The coming monetary revolution involving asset-backed stablecoins and central bank digital currencies (CBDCs) has attracted far less publicity than the recent sharp decline in the price of bitcoin despite the much wider significance. This may be about to change as official and private initiatives gather pace.
Japan’s Financial Services Agency (FSA) announced on November 7 that it will support a pilot project by three major banks to jointly issue stablecoins backed by the yen. The FSA will provide advice to the lenders – MUFG Bank, Sumitomo Mitsui Banking Corp. and Mizuho Bank – under a newly established financial technology support programme.
The banks reportedly aim to promote the use of stablecoins as a new electronic payment method. They hope to identify technical and regulatory hurdles through a trial project.
The move followed shortly after local tech startup JPYC announced that it was launching Japan’s first yen-backed stablecoin.
Japan has now effectively activated all three categories of regulated stablecoins: those issued by banks, trust companies and fintech firms.
Stablecoins utilise blockchain technology and are backed by assets including currencies such as the US dollar and the yen.
The stock of dollar-denominated stablecoins outstanding globally has soared from US$138 billion at the start of 2024 to $308 billion in October this year.
“Stablecoins are on the rise in global finance, promising to facilitate faster and cheaper payments and to lead a wave of financial innovation,” according to a recent study by Project Syndicate, a group of more than 500 media outlets.
The vast majority of stablecoins issued to date are backed by the US dollar, reinforcing the greenback’s role as the leading global currency, making the developments in Japan significant. Yen-backed stablecoins could potentially reduce the role of the dollar in this regard although for now, yen stablecoins are restricted to domestic transactions within Japan.
CBDCs
There is also growing active interest in CBDCs in Asia Pacific. According to Tobias Adrian, financial counsellor and director of the International Monetary Fund’s monetary and capital markets department, the region is becoming a “centre for [digital] payments innovation”.
He was speaking at an IMF regional seminar in Tokyo on November 21, where a briefing paper noted that a majority of the 93 central banks around the world surveyed by the IMF are exploring the use of retail and wholesale CBDCs.
Pilot programmes have been launched in China and Hong Kong and by non-banks in India, as well as by entities in Russia and Kazakhstan.
The Bank of Japan is examining the launch of CBDCs, saying that they “are primarily envisioned as a payment instrument similar to digital cash that can be used by anyone 24 hours a day, 365 days a year”.
CBDCs are in effect a response by central banks to the threat that stablecoins issued by private entities could come to dominate international financial transactions, which are currently the province of commercial banks that are answerable to central banks.
Stablecoins and CBDCs differ fundamentally from crypto instruments like bitcoin and its rivals. During a seminar in Tokyo on November 25, economist and Harvard mentor Paul Sheard argued that bitcoin and its ilk are a “risk asset” rather than a crypto currency.
Some experts fear that confusion among investors about the role of crypto risk assets versus crypto currencies could lead to market disruption.
