law, there is no specific definition of “stablecoins” per se, but there are mainly two categories of “stablecoins” that are defined as follows: (i) digital money-type stablecoins, which are issued at a price linked to the value of a legal fiat currency and promised to be redeemed in the same amount as the pegged fiat currency, which are regulated as electronic payment instruments (“Electronic Payment Instruments”) as defined in Article 2, para. 5 of the Payment Services Act; and (ii) crypto asset-type stablecoins, which are not digital money-type stablecoins and categorized as crypto assets under the Payment Services Act or as securities under the Financial Instrument and Exchange Act.

Digital money-type stablecoins in Japan may be issued by banks, fund transfer service providers and trust banks only, and those issuers are subject to different requirements / regulations depending on who the issuer is to ensure redemption and security. If banks issue digital money-type stablecoins as deposits, which are subject to prudential regulations, and such stablecoin holders are protected up to 10 million JPY by the deposit insurance in the same manner as conventional bank deposits. If fund transfer service providers issue digital money-type stablecoins as claims on outstanding obligations, they are required to secure the obligations through either money deposits with official depositaries, bank guarantees, or entrusted safe assets, such as bank deposits and government bonds. If trust banks issue digital money-type stablecoins, they are required to hold and manage all the trusted assets in the form of bank deposits, and such assets are required to stay in the licensed trust bank in Japan. In this case, digital money-type stablecoins are considered as trust beneficiary rights under the Trust Business Act. Using this method, foreign market players can issue stablecoins denominated in any legal fiat currencies without a separate license on the public permissionless Ethereum blockchain, provided that the issuer does not also solicit or engage in other intermediary activities with its own stablecoins in Japan. Key market players in Japan who are leading the charge via the new trust bank method are Mitsubishi UFJ Financial Group, Progmat, Datachain and TOKI, creating an ecosystem to enable domestic and international market players to issue their own digital money-type stablecoins without a separate license in Japan, who also plan to expand the stablecoins’ use cases to include multi-chain and cross-chain functionalities, such as NFT settlement, security token settlement, cross-chain lending and swapping, amongst others.

Intermediary activities in Japan, widely construed

As noted above, intermediaries of digital-money type stablecoins are still required to comply with various license and regulatory requirements in Japan. If any company’s activities constitute intermediary activities of digital money-type stablecoins under the FSA regulations, including: (i) buying, selling, exchanging, and intermediating stablecoins; (ii) providing custody of stablecoins; and (iii) transferring stablecoins on behalf of the issuer, they must register their business with the Financial Services Agency (“FSA”) and comply with the same regulatory requirements for intermediaries of crypto assets. Such regulatory requirements applying to intermediaries of crypto assets include: (i) complying with AML/CFT requirements; (ii) protecting the users’ rights by granting users rights to revoke transactions and receive compensation for any losses in case of bankruptcy of the issuer or the intermediary, or any technical failures; (iii) entering into contractual agreements with issuers that stipulate how liability would be shared between the issuer and the intermediary in case of any losses suffered by the users³. Intermediaries are also required to comply with code of conduct rules, including capital reserve requirements, segregating client funds from its treasury funds, storing the users’ crypto assets in an offline environment, providing adequate disclosures to the users, and complying with the travel rule - the transferer of crypto assets being required to pass on to the next institution the names and addresses of the sender and the recipient.

If any global crypto exchanges or other intermediaries wish to target residents in Japan, they are required to register with the FSA in Japan. One note of caution is that the FSA has construed this type of intermediary activities widely to include any promotional activities via websites in Japanese, even if the company may not be domiciled in Japan or Japan may not be the main market targeted by such company. The FSA has published the names of foreign crypto exchanges which received a warning letter from the FSA for conducting intermediary activities in breach of the regulations without registration with the FSA⁴.

JPY-denominated stablecoins

Growth of JPY-denominated stablecoins is a crucial strategic movement towards the mass adoption of Web3 in Japan, which alleviates the Japanese users from the foreign exchange risk of buying other foreign currency-denominated stablecoins with JPY. Circle-backed JPYC Inc., one of the first movers in JPY-denominated stablecoins in the industry initially issued JPYC as a “prepaid payment instrument for own business”, which can be used for retail shopping, similar to other retail electronic wallet services, such as PayPay in Japan. JPYC has since announced its partnership with Kyodai Remittance to provide JPYC, the JPY-denominated stablecoin as an Electronic Payment Instrument for fund transfer services.

Ongoing regulatory changes and challenges in Japan

Japan’s big step towards growing the Web3 industry and ecosystem in Japan includes its move to exempt taxes on non-realized gains on crypto assets issued by their own companies in December 2023. Unrealized gains on crypto assets issued by other companies still remain subject to taxes.

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¹ Tokyo International Law Office does not act for or represent the companies referred to in this newsletter, and all the information contained herein has been obtained from the public source, which is accurate as of February 27, 2024.
² Examples of stablecoins pegged to the US dollar include Tether (USDT) and USD Coin (USDC).
³ See Regulatory Framework for Crypto-assets and Stablecoins published by Financial Services Agency on September 14, 2022.
⁴ See Financial Services Agency’s website: To Crypto Asset Users: Financial Services Agency (fsa.go.jp) (Japanese only)

(Written by: Dai Iwasaki／Yumi Ahn／Ryo Yamada)

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*This newsletter is provided for educational and informational purposes only, and is not intended and should not be construed as legal or tax advice.
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