A Unique Digital Coin Pegged to the Yen Emerges in Japan
Japan has achieved a major milestone that sets it apart from its Asian neighbors: it has successfully launched a unique digital coin that is fully backed by the yen and can be utilized globally.
The creators of this new digital coin, dubbed as JPYC, have proudly announced that this is the first stablecoin in the world pegged to the yen. The coin is fully backed by domestic deposits and government bonds in Japan. Interestingly, this digital coin won't be charging transaction fees. Instead, its creators plan to generate revenue through the interest earned on holdings of government bonds.
What Makes the Yen-Pegged Stablecoin Unique
What sets this yen-pegged stablecoin apart from its Asian counterparts is its flexibility and widespread utility. Unlike currencies like the Korean Won or Taiwan dollar, which are limited to onshore use as per local laws, the yen is freely convertible and can be utilized offshore.
Post the 1980s reforms that resulted in the dismantling of Japan’s postwar capital controls, the yen became fully usable outside the country. This was made possible through the euro-yen market, which allows global banks and investors to borrow, lend, and trade the currency without any restrictions. This is a sharp contrast to currencies like South Korea’s won, which remains confined to onshore use due to strict foreign exchange controls designed to limit offshore speculation and preserve monetary stability.
These factors contribute to making the yen one of the most traded currencies in the world. However, South Korea's policy for the won, while preserving monetary control, leaves little room for a global stablecoin to thrive. A won-backed token would be limited to approved Korean users and mostly domestic settlements, thus making it a niche product in a market where instant, free interbank transfers are already the norm.
The Exception of Hong Kong and Taiwan’s Dilemma
Taiwan is in a similar predicament. While its dollar is technically convertible, it's not used offshore. Taiwan’s new stablecoin law, introduced recently, requires full onshore reserves and central bank reporting to prevent cross-border leakage. A stablecoin backed by the NTD could exist, but only within the island, depriving it of the global liquidity that lends purpose to stablecoins.
On the other hand, Hong Kong might be the exception. The HKD is pegged to the U.S dollar and is not restricted in its use offshore. This essentially makes it a stablecoin, leading many to question why one wouldn't simply use a U.S. dollar stablecoin instead.
The Advantage of a Yen Stablecoin
The yen stablecoin offers real-world utility beyond Japan’s domestic payments ecosystem, thanks to the Bank of Japan's openness to the global use of its currency. With interest rates on the rise and Japanese government bonds yielding more than 3% at the long end, the timing of the launch couldn't be more opportune. JPYC doesn’t need to charge fees or chase speculative yield of its stablecoin as it can operate sustainably off the interest earned on its reserves of government bonds.
On-chain Foreign Exchange Market
The global foreign exchange (FX) trading volume averages around $7 trillion per day, with record highs of $9.6 trillion per day. The U.S. dollar is involved in a whopping 89% of all trades, while the Japanese yen features in 16.85% of trades, making the USD/JPY pair one of the most actively traded currency pairs globally.
With both the U.S. and Japan now regulating fiat-pegged stablecoins, it appears there is significant potential for a thriving on-chain USD/JPY market that pairs dollar- and yen-pegged stablecoins. Such a pairing could provide the backbone for Asian cryptocurrency settlements and mark the beginning of a truly multi-currency stablecoin economy.
The Question of Demand
Despite all these promising aspects, one must question if there's a demand for this new stablecoin. Euro stablecoins have been around for a while – designed to be supranational and used beyond borders – but the largest one has a relatively small market cap.
The yen-pegged stablecoin may have the legal clarity and convertibility that others lack, but the question of whether global traders actually want another fiat-backed token besides the dollar remains unanswered.