Japan has made a significant move in the world of digital currencies, announcing the launch of what is touted as the first yen-pegged stablecoin, called JPYC. This fully redeemable digital yen is backed by domestic deposits and Japanese government bonds (JGB). Notably, JPYC’s issuer has decided not to charge transaction fees; instead, it aims to generate revenue through interest earned on its holdings of JGBs.
What sets JPYC apart from stablecoins in other Asian nations is the unique status of the yen. Unlike the South Korean won or the Taiwanese dollar, which are constrained by local laws to onshore use, the yen is freely convertible and can be utilized globally. Following significant reforms in the 1980s that abolished Japan’s postwar capital controls, the yen found its place in the euro-yen market, allowing global banks and investors to trade, borrow, and lend it without any restrictions. In contrast, South Korea’s strict foreign exchange controls on the won are designed to maintain monetary stability while limiting offshore speculation. This regulatory environment largely restricts the potential for a won-backed stablecoin, confining it to domestic users and settlements.
Taiwan is also facing hurdles similar to South Korea. Although the Taiwanese dollar is technically convertible, its use is primarily restricted to the island. The stablecoin framework introduced in June mandates full onshore reserves and central bank oversight to prevent any cross-border currency movement. This limitation erodes the global liquidity that defines the purpose of stablecoins.
Hong Kong presents a slightly different scenario, with its Hong Kong dollar pegged to the U.S. dollar and no restrictions on offshore use. However, given its existing stability, one could question the necessity of launching a new U.S. dollar stablecoin.
The Bank of Japan’s openness to globalizing the yen is crucial, endowing the new stablecoin with substantial real-world utility beyond the domestic payment landscape. The timing of the JPYC launch couldn’t be more opportune, especially with Japanese government bonds offering yields exceeding 3% at the long end. This financial backdrop allows JPYC to operate without needing to impose fees or rely on speculative gains, as it will sustainably benefit from the interest derived from its JGB reserves.
The implications of this launch extend into the foreign exchange (FX) market, which has seen daily trading volumes averaging around $7 trillion, with a record high of $9.6 trillion recorded in April. The involvement of the USD in approximately 89% of trades, contrasted with the yen’s 16.85%, highlights the prominence of the USD/JPY currency pair as one of the most actively traded globally.
As both the U.S. and Japan now regulate fiat-pegged stablecoins, the potential for a robust on-chain USD/JPY market is growing. Such a pool could allow for the integration of decentralized financial infrastructures utilizing fully reserved, regulated fiat tokens, thereby facilitating Asian crypto settlement and paving the way for a multi-currency stablecoin economy.
However, questions linger regarding the real demand for such a product. While euro stablecoins have been in circulation for some time, the market cap for the largest ones remains relatively small. The yen has the legal clarity and liquidity that many other currencies lack, but whether global traders genuinely desire another fiat-backed stablecoin in addition to the dollar still remains uncertain.
