Japan takes the lead with stablecoin regulation

Last month's collapse of the algorithmic stablecoin TerraUSD thrust stablecoins into the worldwide spotlight and Japan became one of the first large economies to build a legal framework to regulate them.

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, as per the new regulations in Japan. Existing asset-backed stablecoins from offshore issuers like Tether, as well as their algorithmic counterparts, are not covered by the Act. It is interesting to note that 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 CoinMarketCap, such crypto tokens have a combined market value of around $161 billion, led by Tether, Circle's USD Coin, and Binance USD.

The new legal framework will be implemented in a year. The Financial Services Agency of Japan has stated that it will establish regulations governing stablecoin issuers in the next months.

The Terra Crash

TerraUSD, or UST, began to wander from its planned 1:1 peg to the US dollar in early May when a combination of trading incentives and algorithms designed to maintain the connection failed to perform as expected. 

The issue precipitated a widespread sell-off of cryptocurrencies, and the Terra blockchain, which supported UST and its sister currency Terra Luna, was wiped out.

The implosion undermined confidence in other stablecoins, with Tether at one time deviating from its dollar peg. Since the crash, the circulation of Tether has decreased by more than $20 billion.

The Terra community approved a plan to construct a new blockchain that excludes the UST token at the end of May. Terra Classic continues to operate on the old blockchain and has lost nearly all of its value.

Expert’s take

Sharat Chandra, crypto expert and vice president of Research and Strategy at EarthID told Business Today, "India should take a leaf out of Japan's stablecoin regulation bill and incorporate elements addressing investor protection and financial stability risks.”

He added, “UK Treasury too is keen on including stablecoins as part of their payments regulation. Payment giants like Visa and Mastercard use stablecoins to bring settlement efficiency to their networks. We can't afford to dilly-dally on this new form of digital money powering the next wave of payments revolution.”

He concluded by saying, “Indian regulators should adopt a forward-looking approach and embrace stablecoins to lead the country in payments innovation and globalise India's payments success story.”