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Stablecoins under Japan’s amended Payment Services Act

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Mayuko Takahashi of Nagashima Ohno & Tsunematsu provides an overview of the stablecoins regulations under Japan’s amended Payment Services Act

Since cryptocurrencies can fluctuate wildly in price due to the lack of value backing, ‘stablecoins’, the purpose of which is to stabilise the value of cryptocurrencies, have attracted international attention in recent years. It is possible that stablecoins will be widely used as a means of making payments in Japan as well as in the US in future.

In preparation for the digitalisation of financial services, the amended Payment Services Act was enacted on June 3 2022.

New defined term ‘electronic payment methods’

Stablecoins are considered to fall into one of two categories:

Digital money-like type

Crypto-assets type

Stablecoins that are issued at a price linked to the value of a fiat currency (e.g. 1 coin = 1 yen) and with a promise of redemption at the same amount as the issue price, or equivalent thereto.

Stablecoins other than those that are listed in the left column (e.g. those attempting to stabilise value with an algorithm).

These could be considered to fall under the category of ‘currency-denominated assets’ under the Payment Services Act.

These could be considered to fall under the category of ‘crypto assets’ under the Payment Services Act or ‘securities’ under the Financial Instruments and Exchange Act.

The amended Payment Services Act created a new defined term, ‘electronic payment methods’, which includes a digital money-like type of stablecoin. The exact scope of the term ‘electronic payment methods’ will be specified in a cabinet office ordinance yet to be issued.

New registration system for stablecoin intermediaries

The functions played by service providers that provide payment services that use electronic payment methods can be broadly categorised as follows: (i) the provision of platforms for the issuance, redemption and value stabilisation of electronic payment methods; (ii) the provision of a mechanism for transfers of electronic payment methods; and (iii) the management of electronic payment methods.

Services relating to the digital money-like type of stablecoin are generally provided to users in a form where the three functions described above are provided by different entities.

Usually, the issuers are responsible for providing function (i), and intermediaries are responsible for providing functions (ii) and (iii). Accordingly, the amended Payment Services Act created the new defined term ‘service providers of transactions using electronic payment methods, etc.’, which correspond to the intermediaries that are involved in electronic payment methods, etc. (‘intermediaries’), based on the assumption that multiple entities are involved in electronic payment methods, etc. as the issuers and the intermediaries, as described above.

A new registration system was also introduced under the amended Payment Services Act to regulate intermediaries, and only those who are registered may engage in the provision of intermediary services relating to transactions using electronic payment methods, etc. (’intermediary services’).

Stablecoin intermediary services

In addition to the above, from the perspective of user protection and anti-money laundering, the following regulations were established under the amended Payment Services Act to regulate the activities of Intermediaries.

Regulations for the protection of users, etc.

Secure management of information

(Article 62-10)

Intermediaries must take necessary measures for the secure management of information.

Provision of guidance to subcontractors

(Article 62-11)

When an intermediary outsources to a third party the provision of a part of its intermediary services, it must take necessary measures to ensure the proper and reliable performance of the subcontracted services, such as providing guidance to the subcontractors.

Measures for protection of users, etc.

(Article 62-12)

Intermediaries must take necessary measures to protect users and ensure the proper and reliable performance of their services, including the provision to users of information relating to the contents of the contracts pertaining to intermediary services, such as the details of the electronic payment method and the fees.

Obligation to enter into contracts with issuers, etc.

(Article 62-15)

When providing intermediary services, intermediaries must enter into agreements with the relevant issuers, etc. that contain provisions concerning the apportionment of liability between the issuers, etc. and intermediaries in relation to liabilities owed to users. Intermediaries must provide intermediary services in accordance with these agreements.

Obligation to enter into agreements with dispute resolution organisations, etc.

(Article 62-16)

Intermediaries must take measures, such as concluding agreements with dispute resolution organisations.

Regulations for the safeguarding of deposited user assets

Prohibition of deposits of money, etc.

(Article 62-13)

In principle, intermediaries are prohibited from accepting deposits of money or other property from users in connection with Intermediary services.

Management of user property

(Article 62-14)

Intermediaries must manage the property of users separately from their own property, and must be periodically audited by a certified public accountant or audit corporation with respect to the status of such management.

Future developments

The amended Payment Services Act is expected to come into effect by June 2023. It is anticipated that stablecoins based on various mechanisms will be issued in the future. For example, Mitsubishi UFJ Trust and Banking Corporation has already stated that it will issue its own stablecoins linked to the yen, named Progmat Coin, after the amended Payment Services Act comes into effect.

Some uncertainties remain, such as the exact scope of the term ‘electronic payment methods’ and ‘crypto assets’; the application of the aforementioned rules where either the issuer or the intermediary is located in Japan, and the other is located overseas; and the regulations on the issuers.

Businesses that are, or may become, involved in stablecoins should stay up to date with the latest developments in the law.

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