The Japanese government has taken a landmark step in the world of digital finance by passing its first comprehensive legislation governing stablecoins. Effective June 1, 2023, amendments to Japan’s Funds Settlement Law, overseen by the Financial Services Agency (FSA), now permit the legal issuance of fiat-backed stablecoins within the country. This regulatory shift positions Japan as a forward-thinking player in the global cryptocurrency landscape and signals a growing commitment to balancing innovation with financial stability.
What Are Stablecoins?
As blockchain technology advances, cryptocurrencies like Bitcoin have gained popularity due to their decentralized nature, transparent ledger systems, and fixed supply models. However, their extreme price volatility presents significant challenges for everyday use. For instance, Bitcoin surged from under $5,000 in March 2020 to over $63,000 by April 2021—an increase of more than 1,200%—only to lose nearly half its value within two months. According to Investopedia, it's common for crypto assets to swing over 10% in just hours.
This unpredictability undermines their utility as reliable mediums of exchange. To address this issue, stablecoins were developed—digital currencies designed to maintain a stable value by being pegged to external assets such as fiat money or commodities.
There are primarily two categories of stablecoins: collateralized and algorithmic (non-collateralized).
Collateralized Stablecoins
These stablecoins derive their value from reserves held in real-world assets.
1. Fiat-Collateralized Stablecoins
Fiat-backed stablecoins are tied to traditional currencies like the US dollar or Japanese yen. For every unit issued, the issuing entity must hold an equivalent amount—or more—of the corresponding fiat currency in reserve. This ensures redemption at face value and maintains trust in the system.
Two of the most widely used examples are USDT (Tether) and USDC (USD Coin). USDT is pegged to the US dollar and operates across multiple blockchains. USDC also maintains a 1:1 ratio with the USD and undergoes regular audits by one of the world's top five accounting firms to verify reserve holdings, enhancing transparency and accountability.
👉 Discover how regulated digital assets are shaping the future of finance.
2. Crypto-Collateralized Stablecoins
In this model, users lock up cryptocurrency—such as Ether (ETH)—as collateral in smart contracts to mint stablecoins. These contracts use algorithmic mechanisms to assess collateral value and ensure stability.
A prime example is DAI, issued by MakerDAO. To generate DAI, users must deposit ETH worth 1.5 to 2 times the DAI amount they wish to borrow—maintaining a collateralization ratio of 150% to 200%. Unlike centralized models, this approach relies entirely on decentralized code rather than institutional intermediaries, offering greater transparency but also exposing users to crypto market swings.
Algorithmic (Non-Collateralized) Stablecoins
These stablecoins do not rely on asset reserves. Instead, they use algorithms to automatically adjust supply based on demand: increasing supply when prices rise above par and reducing it when prices fall.
While innovative, these systems can be fragile during market stress. Without underlying collateral, confidence in the coin’s value is purely psychological and algorithmic. The collapse of TerraUSD (UST) in May 2022 demonstrated the risks—once valued at $1, it plummeted to less than $0.30 within days due to a failed de-peg mechanism.
Japan’s Regulatory Evolution in Digital Finance
Japan has long maintained a progressive yet cautious stance toward digital assets. In the early 2010s, the collapse of Mt. Gox—one of the world’s largest Bitcoin exchanges at the time—highlighted critical vulnerabilities in unregulated crypto platforms. Following repeated hacks and internal fraud, the exchange filed for bankruptcy in 2014, losing hundreds of millions of dollars’ worth of customer funds.
This incident prompted regulatory reform. By 2016, Japan updated its Payment Services Act to formally define crypto assets as “property value that can be used for payment to unspecified persons, transferred via electronic systems, and not denominated in legal tender.” This move brought crypto exchanges under the supervision of the FSA, imposing requirements on capital adequacy, anti-money laundering (AML), customer fund segregation, and public disclosure.
The same year, the Funds Settlement Law was introduced, extending oversight to prepaid instruments like gift cards while setting lighter regulatory burdens for low-risk digital payment tools.
Despite these efforts, another major breach occurred in 2018 when Coincheck, Japan’s second-largest exchange at the time, suffered a hack resulting in the theft of approximately $533 million worth of NEM tokens. The stolen funds were quickly laundered, raising serious concerns about security practices.
In response, the FSA tightened regulations significantly:
- Required all exchanges to conduct internal audits using a standardized 43-point checklist.
- Restricted business operations for non-compliant platforms.
- Raised licensing standards, making exchange approvals rare and highly competitive.
These measures laid the foundation for stronger investor protection and market integrity.
The 2023 Stablecoin Law: A New Era Begins
On June 1, 2023, Japan’s upper house passed revised amendments to the Funds Settlement Law, marking a pivotal moment in its digital asset strategy. Under the new rules:
- Only licensed banks, registered fund transfer agencies, and qualified trust companies may issue fiat-backed stablecoins.
- Each issued stablecoin must be fully backed by reserves in Japanese yen or other legal tender.
- Holders have the right to redeem stablecoins at face value.
- All transactions require user identification under strict know-your-customer (KYC) protocols.
- Stablecoins can be used for foreign exchange transactions, subject to detailed inflow and outflow regulations.
👉 Learn how compliant digital asset platforms are driving innovation worldwide.
This framework ensures that stablecoin issuance remains secure, transparent, and integrated within Japan’s existing financial infrastructure.
Implications for Japan’s Financial Future
With this legislation, Japan aims to become a global hub for stablecoin innovation. Major financial institutions like Mitsubishi UFJ Financial Group have expressed optimism, suggesting Japan could emerge as a leading center for regulated stablecoin development.
Foreign-licensed digital asset exchanges operating in Japan will now be able to offer compliant stablecoin services, enabling smoother cross-border investments and payments. Domestic investors gain access to more efficient tools for portfolio diversification and international transactions.
However, challenges remain. Ensuring reserve transparency, preventing systemic risk from over-issuance, and maintaining interoperability across blockchain networks will be critical to long-term success.
Frequently Asked Questions (FAQ)
Q: What types of stablecoins are allowed under Japan’s new law?
A: Only fiat-collateralized stablecoins—those backed by yen or other legal currencies—are permitted. Crypto-collateralized and algorithmic stablecoins are not included under current regulations.
Q: Who can issue stablecoins in Japan?
A: Issuance is restricted to licensed banks, registered fund transfer service providers, and specific trust companies approved by the Financial Services Agency.
Q: Can individuals redeem stablecoins for cash?
A: Yes. The law guarantees holders the right to redeem stablecoins at face value through authorized issuers.
Q: Are foreign stablecoins like USDT or USDC legal in Japan?
A: Foreign-issued stablecoins can be traded on licensed exchanges but cannot be issued within Japan unless the issuer meets local regulatory requirements.
Q: How does this law protect consumers?
A: Through mandatory reserve backing, KYC/AML compliance, audit requirements, and full redemption rights—reducing counterparty and fraud risks.
Q: Does this law support blockchain innovation?
A: Yes. By creating a clear legal pathway for stablecoin use in payments and investments, Japan fosters innovation while maintaining financial stability.
The passage of Japan’s first stablecoin legislation represents a balanced fusion of innovation and regulation. As global interest in digital currencies grows, Japan’s approach offers a model for responsible adoption—one where trust, transparency, and technological progress go hand in hand.
👉 Explore secure and regulated ways to engage with digital assets today.