While Japanese banks are on the cusp of issuing stablecoins under new legislation, the lack of clarity in the US in the segment is a hurdle preventing institutions in the country from doing the same.
Japan passed a legal framework for stablecoins in June 2022, which came into effect on Thursday.
The law requires stablecoins — usually backed by one or more reserve assets — to be pegged to the yen or other legal tender and the holder to guarantee redemption at face value. It also restricts stablecoin issuance to licensed financial institutions, such as registered banks, money transfer agents, and trust companies.
The country’s move to bridge the gap between TradFi and DeFi with this initiative will benefit everyone in the long run, said David Tawil, co-founder of crypto fund ProChain Capital.
“In the US, most savers, both individuals and businesses, have the benefit of free [automated clearing house] transfers intra-nationally,” he told Blockworks. “But Japan’s initiative is a first step towards international frictionless, free money transfers.”
According to Jeff Embry, managing partner at crypto hedge fund Globe 3 Capital, updating decades-old payment systems to cheaper and faster distributed ledger technology will always be a win for the client.
“The key will be to ensure that these stablecoins use a reliable, immutable and transparent blockchain rather than being in control of one bank or one government like a CBDC would,” Embry added.
Tokyo-based GU Technologies launched a public blockchain — called Japan Open Chain — in March as a way to allow three Japanese financial institutions to experiment with issuing stablecoins that comply with the country’s laws. For example, the stablecoins would be compatible with Ethereum wallets via Metamask.
Embry said that if Japanese banks only want to create their own stablecoins, the stablecoin ecosystem will struggle.
“We would like to see stablecoins originate outside the banking ecosystem bubble, because that is where real, immutable, transparent stablecoin innovation and adoption will thrive,” noted the Globe 3 Capital executive.
What does it take for US banks to issue stablecoins?
While regulation would be key for US banks to issue stablecoins, bills on the subject continue to move.
According to Compass Point Research & Trading analysts Chase White and Joe Flynn, recent hearings by the House Financial Services and Agriculture committees show that crypto regulation could take two or three years.
“What we have seen in these hearings is that members of Congress disagree within parties, let alone between parties, on the basic tenets of even stablecoin legislation, which many observers view as low-hanging fruit. compared to expanded crypto legislation,” Flynn wrote in a research note last week.
Meanwhile, comments from regulators appear contradictory amid a war to regulate the crypto space. CFTC Chairman Rostin Behnam said in March that stablecoins such as tether (USDT) could be considered commodities, while SEC Chairman Gary Gensler has argued that any crypto asset except bitcoin can be a security.
Aside from a lack of movement and clarity from legislators and regulators, stablecoin adoption may be slow for major US banks that want customers to continue paying wiring fees.
“Banks are slow to adopt because they are the intermediaries that blockchain eliminates,” Embry said. “Once customers see the huge benefits of using stablecoins, the demand for them will be so high that banks will have no choice but to use them.”
JPMorgan offers JPM Coin, an authorized payment rail and deposit account book for customers to transfer US dollars held at JPMorgan within the bank’s system. But Embry called the system more of a tool for customers than a true open-source blockchain stablecoin.
JPMorgan and consulting firm Oliver Wyman said in a joint study published earlier this year that using bank-issued deposit tokens to transfer value across chains is more secure than using stablecoins.
Like his wish for Japanese institutions, Embry said he hopes U.S. banks eventually adopt stablecoins from outside innovators instead of creating their own.
The market cap of the Tether stablecoin has surged in recent months, reaching nearly $83.3 billion on Thursday. The market cap of the competing stablecoin USD Coin (USDC) was just under $29 billion.
“I think at some point some country or countries around the world will overtake us with this, and that is when we will get into gear here,” Tawil said of the US stablecoin adoption. “We do nothing in this country until we are threatened. Debt ceiling, case and point.
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