JAPAN: An Introduction to Banking & Finance: Domestic

Recent Development in Banking and Finance Regulations

1． Introduction of Regulations on Stablecoins

The recent noteworthy revision to the banking and finance regulations is the introduction of regulations on stablecoins aiming to keep up with financial digitalisation and establish a stable and effective payment system.

On 10 June 2022 the revisions to Payment Services Act (Act No. 59 of 2009), Banking Act (Act No. 59 of 1981), Act on Prevention of Transfer of Criminal Proceeds (Act No. 22 of 2007) and so on (hereinafter the “Revised Acts”) were promulgated. The Revised Acts are expected to be enforced within a year following the promulgation date. On 26 December 2022 the Financial Services Agency (“FSA”) publicised drafts of government and cabinet office ordinances under the Revised Acts and guidelines thereof, which are also expected to be finalised and officially promulgated after public comment procedures are completed.

(a) The “Electronic Payment Instrument 1” as a certain type of stablecoins has been newly defined.

Among the “Electronic Payment Instruments” defined in Article 2, Paragraph 5 of the revised Payment Services Act, the Electronic Payment Instrument listed in Item 1 of the said paragraph (hereinafter “Electronic Payment Instrument 1”) is the one that satisfies the following requirements:

(i) the instrument can be used to pay prices for purchase or lease of goods, etc, or receiving services to unspecified persons;

(ii) the instrument can be purchased from or sold to unspecified persons;

(iii) the instrument is a currency-denominated asset electronically recorded in an electronic device (the “currency-denominated asset” means any asset that is denominated in Japanese yen or any foreign currencies or used for satisfaction of debt, repayment or any other equivalent act in Japanese yen or any foreign currency);

(iv) the instrument can be transferred by using electronic data processing systems; and

(v) the instrument does not fall under the “specified trust beneficial interest” listed in Item 3 of the said paragraph.

The category of Electronic Payment Instrument 1 is limited to the currency-denominated assets, as a general rule, which is distinguished from crypto-assets typified by bitcoin. It is also construed that electronic money issued by banks or fund transfer service providers as currently used in Japan is not deemed to be Electronic Payment Instrument 1.

As Electronic Payment Instrument 1, digital money-type stablecoins typified by Tether (USDT) and USDC (USD Coin) to be issued at a price linked to a legal currency in value and redeemed at the issue price are expected to be designated. The digital money-type stablecoins are distinguished from crypto-assets-type stablecoins seeking to keep a stable value by means of algorithm without being linked to any legal currency in value.

(b) Regulations on Brokers conducting Sale and Purchase, Brokerage and Management of Electronic Payment Instruments

The revised Payment Services Act requires electronic payment instrument business operators who sell and purchase electronic payment instruments, exchange the same for another electronic payment instrument, broker such sale and purchase or exchange, and manage electronic payment instruments to obtain registration with FSA. Electronic payment instrument business operators registered with FSA are subject to the following regulatory obligations as examples:

・to take measures to protect users;

・not to receive any deposit of money from users, as a general rule;

・to enter into agreements setting forth allocation of liability for compensation for damage caused to users, with issuers of electronic payment instruments, as a general rule; and

・to take confirmation procedures as part of Anti Money Laundering/Countering the Financing of Terrorism (hereinafter “AML/CFT”) and abide by so-called “travel rule” (such as requiring a business operator who transfers any electronic payment instrument to another business operator to notify customer information to the transferee).

(c) Regulations on Issuers of Electronic Payment Instruments

Essentially, issuance/redemption of any electronic payment instrument is deemed as fund transfer transaction and in order to conduct such transaction the banking licence or the registration as fund transfer service provider under the Payment Services Act is required - provided, however, that fund transfer service providers are subject to a rule setting forth maximum amounts of remittance and regulations such as prohibiting accumulation of customers’ funds as a general rule. It is difficult to deal with stablecoins in compliance with these rule and regulations. Therefore, it is said that it may be infeasible for fund transfer service providers to issue electronic payment instruments as their business.

(d) Marketing in Japan of Stablecoins issued outside Japan

If a person who has issued stablecoins outside Japan intends to market such stablecoins in Japan (such as a case where the issuer makes the solicitation by creating a website in Japanese), the issuer is required to obtain the banking licence or registration of fund transfer service as a general rule, and it is considered necessary to establish a local hub and take measures to preserve assets in Japan, which makes it a difficult hurdle to clear.

Then, if the issuer of stablecoins issued outside Japan makes no solicitation in Japan, it will be an issue whether an electronic payment instrument business operator as broker is permitted to market such stablecoins in Japan.

In this point, while no ordinance or guideline is officially promulgated as of the date of this article, according to drafts of the cabinet office ordinance and guideline on electronic payment instrument business operators publicised on 26 December 2022, requirements such as those listed below will probably be necessary to be satisfied:

(i) Requirements on stablecoins issued outside Japan

- The stablecoins have been issued by a business operator who has obtained registration or licence pursuant to laws and regulations of the relevant country equivalent to the revised Payment Services Act or Banking Act;

- The issuer has managed assets necessary to redeem the stablecoins and the management has been subject to audit, in accordance with laws and regulations of the relevant country; and

- If any transaction involving the stablecoins is suspected to have been exploited for a crime such as fraud, the issuer takes countermeasures such as suspension of transaction.

(ii) Requirements on electronic payment instrument business operators

- Electronic payment instrument business operators take measures to protect users such as promising to purchase the stablecoins if it is difficult for the issuer to redeem the stablecoins or the value of the stablecoins significantly declines, and preserving assets necessary to procure funds for the purchase; and

- Electronic payment instrument business operators put a cap on the amount available to be managed or transferred on behalf of users as set forth in government and cabinet office ordinances (ie, JPY1 million).

2． Creation of Fund Transfer Transaction Analysis Service

It is also noteworthy that the Revised Acts have introduced the concept of “fund transfer transaction analysis service provider” to be retained by two or more financial institutions to provide the following services for AML/CFT to be taken by financial institutions:

- Filtering of whether a fund transfer transaction is the one conducted by any restricted person; and

- Monitoring necessary to find any suspicious transaction under the revised Act on Prevention of Transfer of Criminal Proceeds. As it is demanded to conduct a higher level monitoring of transactions, and the banking industry in Japan has been considering more developed and streamlined monitoring of transaction by means of collaboration, the above system has been introduced. Fund transfer transaction analysis service providers are required to obtain permission from FSA.