USD currently dominates the stablecoin market, holding a 99.7% share with no significant competitors. While some projects are attempting to provide alternative stablecoins, they haven't gained widespread adoption.
What could be the next contender? The Euro is certainly increasing its market share, but an overlooked currency is the "Japanese Yen Stablecoin." I believe it has a strong potential to increase its market share in the coming year.
Combined with recent innovations in stablecoins—including (i) modularization, (ii) diversification, and (iii) yield generation—could make the Japanese Yen stablecoin one of the fastest-growing currency-pegged assets.
The Japanese yen has established itself as an important international currency. As of 2024, the yen is the third most traded currency in the foreign exchange market and widely used as a reserve currency. However, its international adoption faces challenges.
In global trade, where the US dollar dominates, the yen accounts for only 5% despite Japan's 7% share of total global trade. As an asset currency, the yen's share is relatively small—only 6% of outstanding foreign-currency denominated cross-border bank liabilities are yen-denominated, compared to 47% for the US dollar.
In official foreign exchange reserves, the yen's share stood at 5.7% in Q1 2024, making it the third largest reserve currency. These figures suggest that while the yen has made progress in international markets, its adoption remains limited relative to Japan's economic size and trade volume.
Source: Stablecoins the Emerging Market Story
In June 2023, Japan implemented a legal framework for stablecoins, becoming one of the first countries with clear regulatory guidelines. This framework allows only licensed banks, trust companies, and fund transfer service providers to issue stablecoins, which must be pegged to the yen or another legal tender and guarantee redemption at face value. The regulations categorize stablecoins into crypto assets/security tokens and e-money stablecoins with redemption promises. Issuers are required to hold 100% of stablecoin assets in a trust within Japan and invest solely in domestic bank accounts.
The framework also addresses intermediaries and foreign-issued stablecoins. Intermediaries dealing with stablecoins must register and comply with consumer protection measures, including KYC and AML/CFT requirements. These regulations aim to ensure user protection, financial stability, and prevent money laundering while promoting innovation in the stablecoin sector.
Japan's approach demonstrates a proactive stance in integrating stablecoins into its financial system while maintaining regulatory oversight to protect consumers and ensure financial stability.
Japan has seen various stablecoin projects emerge, with major financial institutions and tech companies exploring digital assets pegged to the Japanese yen. Here's an overview of some notable Japanese stablecoin initiatives:
[Known to be a Rumor] Sony Bank's Stable Yen: Sony Bank, a subsidiary of Sony Group Corporation, is experimenting with a yen-pegged stablecoin. The project aims to evaluate regulatory compliance and explore the potential for lower transaction fees in money transfers and payments. As Sony has recently announced to launch its L2 with OP-Stack, the Japanese stablecoin could be brought into Ethereum, potentially serving as a gas token for its L2. (Source, Founder of Soneiu, Sota, has noted that this is fake)
JPYC: JPYC is a Japanese yen-pegged stablecoin project that was launched in January 2021. JPYC has been currently categorized as a prepaid payment instrument in Japan, similar to prepaid gift cards. This could be used in Amazon to buy some products. (Source)
Project PAX: Project PAX is a collaborative effort between major Japanese banks (MUFG, SMBC, Mizuho) and blockchain firms (Datachain, Progmat, TOKI) to develop a stablecoin platform for cross-border payments. (Source)
MUFG and DRW Cumberland Project: This project focuses on JPY and USD stablecoins for institutional crypto settlement. It involves wallet provider Ginco issuing XJPY and XUSD stablecoins, targeting the needs of institutional investors in the cryptocurrency market. (Source)
Hokkoku Bank: In 2024, Hokkoku Bank made history by issuing Japan's first stablecoin backed by bank deposits. This move sets a precedent for other banks considering similar initiatives. (Source)
Nomura Holdings and GMO Internet Group Partnership: Nomura Holdings, a major financial services group, has partnered with GMO Internet Group to explore yen and USD-backed stablecoins. (Source)
Modularization: Dapps are now monetizing their distribution by issuing their own stablecoins. Protocols like M^0 and Agora provide the infrastructure to build custom stablecoins. This allows dapps with active user bases and high volume to capture value from stablecoin issuance.
Diversification: While the US dollar dominates 99.7% of the stablecoin market share, other currencies such as the Euro and Yen are poised for growth. This is due to stable legal frameworks and increasing demand for alternative currencies.
Yield Generation: Stablecoins, backed by fiat currency, can have part of their reserves invested in yield-generating assets like bonds. This is possible because stablecoin redemptions don't occur at high volumes daily. With the emergence of yield-bearing tokens like sUSDe and USDY, it's becoming easier to generate yield from stablecoin assets.
The Japanese Yen stablecoin market is poised for growth, if aligned well with the three key innovations in the current stablecoin landscape. Starting with modularized stablecoin, it can offer dapps the opportunity to create custom Yen-pegged stablecoins, potentially increasing the market share of stablecoin, but also allowing dapps to diversify their asset class.
Also, the diversification trends favor the Yen as an alternative to USD-dominated stablecoins, given Japan's stable economic framework and the global demand for non-dollar options. As South Korea and China are currently the most regulated crypto markets in Asia, the yen is likely to become Japan's main crypto reserve currency.
Yield generation could be particularly synergistic with Yen stablecoins due to Japan's unique monetary policy environment. With historically low interest rates, even modest yields on Yen-backed stablecoins could be attractive to investors.
However, it's important to note that while these synergies exist, the cautious approach of Japanese institutions and regulators may slow the adoption process, targeting a gradual integration of Yen stablecoins into the global crypto ecosystem.
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