Japan seeks first-mover advantage with stablecoin regulation

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Hey Fintech Fam!

I hope those of you in the US are enjoying the long weekend. For our readers elsewhere, here’s an explainer on the newest national American holiday.

This week Tokyo correspondent Leo Lewis highlights a precedent-setting crypto industry regulation passed earlier this month that could have an even larger impact on the future of stablecoins than Luna (RIP). Plus, we have an update on Klarna’s fundraising efforts and an interview with the CEO of a company taking on excessive costs in currency markets.

As always, reach out to me (imani.moise) or Sid (sid.v) to share your feedback on today’s newsletter. Happy reading!

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Japan forges ahead on stablecoin regulation as cryptomarkets fall

Earlier this month, Japan became the first major economy to impose formal regulation on stablecoins, setting a global precedent while most market observers were preoccupied with the broader crypto meltdown.

The stablecoin bill breezed through the upper house of parliament on June 3. The law legally defines stablecoins — which help underpin the wider realm of cryptocurrency by providing a peg to fiat currencies — as digital currencies and requires that the coins maintain a fixed peg to the yen.

The law also guarantees investors the right to redeem stablecoins at face value, which it aims to do by limiting the institutions that can issue the coins to banks, trust companies and a limited number of money transfer agents.

While the significance of the new regulation was somewhat lost after the collapse of TerraUSD and Luna shook faith in stablecoins and decentralised finance, the move marked a quietly pivotal moment for both progressive and conservative thinking on the issue. 

Stablecoin regulation elsewhere may look similar if and when it is laid out. Officials involved in drafting the bill told the FT that the Japanese approach drew heavily upon the debates among financial regulators in the US and UK. 

However, critics of the law say that handing this new stablecoin issuance business line to established players will fail to encourage the growth of start-ups that would fulfil the vibrancy Tokyo has long sought as a financial centre.

Casting itself as an early mover on digital assets is part of Japan’s years-long attempt to brand Tokyo as a high-tech financial hub. In 2017, Japan became the first advanced economy to recognise bitcoin as a currency and soon afterwards became the first to set out a licensing system for crypto exchanges.

But while all these legal milestones have been reached with a speed and decisiveness that makes Japan look pioneering, the fundamental motive is the more pragmatic. While the broad mission of Japan’s Financial Services Agency may include awakening the “animal spirits” of a flourishing financial sector, it knows it will bear a massive burden of blame if large numbers of Japanese individuals are burned. 

This is a financial regulator that has repeatedly learned the hard way that the praise received for a light touch can never outweigh the public backlash at having left an ageing, bubble-prone public at risk. (Leo Lewis)

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Quick Fire Q&A

Every week we ask the founders of fast-growing fintechs to introduce themselves and explain what makes them stand out in a crowded industry. Our conversation, lightly edited, appears below.

Capital markets was one of the few fintech subsectors that managed to attract more investment in private markets last quarter compared to the same period last year. For this week’s issue I spoke with Eric Huttman, CEO of MilltechFX, a currency trading platform baked by Millennium Global that claims to lower execution costs for currency traders by up to 80 per cent. The company has raised $30mn from investors since launching in 2019 and handled roughly $50bn* in trading volume last year. 

How did you get started? I was part of the portfolio management team at Millennium and identified that market participants who are trading in foreign exchange markets, not because they want to but because they have to, were not getting a great deal in FX. It was painful for them to set up multibank trading lines and it was a source of operational burden and risk. We realised we had the ingredients and also the technological ability to externalise and democratise our access for those who until now have been excluded from the wholesale market. 

Who are your clients? At the moment, most are asset managers. We operate in the UK, North America, Canada, US and now in the EU plus peripheral Europe. We have a lot of clients in the private equity space and in private credit. We’re now doing a big push to the corporate side to attract internationally focused businesses who’ve got either payment needs or hedging needs. 

What’s the revenue model? We charge a fixed fee in basis points so that it’s transparently visible pre-trade as well as post-trade evidenced by an audit transaction cost analysis. Or clients can pay a subscription fee and then it’s an all-you-can-eat buffet, and there is no per-trade cost. 

Why can’t incumbents do what you do? There’s an inherent conflict of interest between an underlying rate provider and operational service provider, like we are. There are a number of organisations who could do it but the barriers to entry are extremely high. We have been able to do it because we have a fiduciary starting point, with hundreds of billions, three-quarters of a trillion dollars a year of flow. And crucially, we are independent so we are agnostic as to who the underlying rate provider is from our banks.

What’s the incentive for banks to participate given your aim is to lower costs for clients? One is an expansion of an existing client base. So we have the Millennium Group, which is well known to all of these banks and has been for the past 25-plus years, but also it’s about delivering a kind of client who is not trading for speculative purposes but for end user purposes. These [potential clients] don’t have any other requirements that the bank could cross sell to. Because we’re taking over all of the operational burden, including settlements, payment instructions, trade confirmations, from a bank perspective, it becomes very operationally efficient to deal with those kinds of clients through us.

*This article has been corrected to say that MillTechFX handled roughly $50bn in trading volume last year, not $15bn.

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