Author:Tiger Research Reports

 Translation: Compiled by: Shenchao TechFlow

 Summary of Key Points:

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

• 
  However, the application scenarios 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.

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  Nevertheless, the existence of a regulatory framework is significant as it provides greater certainty for businesses. We can anticipate that large banks and companies 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 policies aimed at accelerating the Web3 industry. Japan's actively open attitude stands in stark contrast to the uncertain or restrictive positions taken by many other countries regarding stablecoins. As a result, there is a sense of optimism about the future of Japan's Web3 market. This report examines the regulation of stablecoins in Japan and explores the potential impact of stablecoins backed by the yen.

2. The stablecoin market in Japan is expected to grow rapidly due to regulatory advancements.

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

 2.1. Definition of Stablecoin

According to Japan's revised Payment Services Act (PSA), stablecoins are classified as "Electronic Payment Instruments" (EPI), which means 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 revised 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. Issuers of Stablecoins

Japan's revised Payment Services Act (PSA) clarifies 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 may issue stablecoins with different characteristics. For instance, there may be variations 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 regulatory authorities have stated 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 the issuance of stablecoins by banks needs to be carefully considered and may require further legislation.

Fund transfer service providers also face certain 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 fund 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 activities must register aselectronic paymentinstrument service providers (EPISP) to obtain a stablecoin-related license. This requirement was introduced in the revised Payment Services Act (PSA) in June 2023. Stablecoin-related activities refer to actions such as buying, selling, exchanging, brokering, or managing stablecoins on behalf of others. For instance, 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

As Japan has established 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 gain a better understanding of the current state and characteristics of the yen-based stablecoin ecosystem.

 3.1. JPYC: Prepaid Payment Tool

 Source: JPYC

JPYC is Japan's first digital asset issuer linked to the yen, established in January 2021. However, the current "JPYC" token is classified as a prepaid payment tool rather than an electronic payment tool under the revised Payment Services Act (PSA), which means it is not legally recognized as a stablecoin. Therefore, JPYC is more like a prepaid coupon, with its use and application being restricted. Specifically, while it is possible to convert fiat currency into JPYC (top-up), converting JPYC back into fiat currency (withdrawal) is not allowed, which limits its utility.

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

JPYC is still preparing to register as an electronic payment institution (EPISP) to engage in stablecoin business. In the long run, the company aims to issue and operate a trust-based stablecoin based on Progmat's Progmat Coin, which will enable it to support various commercial 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-baseddigital currency. It was launched in 2024 by the local bank Hokuriku Bank, located in Ishikawa Prefecture. Tochika is backed by bank deposits and provides digital tokens to account holders as a deposit service. This digital token allows users to conduct transactions and manage funds more conveniently.

Users can easily use Tochika through the Tochituka app, which was jointly 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 recharging, users can conveniently make purchases and payments.

Tochika stands out due to its simplicity and the attractive commission rate of 0.5% offered to merchants. However, it also has some limitations. Currently, it is only available in Ishikawa Prefecture, and free withdrawals of recharged Tochika are allowed only once a month—after that, 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 restricts 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, broadening geographical coverage, and introducing a remittance feature between individuals. Despite some current limitations, Tochika has set 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 the Japanese GMO Internet Group based in New York. This stablecoin is regulated by the New York State Department of Financial Services and is included in the Greenlist, which authorizes certain cryptocurrencies to be issued in New York. GYEN is the only yen stablecoin that allows for physical trading on cryptocurrency exchanges and is currently available for trading on Coinbase.

GYEN is issued at a 1:1 ratio and is pegged to the Japanese yen, thus it is classified as a trust-based stablecoin. However, since GYEN is not issued by a trust company within the Japanese 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. It is worth noting that GYEN may be incorporated into Japan's regulatory framework in the future.

 4. Is the stablecoin business really viable?

Despite the fact that it has been over a year since the legalization of stablecoins, the progress of various stablecoin projects in Japan remains limited. Permissionless 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.

In addition, the regulatory requirement for stablecoin issuers to manage all reserves as demand deposits has significantly restricted 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%, which is still below many other countries. This low interest rate may reduce the profitability of stablecoin businesses. As a result, there is a growing market 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, the industry remains highly optimistic about the future, as major financial institutions and corporate groups in Japan are actively engaging in the stablecoin business. This includes the three major banks, such as Mitsubishi UFJ Bank (MUFG), Mizuho Bank, and Sumitomo Mitsui Banking Corporation (SMBC), as well as companies like Sony and DMM Group.

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

 5. Conclusion

Source: Financial Times, Refinitiv

In recent years, Japan has been working to address the challenges posed by the depreciation of the yen 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 markets.

 Source: rwa.xyz

However, despite the regulatory framework for stablecoins being established for over a year, the share of the yen in the stablecoin market remains quite small. Instances of stablecoins are still rare, and no companies related to stablecoins have yet registered for EPISP. The declining approval ratings of the Kishida Cabinet and the Liberal Democratic Party have also made it difficult to promote 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.