Laws and regulations are not keeping up with technology.

Stablecoin is a term that refers to cryptocurrencies whose prices are stable relative to legal currency. There are many types of stable coins linked to the US dollar, such as Tether [USDT], USDC, and MakerDAO [Dai]. However, the use of stable coins linked to the Japanese yen has not yet begun. This is because the direction of legislation is not clear. In this situation, the challenge of stable coins and “digital currency” utilizing the advantages of blockchain technology has begun.

The advantages of Stable Coin are convenience, innovation and distribution

First, let's confirm the merits of StableCoin. In short, Stablecoins are both cryptocurrency innovations and real-world usability. It can be expected to create an economic zone that is more convenient than conventional Internet banks and electronic money.

Cryptocurrency has the following properties as compared with the electronic money used conventionally.

[1] Instant payment. In many conventional settlement systems, settlement is processed over a plurality of steps, and there is a settlement risk [counterparty risk]. With cryptocurrencies, value can be exchanged in a single procedure, reducing administrative costs and eliminating settlement risks. This has great benefits for use in companies.
[2] Programmable. Smart contracts can be used to realize "programmable money". It will greatly contribute to the digitalization of the economy.
[3] Interoperability. It can be distributed over multiple users and multiple systems.

However, many cryptocurrencies have high price volatility and are difficult to use for settlement. That's where the stable price cryptocurrency, stablecoin, comes in.

Broadly divided into three types for compliance with laws and regulations

Stable coins in Japan have not yet started up in earnest, but various challenges continue to be made in response to legal regulations. There are the following:

[1] Stable coin Zen treated as "virtual currency" according to the Funds Settlement Act. WJPY where the test net started. A crypto garage L-JPY token using a regulated sandbox system. [Note: In the revised Funds Settlement Act, which was enacted in May 2019 and will be enforced in 2020, virtual currencies will be renamed to "cryptographic assets", but this article uses the current notation of "virtual currencies" ]
[2] Digital currency handled by the license of the money transfer business. The KDDI Group and Dee Caret are working on it.
[3] LCNEM check, which is treated as a prepaid payment method.

What they all have in common is that they are trying to leverage blockchain technology to realize innovative "digital money." However, the method of realization and the legal system to be used vary. At present, it can be said that the correct answer differs for each task to be tackled.

In this article, the term "Stablecoin" is used as a generic term. I refuse to mention stable coins in this article, including those that do not apply to "virtual currencies" under the Japanese Payment Services Act. Different approaches use different terms and expressions, such as "digital currency", "tokens", and "digital vouchers".

Legal regulations are a big hurdle

Stablecoins seem to have great potential, but there are significant hurdles to regulation before they can be exploited. The Japanese Money Settlement Act excludes "currency-denominated assets" from the definition of virtual currency. If the transfer of value of assets fully linked to the fiat currency is carried out as a business, a view that a separate license from the virtual currency exchange business such as banking, fund transfer business, or prepaid payment instrument issuing business will be required Is the mainstream.

At one time, a major Japanese bank was reportedly planning to issue stable coins treated as cryptocurrencies, but there have been no cases at this time. In this regard, there are observations that financial regulators are not willing to use cryptocurrencies for payment purposes.

Against this background, the virtual currency exchange business in Japan does not currently handle stable coins [except for Zen, described below]. For example, stable coins such as Tether [USDT] and USDC, which are cryptocurrencies whose prices are stabilized by backing the US dollar, and MakerDAO [Dai], which stabilizes prices with smart contracts backed by cryptocurrency assets, are US cryptocurrencies It is circulated at exchanges, but is not handled at any virtual currency exchange in Japan.

By the way, the Libra initiative launched by Facebook in 2019 has attracted the attention of financial authorities around the world, and the plan is floating. The big reason Libra was wary was that the currency authorities concerned that if a huge player named Facebook enters “ global stable coin linked to multi-currency basket '', there is a concern that it will affect international financial stability . On the other hand, conventional USD-linked stable coins are used as usual. The Libra concept and the stable coins discussed in this article are two different categories.

Category 1: Stable coin as virtual currency. Zen starts Phase 2, WJPY also experiment

From here on, I will take a look at some examples of stable coins or digital currencies in Japan. It can be roughly classified into three types. Category 1 assumes that it will be treated as "virtual currency" under the Funds Settlement Act. While immediate exchange and re-distribution on the blockchain become possible and the benefits of the cryptocurrencies described above can be enjoyed in a full set, there is a concern that the legal position is unclear. Category 2 is handled under the license of the "fund transfer business". Class 3 is treated as a "prepayment payment instrument".

As a pioneer of stablecoin in Japan, there is "Zen", which conducted a first phase demonstration experiment in July 2017 [presentation material]. It was issued as Ethereum's ERC20 token, and the price stabilization method adopted was "to keep placing buy orders of the same price at the virtual currency exchange". As a result, a soft peg, that is, a virtual currency that is not strictly linked but whose price is almost linked to the Japanese yen is realized.

In January 2020, the industry association Blockchain Promotion Association [BCCC] announced that it has launched the "Stablecoin Committee" and will proceed with Zen's second-phase efforts. Aiming to issue "JPYZ" linked to Japanese yen by consortium [corporate association]. The plan is to issue stable coins linked to the legal currencies of each country, and to use them as collateral to issue a global stable coin "ZENX" [ZEN NEXT] equipped with a price determination algorithm linked to the currency basket. This ZENX has properties similar to the Libra concept launched by Facebook, but is new in that it is a global stable coin composed of multiple stable coins.

The advantage of Zen is that it has the convenience of cryptocurrency as mentioned above. It can be circulated among individuals and companies, and can be settled immediately. On the other hand, uncertainty about the regulation of stable coins remains an issue. A notable feature of Zen is that it was listed on a virtual currency exchange for a test run in 2017. It has been announced as a so-called "Financial Services Agency White List" as a stock handled by the virtual currency exchange. Zen is the only stablecoin ever recognized in Japan.

WJPY without the issuer

WJPY is an attempt to create a cryptocurrency-backed Japanese yen-linked stable coin [announcement page, future plans]. Developed by the friendly CTO Tomoya Nagasawa. The major features of WJPY are [1] it is realized by smart contracts and eliminates the operation entity, and [2] it is realized by using the DeFi [distributed finance] ecosystem on Ethereum.

WJPY is created as an ERC20 token on the Ethereum blockchain. The algorithm that issues WJPY is deployed as a program [contract] that runs on the Ethereum blockchain, but it is designed to give up "issuer authority" and prevent a specific operating entity from intervening. This is based on the idea that cryptocurrencies with no issuer, such as Bitcoin, can be used more widely. It is not intended to be a cryptocurrency issued by any particular company or entity, but rather a public good that is not subject to any particular entity, such as Bitcoin.

In addition, a price-linked mechanism was built on top of the existing DeFi service. [1] MakerDAO's cryptocurrency-backed US dollar-linked stable coin Dai, [2] decentralized Oracle Chainlink to reflect the exchange rate between Japanese yen and US dollar, and [3] Uniswap for automatic token conversion. By combining these existing services called DeFi [distributed finance], we will form a cryptocurrency-backed stable coin that is linked to the Japanese yen. By utilizing existing services, we were able to build in a short time.

WJPY has an asset backed by Dai, a USD-linked stable coin, and the exchange rate between the dollar and the Japanese yen is entered into the blockchain as a decentralized oracle.

This WJPY is currently being verified on the test net. Version 2 has been designed, but will be released more than a month later. The major change in version 2 is the introduction of a mechanism that allows you to deposit [stake] WJPY and earn interest. There are a few things to prepare for the launch of the mainnet, which is expected to be as early as late 2020.

Exchange stable coins with side chains between businesses

Crypto Garage has demonstrated the use of a government-regulated sandbox system to "establish a professional payment platform that can simultaneously settle cryptocurrencies and fiat currencies."

Atomic exchange for Bitcoin's sidechain technology Liquid Network, a token “ L-BTC '' backed by Bitcoin, and a token “ JPY-Token '' that stabilizes prices by backing yen-denominated assets, targeting virtual currency exchange companies We worked on swapping. DMM Bitcoin, Coincheck, TAOTAO, and Zaif participated in the demonstration [related article].

The purpose of value exchange on the Liquid Network is to ensure liquidity between crypto exchanges. Although this is a different approach from retail coins, it is a remarkable effort because it demonstrates a technology that can instantly exchange the value of fiat-denominated tokens on blockchain technology.

Category 2: Fund transferer = Digital currency as currency exchange transaction. "This digital currency" speaks "smart contracts"

Dee Kallet, the operator of the virtual currency exchange, has been continually issuing a message saying, "I want to make a digital currency plafoform." Mr. Kazuhiro Tokita, President and Representative Director, said as follows. "The complexity of online transactions has increased the workload. We want to reduce this workload with digital currency." This means that the introduction of digital currency instant settlement on the blockchain can significantly reduce corporate operations such as payment confirmation and clearing.

A concrete example of the company's digital currency platform is the digital currency demonstration conducted in February 2020. KDDI, au Financial Holdings [auFH], Web Money [scheduled to change to au Payment in April] and Dee Caret cooperate to issue digital currency to be issued on the blockchain and use it at KDDI's in-store Initiatives [related articles]. It is meaningful to show a scheme that can be developed into a real business according to the current laws and regulations, not just an experiment. In this demonstration, the company uses the term "digital currency" instead of stablecoin.

What is noteworthy in the company's demonstration is that it used a license for the "fund transfer business" specified in the Payment Services Act. In the money transfer business, up to 1 million yen can be exchanged in the same manner as banks. In the demonstration, WebMoney, a money transfer company, becomes the issuer. On the other hand, the issuer of digital currency is KDDI, which deposits the funds that support the company into web money. WebMoney deposits and backs up the backing assets in banks and issues digital currencies. This digital currency is remitted from KDDI to an individual "A". "Mr. A" can be used for settlement at an experimental store in KDDI using the WebMoney service. The outline is that such a framework has been realized.

The demonstration also enables dynamic pricing by running smart contracts behind digital currencies. For example, if the temperature is lower than the day before, an automatic discount such as lowering the price of a hot beverage at a store is performed. He showed that smart contracts can be used to achieve "programmable money."

The smart contract system is implemented as a private version of Ethereum [Enterprise Ethereum] operated by Deaklet. "This digital currency can" speak "smart contracts," says Dekalet CTO Yosuke Shiraishi.

Digital currencies using the money transfer business have one limitation. The distribution of digital currency is limited to a kind of "closed economy" in the relationship between issuers [web money] and their users. If you want to expand your economy without creating boundaries, it is more convenient to use "virtual currencies", which have reversible circulation and have no upper limit on remittances. However, in order to launch a stable coin business as a “ virtual currency '' prescribed by the Funds Settlement Act, it is necessary to wait for legal development, and it is possible that a blank for several years will occur before launching the business, Looking. Therefore, it has begun to demonstrate digital currencies and programmable money using the scheme of the money transfer business that can be realized at the moment.

The company says, "I think separately about the part that is carried by cryptocurrencies that have reversible circulation and the part that is carried by programmable stable coins [according to the business law of the money transfer business]." Since he is a virtual currency exchange company, he is in a position to provide a bridge between digital currencies and cryptocurrencies [virtual currencies] that follow the money transfer business. "I am convinced that we can serve as a digital currency platform as a virtual currency exchange company," said Tokita.

Category 3: Prepaid Payment Means = Stable Coin as Digital Certificate

"LCNEM check" issued by startup company LCNEM is a kind of stable coin, a kind of digital cash voucher, that follows the framework of "prepaid payment means" defined by the Funds Settlement Act. "Prepaid payment means" is a framework used in cash vouchers, electronic money like Suica, and many payment apps.

Unlike schemes in the money transfer business, prepayment payment instruments cannot be converted into cash, but mainly assume a one-way flow of money that can be deposited and used. This is similar to transportation electronic money like Suica and many payment apps. However, the LCNEM check has a continual distribution, and it is possible for a person with a secondhand license to buy a digital voucher, like a voucher shop to buy a voucher.

LCNEM check is implemented as a token [mosaic] of the NEM blockchain. When the new blockchain Symbol, which was created as a successor to NEM, is launched, LCNEM check will also move to Symbol. Separately, it will be made available on the blockchain technology COSMOS.

"The biggest difference between StableCoin and e-money in the framework of the money transfer business is interoperability," said Yu Kimura, CEO of LCNEM. Stablecoins can transfer value across systems with multiple blockchains and multiple balance management functions. This is why it is attractive.

LCNEM plans to use StableCoin to design incentives for consortium blockchain services that utilize COSMOS technology. In addition, the direction is "to make it a platform where anyone can easily issue stable coins."

LCNEM check is a kind of digital voucher that can be purchased by individual users. Due to the nature of prepaid payment instruments, it cannot be used for very large transactions. Instead, they can be handed over between individuals, like gift certificates, and can be bought and sold with curio dealer licenses. For example, it can be applied to gift certificates and local currencies. For those who are looking for something "electronic money that works in a small economy," it is a solution that is available at the moment.

Legal schemes and implementation methods differ depending on the issue

Each of the initiatives we have seen so far is unique and difficult to compare side by side. Zen is considering issuing a corporate consortium based on its track record of being whitelisted. WJPY is an experimental approach to distributed stable coins. Dee Caret chose to build a track record of programmable money within a well-moved and well-moved money transfer business framework. The reason for choosing the money transfer business is that exchange transactions can be limited to 1 million yen, making it easy to use for corporate use. LCNEM intends to choose a “prepaid payment instrument” that is relatively less restrictive and easier for startups to use, and leverage it in the consortium blockchain.

At the moment, all of the players we've picked are working in different directions. If the direction of regulation of stable coins becomes clear, greater business opportunities may be created. I want to pay attention to the future efforts of each player.


Shane is an economics and mathematics double major with a keen eye for the financial world. His understanding of the current economic model of different countries is enlightening and he aims to bring that impressive knowledge and experience into his writing. He is currently exploring writing about different genres within the entertainment, business and cryptocurrency sphere and aims to bring diversity in his writing.

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