Japan Seeks to Impose Legislation on Stablecoin Issuers

A representation of the virtual cryptocurrency Ethereum is seen among representations of other cryptocurrencies in this picture illustration taken on June 14, 2021. (Edgar Su/Illustration/Reuters)

Japan’s Financial Services Agency (FSA) is set to propose new legislation in 2022 that will restrict the issuance of stablecoins to banks and wire transfer companies, as part of its effort to cut potential risk from asset-backed stablecoins, such as Tether.

With the new legislation, companies engaged in stablecoin transactions, such as wallet providers, will be subject to certain rules like verifying users’ identities and reporting suspicious transactions as a way to prevent money laundering.

The news was first reported by Nikkei Asia on Dec. 7.

Stablecoins are a new class of cryptocurrencies designed to have a stable price relative to traditional currencies, or to a commodity such as gold, making them less volatile than other digital assets. They are typically used to facilitate trading, lending, or borrowing of other digital assets, predominantly on or through digital asset trading platforms and exchanges.

The digital coins are typically created or “minted” on the blockchain in exchange for fiat currency that an issuer receives from a user or third party.

FSA’s move follows a similar proposal from the U.S. Treasury Department, which urged Congress to enact legislation that would subject issuers of stablecoins to “a federal prudential framework” in a report (pdf) released by the President’s Working Group on Financial Markets (PWG) in early November.

The PWG, along with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, said in the report that “failure to act risks growth of payment stablecoins without adequate protection for users, the financial system, and the broader economy.”

The regulation is necessary to prevent “runs” on stablecoins, which can occur when consumers withdraw their assets en masse if they lose confidence in stablecoins for some reason, such as the use of reserve assets that could fall in price.

“Runs could spread contagiously from one stablecoin to another, or to other types of financial institutions that are believed to have a similar risk profile. Risks to the broader financial system could rapidly increase as well, especially in the absence of prudential standards,” it stated.

On Nov. 23, the head of the U.S. Senate banking committee sent letters to stablecoin issuers and exchanges urging them to be more transparent about how they are protecting consumers and investors.

Sen. Sherrod Brown (D-Ohio), chair of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, also sent letters to Coinbase, Gemini, Paxos, TrustToken, Binance, and Centre, stating that he was concerned some consumers and investors may not understand how stablecoins work and the potential risks associated with the digital currencies.

“The complex terms and conditions applicable to digital assets and stablecoins, as well as the need for reliable and resilient underlying networks, can make it difficult for investors and consumers to fully understand the details of how those assets function and their potential risks,” Brown wrote in his letter.

“I have significant concerns with the non-standardized terms applicable to redemption of particular stablecoins, how those terms differ from traditional assets, and how those terms may not be consistent across digital asset trading platforms.”

Katabella Roberts contributed to this report.