Will it be a year of breakthrough for stablecoins? What is the big hurdle to overcome? – Attorney Ken Kawai[2024 Special Feature]

In June 2023, the revised Payment Services Act came into effect, and the stablecoin business in Japan began in earnest. Multiple stablecoins are expected to appear in 2024. Mr. Kawai, who has been involved in crypto assets and blockchain from an early stage, is one of the people who has been working on regulating stable coins as a member of the JCBA Stable Coin Subcommittee and the Liberal Democratic Party’s web3PT. We spoke to Mr. Kawai, who says that although he is excited about the potential of stablecoins, there are still hurdles remaining.

Major companies supported by technology enter Web3

–About a year ago, the Liberal Democratic Party web3PT issued an interim proposal, a white paper was published in April 2023, and the revised Payment Services Act came into effect in June. It must have been a very busy year, with the “DAO Rulemaking Hackathon” held at the end of the year.

Kawai:2023 was a year of many movements. The biggest move was, of course, the start of stablecoin regulations, but there was also an increase in the number of businesses entering the Web3 business. As many major companies, including game companies and telecommunications companies, have entered the Web3 business, I think the base has expanded and recognition has expanded. For example, in 2023, the NFT market was in a slump, but an increasing number of businesses entered the market, believing that services using NFT would be suitable for Japan. Along with this, the need for payments using crypto assets and stable coins is emerging. In addition, in terms of policy, Web3 has become an area of ​​industrial promotion, and there are many opportunities for discussions with the government and ministries.

—When do you think the number of major companies entering Web3 started to increase?

Kawai:I think it will start to increase from the second half of 2022. There are probably two factors: government support and technological advances. In terms of chains, various technologies related to Layer 2 have appeared. In addition, easy-to-use wallets, so-called “non-custodial wallets,” have become available, and an environment has been created in which it is possible to provide Web3 business without having to keep user assets.

──Do you think non-custodial wallets will be able to clear up the issue of “applicability of exchange business”, that is, the issue that businesses conducting Web3 business may be considered as exchange businesses?

Kawai:The key points are what the specific specifications of the wallet are and what kind of services it provides. Services that store crypto assets and stable coins are naturally subject to regulation, but handling NFTs is not. What matters is who controls crypto assets and stablecoins. If a business operator can transfer tokens, or if the tokens are leaked when the business operator is hacked, then the business operator is in control. Some people talk only about the location of the private key, and some say that it is not custodial because it is managed by a smart contract, but the watershed lies in who is in control.

There are services that connect crypto asset trading with DEXs (decentralized exchanges) through APIs, but this area is still a gray area. The buying, selling, and exchanging of crypto assets is subject to intermediary regulations, but the industry and authorities are continuing to discuss the extent to which it is acceptable to not fall under the category of intermediaries. The watershed is quite delicate, and decisions are made on a case-by-case basis, but I would like to see clearer guidelines from industry groups.

Expected cross-border payments and major challenges

──A big topic in 2024 is the emergence of stable coins. What are the current challenges that remain?

Kawai:The most difficult thing is handling stable coins issued in foreign countries. Simply put, in order to handle USD Coin (USDC) in Japan, an intermediary, more precisely an electronic payment method transaction company, a so-called electronic payment transaction company, must also prepare a reserve (purchase reserve fund). There are regulations such as a transaction limit of 1 million yen per transaction. After all, a stablecoin business can survive without a lot of stablecoins. This is a business where dominant stablecoins take a significant share, and dollar-linked stablecoins are probably already settled.

Despite the fact that stablecoins have the greatest appeal of being able to be used cross-border, it is difficult to handle dollar-linked stablecoins issued overseas in Japan, even if they are compliant. Although there is a way to do this, it is actually difficult, and I think that is the biggest problem. It is possible to issue a dollar-linked stablecoin in Japan, but it would be difficult for it to become dominant.

──Stablecoins are seen as promising for use in inter-company payments, but the difficulty of using them in cross-border payments poses a major challenge.

Kawai: It would be fine if yen payments were the mainstream of international payments, but unfortunately this is not the case, so even if you create a dollar-linked stablecoin in Japan, there is no point if the other party does not receive it. . Regulations to protect Japanese users even if issuers of overseas stablecoins go bankrupt are an important point in user protection, but if the regulations become too heavy that business cannot handle them, they may not be convenient. It is certain that it greatly impairs sexuality. In the end, I believe that cross-border remittances may be the reason for not being able to escape from the SWIFT (Society for Worldwide Interbank Telecommunications) system.

──So, where do you think it will be used?

Kawai：Basically, crypto asset exchange companies will also obtain approval for trading business such as electronic payment methods, so to speak, “new tickers will increase”, that is, payment methods for crypto asset transactions will start. I think there are various possibilities as to which stablecoin it will be.

Some argue that yen-linked stablecoins have strict restrictions on the investment of funds accepted at the time of issuance, making it difficult to generate profits, but there are ways to make payment fees lower than current credit cards. Masu. If an overseas exchange handles it, it can also be used for remittances.

However, I think the most promising business is cross-border payments. That is why major Japanese financial institutions, which had previously kept a distance from crypto assets, are considering this field. Stablecoins are an area where blockchain and major financial institutions intersect. In some cases, it may be possible to eliminate the need for Swift, and stable coins may be more convenient for domestic interbank remittances. Even if we don’t expect much profit, if everyone is going to shift to that direction, I think we have to respond.

──What challenges do you face in order for it to be used for interbank remittances?

Kawai:This time, the legal system is extremely complicated. There is a method called electronic payment handling company stipulated by the Banking Act, but this is a deposit transfer and is different from a stable coin that anyone can receive. In fact, there are significant restrictions on banks issuing or holding stablecoins that are bought and sold on exchanges. Of course, this may change in a few years, but at this stage, if a bank were to handle stablecoins, it would be in the trust business. It is a so-called trust-type stable coin. There are quite a few banks that can conduct trust business even if they don’t call themselves trust banks, so I think the regulatory authorities would like to see them start with this system.

This time, in the revised Payment Services Act, stablecoins are defined as “electronic payment instruments” and those similar to electronic payment instruments are excluded from the definition. For example, points and electronic money are excluded. I think it is generally difficult to understand where the watershed lies between stablecoins and electronic money, but transfers are limited to people who have completed KYC (identity verification), and each transfer requires the issuer’s involvement. are excluded from the definition of electronic payment instruments, or stablecoins. Such items fall under electronic money. I think the authorities have decided that it is premature for banks to issue non-KYC accounts, that is, stablecoins that can be widely sent to anyone.

Extremely difficult legal system

──The media may not be able to make a sufficient distinction in this regard.

Kawai: The current situation is too complicated. The legal system is extremely difficult to understand. I think the strong aspect is that they managed to achieve this while prioritizing user protection. Although the wording of the law is complex, the action is simple. From a business perspective, we are receiving a lot of inquiries about the aforementioned cross-border payments, security token (digital securities) payments, and NFT platform payments.

Or, there is a need for crypto asset exchange companies to offer it as one of their payment pairs. In terms of market capitalization, Bitcoin and Ethereum are at the top, but in terms of daily trading volume, USDT probably has the most, and USDC is also close to Bitcoin and Ethereum. It is very attractive as a payment pair, and the need for it is likely to increase in the future.

Another point is that from a different perspective than what has been discussed so far, there is also a debate as to whether it can become a competitor to PayPay, which is currently the default QR code payment.

–Do you think you can compete?

Kawai:I think it would have been an interesting battle if PayPay hadn’t been the dominant player. However, dominant ones are convenient and everyone uses them. For users, “convenience” is important, and while PayPay can only be used at PayPay member stores, stablecoins do not have such a limit. In theory, it has the advantage of being more widely used, but the disadvantage is that it requires a wallet. Stores will be asked to respond, and it will be interesting to see whether any businesses will go that far and compete with PayPay.

As a product, there are potential benefits. However, things don’t end there. Considering this, cross-border payments are full of problems, so it is a promising place for stablecoins to spread. Currently, international money transfers between banks have high fees and take several days from the time the money is sent until the money arrives.

To not be left behind by the world

──CoinDesk JAPAN wrote with high expectations that stablecoins will appear in 2024, but do you think they will gradually take off as a business?

Kawai:I agree. However, I want everyone to be ahead of the curve. I feel that the faster you move, the easier it is to establish dominance. However, it takes time to consult with the authorities and obtain a license, and building a system for issuance is also a heavy task, and sufficient security must be ensured. Additionally, if there is a possibility that remittances will be sent to a sanctioned person, a mechanism that can freeze the remittance is also required.

──I think it took time and a lot of work to develop regulations regarding stablecoins. Where did that motivation come from?

Kawai: There has been discussion for quite some time that stablecoins need to be introduced in Japan. It is used as a payment method overseas and has been proven to be very superior, and we have been receiving consultations and discussions since around 2018 and 2019.

We use public blockchains and perform KYC at businesses, but we know that there is no market need unless it can be moved freely, and we believe that new legislation is needed to make this happen. This has been discussed in the stablecoin subcommittee of the JCBA (Japan Crypto Asset Business Association). This is not just about blockchain-based finance or finance, but when we think about such a world, there is a strong sense of crisis that if things continue as they are, Japan will be left behind. I think it was also important that I had friends to work with. Although they are involved in various industries, everyone was working with overwhelming enthusiasm.

Also, it was a great opportunity to move forward. If this were 2019, I might have given up. At that time, there was a complete headwind against the industry, and there was almost no room for negotiation with the authorities. This time, there were people who wanted to move forward with the stablecoin business, with support from the Liberal Democratic Party web3PT, and even traditional financial institutions were considering getting involved. I think these movements have come together.

──Based on the development of stablecoin regulations, what kind of developments do you expect to see in 2024?

Kawai: Businesses using tokens are currently in the stage of blooming, so I hope many use cases will emerge. For example, the groundwork has been laid for blockchain games and collaborations between exchanges and telecommunications companies, so I hope they will actually bloom and bear fruit in 2023. Of course, the biggest thing is that I would like to see payments using stablecoins actually begin and grow amid healthy competition.

I also think it would be better to clarify areas that remain as gray areas so that the Web3 business can move forward, and to have intermediary legislation for the crypto asset exchange industry as well, so financial products intermediaries and We would like to create an intermediary legal system similar to that of bank agents. Embedded finance becomes easier if there is an intermediary legal system.

In other words, it will be easier for various businesses other than the crypto asset exchange industry to provide crypto asset-related services by incorporating them into their existing services. For many people, we can create an environment where it is easier to enter into crypto assets. In addition, it is also necessary to consider how DeFi (decentralized finance) can be used to build a business without any legal issues. The market is already large, so I think it’s important to consider how to respond to it.

Ken Kawai
Partner/Attorney at the Anderson Mori & Tomotsune law firm. Liberal Democratic Party “Web3PT” working group member, Ministry of Economy, Trade and Industry “Startup New Market Creation Task Force” member, Japan Financial Services Intermediaries Association auditor, Japan Digital Space Economy Federation advisor, Metaverse Japan advisor, Osaka Prefecture “International Financial City OSAKA Promotion Committee” He serves as an advisor to the Japan STO Association, Japan Crypto Asset Business Association, etc. His main areas of focus are fintech, blockchain, financial regulation, and IT/digital law.

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