Japan: FSA wants to tweak rules for specific digital assets

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Japan‘s financial regulator is again considering tweaks to digital asset rules, taking into account the growing number of different roles and asset types. Among the new proposals are a new classification for digital asset applications that work as brokers between users and exchange platforms, as well as ideas on managing stablecoins.

The Financial Services Agency (FSA) floated the ideas as part of its Financial System Council Working Group on Payment Services. The Group seeks to keep abreast of any developments in new payment technologies while maintaining a balance between supporting smaller innovators and protecting investors’ assets.

The proposals, which haven’t reached the formal legislative stage, would address applications like games and online wallets that allow users to swap between fiat currencies and various “crypto assets” but do not operate the third-party exchange platforms they utilize. Although they provide digital asset services on some level, they see themselves more as intermediaries or brokers and say they shouldn’t face the same strict regulations Japan imposes on custodial services.

(Note: the Japanese FSA now refers to “crypto assets” in its official documentation, rather than the term “virtual currencies,” which was widespread until around 2020.)

Lighter regulations for non-exchange digital asset services would likely be welcomed in Japan (and elsewhere). Reporting and inspection requirements for digital asset businesses are anecdotally said to be quite burdensome. This results from caution stemming from the 2014 Mt. Gox Bitcoin exchange implosion and its years of after-effects. Japan’s financial industry likes to protect its reputation as a safe and stable place to keep international funds, and the government was in no mood to tolerate more of the technological shenanigans this new form of money produced.

That said, exchanges themselves won’t get a reprieve from those burdens any time soon. The proposed lighter regulations would affect only those acting as intermediaries between exchange platforms and end users, i.e., those who don’t hold any digital asset reserves.

Nor would intermediaries be completely immune from any action if the third-party services they utilize lose users’ funds—most likely, they’d be relieved from having to put up security deposits. They would also face restrictions on their advertising and need to provide more information on the custodial services they’re linking to.

Stablecoins still raising eyebrows

The Payment Services Working Group also discussed stablecoins, which have proven to be the digital asset type most compelling to regulators in Japan and worldwide. Japan was one of the first countries to introduce regulations specifically aimed at the stablecoin class, and this imposed heavier KYC requirements for transferring these assets across borders.

The FSA is reportedly still wary of allowing banks (other than trust banks) to issue stablecoins themselves. For trust banks, though, it would like to ease the backing-asset reserve requirements while tightening the KYC rules for transfers between institutions.

Interestingly, the regulator also wants to differentiate between stablecoins issued on “permissioned” (i.e., closed) blockchains and those issued on “permissionless” or “open” ones. It’s more in favor of the former. This suggests that authorities still distrust open/public blockchain networks, including Bitcoin and Ethereum. In recent years, the BTC and Ethereum networks have made significant changes to their base protocols and (in Ethereum’s case) transaction-processing algorithms, which no doubt act as a turn-off to governments looking for rock-solid trust.

The BSV blockchain, on the other hand, is an open network that guarantees unchanging protocol rules as a core function of its governance. Yet, it remains secure and transparent enough for large organizations to tokenize other assets with confidence, including fiat-backed stablecoins.

Stablecoins are of particular concern to governments for several reasons. One, they’re relatable: stablecoins are far more likely to be adopted and used by parties who might otherwise not touch (more volatile) native blockchain units like BTC, ETH, or DOGE. Second, their prices rarely shift more than 2% away from the fiat asset they represent. Yet, they can be transferred with the same ease and speed as any “cryptocurrency”—and can be transmitted outside the regulated banking networks. These properties make them far more attractive as vehicles for money laundering and tax evasion.

Another reason is that issuing a stablecoin with a name representing a known fiat currency could become a private printing press for that currency if there aren’t tight rules governing reserve assets. Some well-known stablecoins use reserve audits as key selling points, while others (we’re looking at you, Tether) have become popular merely through longevity and name recognition without providing any real guarantee they’re backed by reliable assets at all.

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