Stablecoins are digital currencies linked to an underlying asset, such as fiat money, gold, or other assets. They help to maintain price stability by linking to external assets such as fiat currency. They’re the second generation of cryptocurrencies, designed to keep the value stable in comparison to official currencies. However, these tokens have come under scrutiny by regulators especially due to the TerraUSD collapse.
As reported today, Japan became the first country to enact legislation regulating stablecoins after TerraUSD (USDT) dropped, prompting other major economies worldwide to consider regulation.
Japan defines stablecoins as digital money
The Japanese Parliament passed a stablecoin bill into law, recognizing them as digital money. This makes Japan the first major economy to establish a legal framework for cryptocurrencies. According to the new legislation, they must be denominated in yen or another legal currency and must guarantee redeemability at face value.
Japan is among the most crypto-friendly countries, with growing adoption by retail and institutional investors. Beginning next year, the new law will be in force. Japan is attempting to shield investors from the volatile cryptocurrency market as cryptocurrency use expands in the country.
The collapse of UST and LUNA triggered a major sell-off across the crypto market. The crash resulted in the collapse of Tether’s peg to the US dollar. Investors lost billions of dollars because of it, and governments must now pass rules regulating them.
Japan’s Financial Services Agency is expected to release rules and regulations for stablecoin creators within the next few months that would allow them to approve only authorized banks and businesses. Earlier last year July, FSA called for additional regulation on them.
There are a number of benefits that they provide to users. Firstly, they offer a way to hedge against the volatility of other cryptocurrencies. This is because their value is pegged to another asset, such as the US dollar. Secondly, they can be used to make payments. This is because they are less likely to fluctuate in value than other cryptocurrencies. Thirdly, they can be used to store value. This is because they have the potential to retain their value over time.
The legal definition entails that stablecoins can only be created by licensed banks, registered money transfer businesses, and trust companies. The rules don’t address existing asset-backed stablecoins issued by foreign firms like Tether or their algorithmic counterparts. In Japan, crypto exchanges do not list stablecoins.
Stablecoins to bring more institutional money into the market
The new law is seen as a way to attract more institutional investors into the cryptocurrency market. This is because it provides more clarity and certainty around the regulatory environment. In addition, the new law will help to protect investors from volatility. This is because they are pegged to an external asset, such as the US dollar.
Mitsubishi UFJ Trust and Banking Corp. is preparing to launch its proprietary currency, Progmat Coin after the legislation goes into effect next year. The Progmat Coin will be entirely backed by yen and kept in a trust account. It will also assure repayment of full value.
The passage of this new law is a positive development for the cryptocurrency industry. It shows that the Japanese government is willing to work with the growing digital currency sector. However, government around the world looks to pass regulations surrounding stablecoins to protect investors following the LUNA collapse.
The U.S. and the United Kingdom are both working hard on establishing a stablecoin regulation. Secretary Yellen of the Treasury has called for legislation regulating stablecoins in the United States. Meanwhile, the United Kingdom is currently considering regulating them for domestic use. According to a Treasury Department document, digital assets are likely to be regulated and recognized as legal tender in the country.