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The upper house of Japan's parliament has just passed a landmark law clarifying the legal status of stablecoins, essentially defining them as digital money, per a Bloomberg report Friday.
The bill, initially prepared by Japan's Financial Services Agency (FSA), was first announced in December 2021 and passed Parliament in March before being approved by a majority during today’s House of Councilors plenary session.
Stablecoins are a type of cryptocurrency whose value is usually pegged to a fiat currency such as the U.S. dollar, the euro, or the pound, or commodities like gold. They're designed to stabilize the price of otherwise volatile cryptocurrencies like Bitcoin and can be also used as stores of value or units of account.
Under the new legislation, which will come into effect in 2023, stablecoins must be linked to the yen or another legal tender and guarantee holders the right to redeem them at face value.
The bill also says that stablecoins can only be issued by licensed banks, registered money transfer agents, and trust companies, with the FSA reporting that regulations governing stablecoin issuers are to be introduced in the coming months.
"We see Japan’s landmark law as a standard-setting example of smart policy," Dante Disparte, chief strategy officer and head of global policy at USDC-issuer Circle, told Decrypt. "It fosters innovation and economic development while providing guidelines to keep stakeholders safe. This is exactly the kind of leadership and balanced approach to stablecoin legislation we hope to see from other countries.”
Prior to today’s vote, Mitsubishi UFJ Trust and Banking Corp outlined plans to issue its own stablecoin, called Progmat Coin. The Tokyo-based bank said its stablecoin will be fully backed by yen reserves custodied in a trust account.
The new law, however, doesn’t address existing asset-backed stablecoins issued by overseas companies like Tether, or their algorithmic counterparts.
Stablecoins in the regulatory spotlight
Stablecoins came under increased scrutiny in recent weeks following the implosion of Terra’s UST algorithmic stablecoin and its sister LUNA token, after UST—once the industry’s largest decentralized stablecoin—decoupled from its intended 1-to-1 peg to the dollar, stripping investors off billions of dollars.
The collapse of Terra also sent shockwaves through global crypto markets and heightened regulatory concerns, with the U.S. Treasury Secretary Janet Yellen pointing to UST as an example of "rapidly growing risks."
She later clarified that cryptocurrencies, on the whole, don't pose any systemic risk to the financial system.
The U.S. Securities and Exchange Commission (SEC) Commissioner Hester Peirce was another high-ranked regulator to join the debate, stating that she wants to see clear regulatory rules about the use of cryptocurrencies and stablecoins.
Peirce also suggested that last month’s events surrounding Terra are “likely to encourage” Congress to weigh in and “work more quickly on it."
Meanwhile, the Bank of England proposed earlier this week that it should have the ability to intervene to oversee stablecoin issuers should it decide that “its operation may threaten the stability of the UK financial system or have significant consequences for businesses or other interests.”