Stablecoin and Payment Service Act — Concerns when issuing stablecoins in Japan

There is no legal definition of stablecoin, but according to Financial Stability Board it is defined as “a cryptoasset designed to maintain a fixed value relative to another asset or basket of assets. There are no stablecoins linked to the Japanese Yen that is listed in Japanese cryptoasset exchanges as of January 2021 (although there are stablecoins designed to be linked to the Japanese Yen that are being handled as social experiments or on decentralized exchanges (DEXs) such as Uniswap).

Zooming out to the world, there are stablecoins designed to link to the US dollar, and these are handled by several exchanges, including Binance, a major crypto asset exchange.

3 methods stablecoins maintain its price

So, how does a stablecoin maintain its price?

We can roughly break this down to three ways.

(1) Fiat-Collateralized Stablecoins

Literally, this method aims to stabilize prices by using fiat as collateral and fixing the exchange ratio with legal tender. For example, Tether (USDT) and USD Coin (USDC) fall under this legal tender collateral type.

(2) Crypto-Collateralized Stablecoins

This method aims to stabilize prices by using cryptoassets as collateral instead of fiat. Since this method uses volatile cryptoassets as the collateral, it is often said that it is necessary to consider the volatility while holding the collateral. For example, Dai (DAI) issued by MakerDAO falls under the crypto asset collateralized type.

(3) Collateral Free stablecoins

Sometimes referred to as algorithmic, this method aims to stabilize prices by adjusting the supply of coins. For example, when the price overshoots, additional coins are issued to lower the price, and when the price plunges, coins are purchased from the market to reduce the supply and raise the price. For example, Basis Cash falls into this category.

As mentioned, as of January 2021, there are no stablecoins linked to the Japanese yen available on Japanese crypto exchanges. On the other hand, this does not mean that there are no running stablecoin projects aimed to be linked to the Japanese yen. If we expand our scope to projects such like local currencies, there are several stablecoin projects running at this point right now.

Definition of Stablecoin

In investigating stablecoins, it is important to understand the definition of cryptoassets as set forth in Article 2.5 of the Payment Service Act. Under the Payment Service Act, the definition of cryptoassets is set forth as follows

“The term “cryptoassets” as used in this Act means the following. However, that those which indicate the rights of electronic recording transfer as prescribed in Article 2, paragraph 3 of the Financial Instruments and Exchange Act shall be excluded.

(i) Property value that can be used to pay for the purchase or lease of goods or the provision of services to an unspecified person and that can be purchased and sold to an unspecified person as the counterparty (Japanese currency, foreign currency and currency-denominated assets are excluded if they are recorded electronically on electronic devices and other items. Same for the next issue.)

(ii) Property value that can be mutually exchanged with those listed in the preceding issue with an unspecified person as the counterparty and that can be transferred by using an electronic data processing system.”

On its website, the Bank of Japan (BOJ) interprets the above definition in terms of three properties.

1) Can be used for payment to unspecified parties and can be exchanged for legal tender (Japanese yen, U.S. dollars, etc.)

2) Electronically recorded and transferable

3) Not legal tender or assets denominated in legal tender (e.g., prepaid cards)

The above 3 properties of cryptoassets, which can be found on BOJ’s website, are very important properties when investigating stablecoins. From this property, we can imply that Fiat-Collateralized Stablecoins are not considered cryptoassets under Japanese law.

So how are Fiat-Collateralized Stablecoins treated under Japanese law? The legal status of stablecoins will vary depending on the specifications of the stablecoin.

For example, if the issuer issues stablecoins that are intended to be refunded in cash, it may be considered an “exchange transaction” under the Banking Act and the Payment Service Act and will be required to obtain a banking license or registration as a fund transfer service provider.

In addition, if the property is to be like digital money issued for a consideration, it may legally fall under the category of “prepaid means of payment”. In this case, basically refunds are not permitted.

Current Status of Stablecoin in Japan

Considering the current situation, if Fiat-Collateralized Stablecoin is issued in Japan, it is highly likely that regulators will determine that it is not a cryptoasset, due to the definition under the law. If transactions in such stablecoin fall under “exchange transactions,” then a banking license or registration as a fund transfer service provider would be required, and if they fall under “prepaid means of payment,” then notification to the ministry of finance may be required in some circumstances.

In addition, it depends on how the stablecoin’s price is stabilized. For a Fiat-Collateralized Stablecoin, it may be considered not a cryptoasset under Japan’s Payment Service Act. In the case of Crypto-Collateralized Stablecoins or Collateral Free types, the difficulty in stabilizing the price remains to be an issue. It is important to closely monitor the status of ongoing projects and legislation in accordance with actual conditions in order to determine the optimal method for issuing stablecoin in Japan.


■Ministry of Finance HP

■Bank of Japan HP

  • Q&A Introduction to Cryptoassets for Professionals — Legal, Accounting and Tax — Ken Kawai