Japan Becomes the First Major Economies to Introduce a Legal Framework for Stablecoins

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A crucial part of the crypto industry, which led to multi-billion-dollar losses from a supposedly safe asset after TerraUSD’s implosion, thus the governments around the globe are now racing to regulate the framework for stablecoins. The new law states that stablecoins must be linked to another legal tender and guarantee holders the right to redeem them at face value. 

Terra USD, or UST, began slipping from its intended 1:1 peg to the US dollar in early May, as the mix of algorithms and trader incentives meant to safeguard the link failed to work as planned. These tokens have now combined a market value of about $161 million, led by Tether, Circles’ USD Coin, and Binance USD, according to the CoinGecko report. 

Japan’s parliament on Friday passed a bill clarifying the legal status of stablecoins, and defined them as digital money, which will come into effect from. By this, Japan has now become one of the first major economies to introduce a legal framework around stablecoins. 

The legal definition also further states that the stablecoins must be issued only by licensed banks, registered money transfers, and trust companies. Whereas the legislation does not address existing asset-backed stablecoins from overseas issuers like Tether, or Their algorithmic counterparts. 

The new legal framework will take effect in a year, as Japan’s Financial Services Agency has said it will introduce the regulations governing stablecoin issuers in the future months. Further, the Mitsubishi UFJ Trust and Banking Corp has said that it plans to issue its own stablecoin once the legal framework is in place, called Progmat Coin. They also added that the token will be fully backed by a yen that’s placed in a trust account, which will guarantee the redemption at face value. 

This crash has further caused a steep selloff across cryptocurrencies, and the Terra blockchain backing UST and its sister luna token effectively collapsed. This implosion has further affected the confidence of the other stablecoin too. Whereas the stablecoin’s circulation has dropped by more than $20 billion since the event. 

In response to Terra’s crash effects, the Terra community has planned to approve the new blockchain excluding the UST token. The stablecoin which runs on the old blockchain called Terra classic has almost lost its value.