Although the regulatory framework for stablecoins has been in place for more than a year, the Japanese yen’s share of the stablecoin market remains small.
Author: Tiger Research Reports
Compiled by: 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 of stablecoins in Japan are limited. Currently, no stablecoin business has obtained EPISP registration, and no stablecoin is listed on local exchanges. This limits the use of stablecoins in the retail sector.
Nonetheless, the existence of a regulatory framework is significant as it provides greater certainty to businesses. We can foresee large Japanese banks and businesses such as Sony participating in the stablecoin market.
1. Introduction
The stablecoin market in Japan has achieved stability, largely due to the establishment of a clear regulatory framework. This growth has also been supported by government initiatives and policies of the ruling Liberal Democratic Party aimed at accelerating the Web3 industry. Japan's positive and open attitude stands in stark contrast to the uncertain or restrictive stance taken by many other countries towards stablecoins. As a result, there is optimism about the future of the Japanese Web3 market. This report examines stablecoin regulation in Japan and explores the potential impact of stablecoins backed by the yen.
2. Japan’s stablecoin market is expected to develop rapidly due to regulatory progress
In June 2022, Japan prepared for the revision of the Payment Services Act (PSA) to establish a regulatory framework for the issuance and brokerage of stablecoins. These revisions came into effect in June 2023. This marked the official start of the issuance of stablecoins. The revised law defines stablecoins in detail, clarifies issuing entities, and lists the licenses required to conduct stablecoin transactions.
2.1. Stablecoin definition
Under Japan’s revised Payment Services Act (PSA), stablecoins are classified as “Electronic Payment Instruments” (EPI), meaning they can be used to pay for goods or services to unspecified multiple recipients.
Source: Tiger Research
However, not all stablecoins are classified as such. Under Article 2, Paragraph 5, Item 1 of the revised Payment Services Act, only stablecoins that maintain their value based on fiat currencies are recognized as electronic payment instruments. This means that stablecoins backed by cryptocurrencies such as Bitcoin or Ethereum, such as MakerDAO’s DAI, are not classified as electronic payment instruments under the law. This distinction is an important feature of Japan’s regulatory framework.
2.2. Stablecoin Issuing Entity
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 can issue stablecoins with different characteristics. For example, they may differ in maximum transfer amounts and recipient restrictions.
Source: MUFG
Among these issuing entities, the most eye-catching 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 such as USDT and USDC.
Japanese regulators said that stablecoins issued by banks will be subject to certain restrictions. Banks must maintain the stability of the financial system under strict supervision, but stablecoins based on unlicensed permission are difficult to control and may conflict with this responsibility. Therefore, regulators emphasized that stablecoins issued by banks need to be carefully considered and may require further legislation.
Money transfer service providers also face some restrictions. The transfer amount per transaction is limited to 1 million yen, and it is unclear whether transfers can be made to recipients who have not undergone KYC (know your customer) verification. Therefore, stablecoins issued by money transfer service providers may require additional regulatory updates before this. Given these conditions, the most likely form of stablecoin will be a stablecoin issued by a trust company.
2.3. Stablecoin-related licenses
In Japan, entities engaged in stablecoin-related businesses must register as Electronic Payment Instrument Service Providers (EPISP) to obtain stablecoin-related licenses. This requirement was introduced in the Payment Services Act (PSA) revised in June 2023. Stablecoin-related businesses refer to activities such as buying, selling, exchanging, brokering or representing stablecoins. For example, virtual asset exchanges that list and support stablecoin transactions, 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. Stablecoins backed by the Japanese Yen
As Japan has established a good 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 better understand the current status and characteristics of the yen-based stablecoin ecosystem.
3.1. JPYC: Prepaid Payment Instrument
Source: JPYC
JPYC is Japan's first issuer of digital assets linked to the yen, established in January 2021. However, the current "JPYC" token is classified as a prepaid payment instrument rather than an electronic payment instrument under the revised Payment Services Act (PSA), which means that it is not legally recognized as a stablecoin. Therefore, JPYC is more like a prepaid coupon with limited use and application. Specifically, while it is possible to convert fiat currency into JPYC (recharge), it is not allowed to convert JPYC back into fiat currency (withdrawal), which limits its use value.
However, it is worth noting that JPYC is actively working to issue a stablecoin that complies with the revised Payment Services Act (PSA). First, it plans to issue a stablecoin by obtaining a money transmission license. The goal is to expand its use by exchanging it with Tochika, a deposit-backed digital currency issued by Japan's Hokkoku Bank. Obtaining a money transmission license will enable JPYC to legally conduct money transmission, thereby enhancing its competitiveness in the market.
JPYC is also preparing to register as an electronic payment institution (EPISP) to conduct stablecoin business. In the long term, 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 USDC issuer Circle’s infrastructure is expected to provide significant advantages in expanding its business, especially in cross-border payments.
3.2. Tochika: Digital Currency Supported by Deposits
Source: Hokkoku Bank
Tochika is Japan's first deposit-based digital currency. It was launched in 2024 by the Hokkoku Bank, a local bank in Ishikawa Prefecture. Tochika is backed by bank deposits and provides digital tokens to the bank's account holders as a deposit service. This digital token enables users to conduct transactions and manage funds more conveniently.
Users can easily use Tochika through the Tochituka app, which was jointly developed by Kitakyushu Bank and Suzuki City. The whole process is very simple: users register their bank account in the app, top up their Tochituka balance, and then can use it as a payment method at participating merchants in Ishikawa Prefecture. After topping up, users are able to make purchases and payments conveniently.
Tochika stands out for its simplicity and the attractive commission rate of 0.5% it offers to merchants. However, it also has some limitations. Currently, it is only available within Ishikawa Prefecture and allows only one free withdrawal of topped-up Tochika per month - after that a fee of 110 Tochika (equivalent to 110 yen) will be charged. In addition, Tochika runs on a permissioned private blockchain developed by Digital Platformer, which limits its use to a closed ecosystem.
Going forward, Tochika plans to enhance and expand its services. These plans include connecting deposit accounts at other financial institutions, expanding geographic coverage, and introducing person-to-person remittance capabilities. Despite some current limitations, Tochika sets a good example for deposit-backed digital currencies. As its development efforts continue, Tochika's future potential is certainly worth keeping an eye on.
3.3. GYEN: Offshore Stablecoin
Source: GMO Trust
GYEN is a yen-denominated stablecoin issued by GMO Trust, a subsidiary of Japan's GMO Internet Group, based in New York. The stablecoin is regulated by the New York State Department of Financial Services and is listed on the Greenlist, which authorizes certain cryptocurrencies to be issued in New York. GYEN is the only yen-denominated stablecoin that is physically traded 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, so it is classified as a trust-type stablecoin. However, since GYEN is not issued through a trust company within the Japanese regulatory system, it cannot be distributed within Japan or to Japanese residents, which limits its use in the country. Nevertheless, Japanese regulators are discussing specific requirements and compliance measures for GYEN, as well as stablecoins such as USDC and USDT. It is worth noting that GYEN may be included in Japan's regulatory framework in the future.
4. Is the stablecoin business really feasible?
Although more than a year has passed since stablecoins were legalized, the progress of various stablecoin projects in Japan is still limited. Permissionless stablecoins like USDT or USDC are still scarce in the Japanese market. No company has yet completed the EPISP registration required to operate stablecoin-related businesses.
Furthermore, regulations requiring stablecoin issuers to manage all reserves as demand deposits impose significant restrictions on business operations. Demand deposits are generally unprofitable as they can be withdrawn at any time with little to no return. Although the Bank of Japan recently raised its interest rate from 0%, short-term interest rates remain low at 0.25%, which is still lower than many other countries. This low interest rate may reduce the profitability of stablecoin business. Therefore, there is a growing demand for more competitive stablecoins backed by different assets, such as Japanese government bonds.
Source: (left) Circle & Soneium, (right) DMM Crypto & Progmat
Still, industry expectations for the future remain high, as major Japanese financial institutions and corporate groups are actively participating in the stablecoin business. This includes the three largest banks, such as Mitsubishi UFJ Bank (MUFG), Mizuho Bank, and Sumitomo Mitsui Banking Corporation (SMBC), as well as corporates like Sony and DMM Group.
Amid these expectations, calls are growing for regulators to reassess their policies. Although the legal framework has been in place for some time, questions and concerns about its effectiveness are likely to grow due to the lack of tangible results. In this context, it will be interesting to see how the Japanese stablecoin market evolves in the future.
5. Conclusion
Source: Financial Times, Refinitiv
In recent years, Japan has been grappling with the challenge of a weakening yen and has implemented various strategies to enhance the competitiveness of its currency. Stablecoins are part of this broader effort to enhance 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 beyond domestic applications, including cross-border payments. This could enable Japan to expand its influence in global financial markets.
Source: rwa.xyz
However, even though the regulatory framework for stablecoins has been in place for more than a year, the yen’s share of the stablecoin market remains small. Examples of stablecoins remain scarce, and no stablecoin-related businesses have yet to register with the EPISP. The decline in support for the Kishida Cabinet and the Liberal Democratic Party also makes it difficult to promote strong Web3-related policies. However, establishing a regulatory framework is an important step forward. Although progress may be slow, the changes it brings are worth looking forward to.
