Japan's Financial Regulator: Stablecoins Are Not Cryptocurrencies, Have to Be Regulated Individually

  • Japan's financial regulator, the Financial Services Agency (FSA), has said that stablecoins do not meet the criteria to be considered cryptocurrencies.
  • Japan's self-regulatory body, the Virtual Currency Exchange Association (JVCEA), is not authorized to regulate stablecoins.

Japan’s financial regulator, the Financial Services Agency (FSA), recently announced that it does not consider stablecoins to be cryptocurrencies. This, according to the nation’s current regulatory framework.

At present, there are two specific regulatory requirements, or laws, that crypto firms operating in Japan must follow. They include the nation’s Payment Services Act and the Fund Settlement Law.

Under Japan’s Fund Settlement Law, cryptocurrencies are considered a method of payment, or medium of exchange, and their users need not pay taxes. The Payment Services Act requires that local digital asset exchanges register with the FSA.

Stablecoins Are Not "Virtual Currencies"

According to the Payment Service Act, stablecoins do not meet the criteria, or fit the definition, of “virtual currencies.” An FSA representative told Bitcoin News: “In principle, stablecoins pegged by legal currencies do not fall into the category of ‘virtual currencies’ based on the Payment Services Act.”

Moreover, the FSA has found that all the different stablecoins in circulation have varying characteristics, and because of this, there is no uniform criteria that can be used to categorize them. This also means there’s no standard, or common rule that can be applied when determining how they should be legally registered.

The FSA spokesperson noted:

Due to [varying] characteristics [of stablecoins], it is not necessarily appropriate to suggest what those companies need to obtain or register before issuing stable coins.

Japan's Financial Service Agency

As CryptoGlobe reported on October 24th, Japan’s Virtual Currency Exchange Association (JVCEA) is now authorized by the FSA to operate as a self-regulatory body - which means that it can create regulatory guidelines for local crypto exchanges to follow, and also enforce penalties in cases of non-compliance.

The JVCEA Cannot Regulate Stablecoins

However, given that the FSA has now stated that stablecoins are not cryptocurrencies, the JVCEA will not be able to regulate them. Presumably, the nation’s financial regulator will now have to determine how to regulate each stablecoin individually.

As CryptoGlobe covered, one of the biggest problems facing digital currencies is that they are extremely volatile. Although the bitcoin (BTC) volatility index is at its lowest since December of 2016, and the prices of other major cryptos have also experienced relatively less volatility, many institutional investors might still be waiting on the sidelines as they may still view digital currencies as highly risky investments.

With the launch of many new stablecoins, would-be investors now have a way to enter the crypto market without having to experience the adverse effects of high volatility (to a certain extent).

Blockchain-Enabled Chinese Yuan Could Increase Governmental Oversight, Investor Argues

The Chinese government has been closely studying blockchain technology in order to determine whether the immutable distributed ledger can be used to streamline routine business processes.

However, Chinese authorities have expressed concerns regarding the use of cryptocurrencies in financing illicit activities and potentially disrupting the country’s $12 trillion economy by facilitating capital flight.

People’s Bank of China Considering Blockchain-Based Yuan

While China’s government has attempted to restrict transactions involving cryptocurrencies, the People’s Bank of China (PBoC) has reportedly been conducting research to determine the feasibility of launching a blockchain-based Chinese yuan (CNY) since 2014.

This, according to Dovey Wan, a founding partner at Primitive Ventures, a “market cycle agnostic” investment firm which has invested undisclosed amounts into various cryptoasset projects such as ZCash (ZEC) and DFINITY.

Wan, who earned her Masters in Information Systems from Carnegie Mellon University, wrote in a blog post published on CoinDesk on May 17, 2019 that the digital yuan, or Renminbi (RMB), initiative may potentially allow the Chinese government to exercise greater control over the nation’s local and international economy.

M0 Versus M2

As explained by Wan, digital fiat currencies allow financial institutions to more effectively create credit flows which increase M2, the broad money supply. Meanwhile, blockchain-based digital currencies impact a base currency measure, referred to as M0.

Blockchain-enabled digital currencies could potentially allow central banks to “bypass commercial banks” in order to directly control money creation and supply channels. This would structurally centralize the central financial institution’s power and role in formulating monetary policy, Wan argued.

Chinese Government Will Most Likely Use Permissioned Network

According to Wan, the PBoC is looking at various types of network design for a digital, blockchain-powered RMB. She believes that it will most likely be a permissioned network in which the nodes will be managed by major Chinese financial institutions, including the PBoC.

This indicates that transactions involving a digital yuan would only be seen by Chinese banks, and not the nation’s citizens.

Blockchain-Powered Currencies Enable “Better Coordination Paradigm”

One of the main reasons for using blockchain technology, Wan noted, is to take advantage of “a better coordination paradigm” when compared to “traditional currency supply management, which is heavily dependent on bookkeeping,” Wan wrote.

Moreover, Wan thinks blockchain’s immutable nature and private-key cryptography can prohibit users from entering fraudulent transactions and also prevent users from counterfeiting currency notes.

A blockchain-based yuan could also assist the Chinese government in more carefully monitoring the spending history of the nation's residents. This would allow the government to "accurately assess creditworthiness" and detect illegal activities such as money laundering and tax evasion, Wan noted.