FSA plans to categorize some stablecoins just like Bitcoin! What about it? Algorithmic stables are pre-programmed to provide stable value over time. And it is this type of crypto that the financial services agency in Japan decided to look into.
To do this, the organization published a report titled “Regulating the Crypto Asset Landscape in Japan”. Among the 3 main points discussed, one specifically addresses the issue of stables. But let’s take a closer look at this event and its implications for the financial landscape in Japan.
FSA remains wary of algorithmic stablecoins because of TerraUSD
TerraUSD will stay for a long time a textbook case in terms of stablecoin algorithmic failure, with a record fall in 24 hours. The impact the latter will have on the entire crypto-economy is staggering. TerraUSD really has a crisis of confidence large among investors who feel even today and increased by other scandals such as FTX.
But if TerraUSD failed, it is because of a a fundamental problem in its operation. Because indeed, even if TerraUSD was sold as a safe asset, its algorithmic implementation raised many questions. And with good reason when we look at the latter’s tragic balance sheet.
Due to all these findings, the FSA continues to advise investors not to trust this type of stable coin. But, the proposed regulations could help their integration in the Japanese economic system.
Even if it were sold as such, TerraUSD does not respond to any of the classic schemes to guarantee the stability of a stablecoin. Since usually, the mechanisms that control the value of this type of digital currency are simple, but they must be followed to the letter.
Non-algorithmic stables called USDT and USDC are pegged directly to the dollar. This means that every time a crypto is issued, a dollar equivalent amount is purchased from the US Treasury Bond and subsequently placed in a reserve account in case of turbulence.
This process will enable them to withstand all the bear markets without moving in value. USDC and USDT remain, to this day, reliable constables for investors.
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TerraUSD meanwhile, based on smart contracts thanks to the Ethereum system like many other stable algorithms. To guarantee its stability, a series of pre-programmed solutions aims to reduce or increase the supply of the signal to be played by its value on the markets.
Unfortunately, this system will show its limits. When the TerraUSD, caught in the turmoil of the crypto market, was unable to support its own value using its mechanisms. Despite an injection of $1.5 billion in Bitcoin, nothing could prevent TerraUSD from dropping 42% in value in one week.
Algorithmic stablecoins are classified the same as Bitcoin
So what will happen to algorithmic stables in Japan in light of what has been said? good the latter will be much more controlled with strict rules regarding their application.
For example, Stablecoin issuers will need to obtain licenses consider them a bank, a payment service provider or a trust company.
The goal is to protect investors as much as possible potential losses associated with falls, as TerraUSD was able to demonstrate. The project also aims to show respect for the fight against terrorist financing and money laundering. Japan had also started its campaign in 2016, starting with the first law reform.
As a reminder, Bitcoin is classified in Japan as a legal means of payment. It is recognized as a virtual currency, a rarity even today around the world. Therefore, algorithmic stablecoins tend to attach the status of Bitcoin with all the restrictions that come with them.
Due to the point of regulation, Japan will be transient towards stable algorithmic coins. We can in addition expect this to promote quality and safety to be able to meet the needs of Japan.
The FSA in Japan: what exactly?
Established in 2000, the FSA (Financial Services Agency) is a Japanese government agency. responsible for regulating the entire financial system of the country.
To do this, it intervenes in the banking sectors, scholarships, and insurance. A commissioner reports to the Minister responsible for financial services on his observations and analysis of the various issues raised.
This is a big player in Japan to maintain the country’s economy and control any form of abuse. When it comes to cryptocurrency, the FSA allows it to be regulated and integrated into its economic system.
Japan is not the only country that shows some progressive vision in the field of cryptocurrencies. Brazil also plans to integrate Bitcoin as a legal method of payment. We encourage you to view our article that discusses it in detail if you want to know more about it.