In June this year, Japan introduced a legal framework to regulate the stablecoins, but it did not address existing algorithmic or asset-backed stablecoins.
As per a document published by the Financial Service Agency (FSA) on December 7, the regulator recommends restricting the algorithmic backing of stablecoins. FSA is a Japanese government agency and an integrated financial regulator responsible for overseeing the banking, securities, exchange, and insurance sectors to ensure Japan’s financial system’s stability.
The organization’s recommendation was previously supported by the country’s vice minister for international affairs, Tomoko Amaya, in his speech on crypto assets at an event organized by the Official Monetary and Financial Institutions Forum (OMFIF). The OMFIF is an independent think tank organization concerned with central banking, economic policy, and public investment.
In his speech, Amaya focussed on Japan’s regulatory framework and emphasized financial stability, user protection, and anti-money laundering/ combating financial terrorism (AML/CFT). The event occurred in November, but the regulator released the document today.
FSA’s document is 29 pages long and summarizes the nation’s approach to regulate crypto. It is formed by several significant legislations like the Banking Act, the Payment Services Act, and the Financial Instruments and Exchange Act.
The Japanese regulatory environment differentiates between the “crypto assets” and “digital-money type stablecoins” and has different approaches towards respective regulations. However, there isn’t a specific deadline for future legislation either in the document or in the speech of Amaya.
In the document’s “way forward” section, the vice minister states the organization’s recommendations made in October this year and quotes the same. The quote is as follows:
“The proposed review states that ‘global stablecoins must not use algorithms in stabilizing their value’ and strengthens the ensuring of redemption rights.”
Sources expect the present recommendations to be considered by the regulators and lawmakers. The current stablecoin legislation, passed by the parliament in June and will become law next year, doesn’t cover algorithm-backed stablecoins, creating a significant need for lawmakers to turn to FSA’s recommendations.
The current stablecoin regulation was framed citing the decline of the cryptocurrency markets, triggered by the collapse of Terra tokens, and the algorithmic stablecoin Terra USD (UST) lost its 1:1 value to the U.S. dollar in early May.
However, Japan is not the only country committed to regulating the stablecoin. Earlier this year, several countries expressed their plans to regulate stablecoin, including Singapore, the United Kingdom, the United States, etc.