Financial Services Agency Discusses DeFi Regulation and Risks of Stablecoin Redemptions

Key Points of the Article

• Committee members pointed out that overseas interest is shifting towards tokenized deposits
• Risks of selling government bonds due to large-scale redemptions of electronic payment methods were highlighted

Examining Issues Related to DeFi and Stablecoins

The Financial Services Agency published the minutes of the first meeting of the "Study Group on Responses to Digital and Decentralized Finance" held on October 20. Regarding DEX (decentralized exchanges) and DeFi (decentralized finance), committee members expressed the need for Japan to respond in a timely manner to avoid becoming a "regulatory void or a place for regulatory arbitration."

The study group aims to examine the systems related to tokenization, stablecoins, DEX, and DeFi to facilitate the environment for "on-chain finance" based on blockchain technology.

During the first meeting, Nomura Holdings and Securitize Japan participated in hearings, expressing opinions that regulations on DeFi and wallets should be aligned with those overseas. The minutes revealed the discussions held by the committee in response to these opinions.

Concerns About Regulatory Gaps in DEX and DeFi

There were voices suggesting that before considering the regulatory framework for DEX and DeFi, there should be sufficient discussions on how to engage with them. From the perspective of anti-money laundering, it was pointed out that Japan should thoroughly discuss how to interpret the FATF (Financial Action Task Force) report on DeFi published in July.

Opinions were also raised that investor protection and ensuring market integrity should be prioritized in discussions. The question of who will take on the gatekeeper role traditionally held by financial institutions was also raised as a topic for consideration. There were suggestions to organize the targets and methods of regulation based on international discussions.

Concerns About Redemption Risks of Stablecoins

Regarding stablecoins, it was indicated that international interest is declining while interest in tokenized deposits is increasing. Concerns were raised about price volatility and the high hurdles for using stablecoins in international remittances from the perspective of anti-money laundering, calling for balanced discussions that take into account the international situation.

Concerns were also expressed about electronic payment methods under domestic regulations. It was suggested that if large issuers receive substantial redemption requests, there could be a situation where government bonds, which are the underlying assets, are sold in large quantities, and it should be confirmed whether the regulations are sufficient.

There were also doubts about whether the current regulations are adequate, as lending of electronic payment methods could appear to be an investment solicitation when combined with issuance.

Caution Regarding Connections to Public Blockchains

In general discussions, opinions were expressed that tokenized payment methods and assets have significant value for active utilization. It was stated that the implementation of services could lead to societal development, and appropriate regulations should be considered based on the objectives of current regulations and the risks of regulatory arbitration.

There were also calls for careful consideration regarding connections to public blockchains. In addition to anti-money laundering measures, risks were pointed out regarding the safe custody of assets by financial institutions and the uncertainty of returning them to rightful owners. It was emphasized that it is important to incorporate into the design or make known who can stop what and to what extent during incidents.

In the field of security tokens, there was a proposal to consider the tokenization of highly liquid listed stocks. It was suggested that the fundamental change brought about by the use of blockchain is the shift from account-level management of customer transactions to signature key-level management, and some committee members argued that discussions should prioritize the advancement of transfer systems.

The minutes were published with the names of the speakers withheld. The study group will hold its second meeting on November 2.

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