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The flexibility of remittance compared to bank payments is a major attraction.
Progma leads the stable coin business in Japan.
--The revised Funds Settlement Act of 2023 has come into force. Do you think stablecoin will be utilised in Japan in the future? What are your thoughts on the issues and areas that could be solved by its use?
Tatsuya Saito (Saito): Firstly, there are three types of stablecoin stipulated: deposit-type, fund transfer-type and trust-type. We believe that the ‘trust type’ is easier to use.
On top of this, one of the characteristics of stablecoins is the degree of freedom of restrictions on the destination of remittances. At least with trust-type stablecoins, transfers can be made as long as the address information is available, regardless of whether the identity has been verified or not, and this has been legally sorted out.
Bank deposits, on the other hand, can only be transferred to the extent that the identity is verified and the account is open. This difference is significant. In light of this, areas with a wide range of availability, such as cross-border payments, have an advantage in using stablecoin. Stablecoin can be used to transfer money regardless of the address holder's place of residence, whether domestic or international, and this is of great value.
Another aspect is what the settlement object is. If the settlement target is an asset on the blockchain, both the asset and the funds move in the blockchain at the same time, making so-called simultaneous settlement possible. Stablecoin is the best match, as it is a white space where it can demonstrate its true value and where there are no existing competing means of settling funds.
On the other hand, the payment target may not be an asset on the blockchain. Broadly speaking, there are two types of payments: those that require programmability and those that do not.
Those that do not require programmability are those where all that is required is a physical coin, such as a vending machine. Stable coins are not required there.
The most likely example of something that requires programmability is corporate payments. In corporate payments, an invoice is first issued and the recipient accounts for it. The process from receipt of the invoice to the accounting process is already automated.
However, the process of receiving the invoice and transferring funds from the ordering party to the recipient is not automated. The contents of the invoice to the accounting process have to be output separately, and the remittance operation has to be carried out manually by logging in to the Corporate Internet Banking System (Corporate IB).
To automate payments through banks and other financial institutions, each bank used as the main bank needs to open its API for updating the system.
In fact, with the exception of a few banks, the majority of banks have only opened up their APIs for reference systems. For example, balances can be seen from a household account app, but it is not possible to send money directly from external systems other than Corporate IB. This is because it is the same as allowing updates to be made to the ‘account system’ that handles deposits and foreign exchange within the bank from an unspecified external system, and the scope of impact is so large that it is unrealistic from a profitability perspective when considering the time and costs required to deal with the issue.
Trust-type stablecoins can be moved directly from the outside, as they are issued wrapped in a trust that guarantees programmability, without direct access to bank deposits (i.e. account systems).
Therefore, it is possible to automate the entire process from receipt of invoices as an input to settlement together with the accounting process. Therefore, I think the value of stable coins can be demonstrated in corporate settlements.
--What are the most important points and visions for issuing stablecoins?
Saito: What we focus on in providing a payment system is optimising the ‘payment segment’ and the ‘usage chain’. Even if the payment target is limited to assets on the blockchain, the nature of the ‘tokenised market for real assets such as real estate’ and the ‘so-called Web 3.0 market such as crypto and NFT’ are different.
Quite simply, the former is generally deployed on permissioned blockchains, such as consortium-type blockchains, while the latter is generally deployed on permissionless blockchains, such as public-type blockchains. Therefore, the payment instruments used in each market need to be built on optimised blockchains for each.
Progma is a platform that handles all digital assets across the board. As a first step, it has expanded from the business of tokenising real assets such as real estate (so-called security tokens), where the strengths of trusts can be demonstrated.
The advantage of this is that it allows individuals to become owners of small amounts of assets that until now could only be invested in by institutional investors. This can provide a new means of asset building for individuals.
When buying and selling real asset tokens, if the funds settlement side is also on the blockchain, costs will be lower and settlement will be faster. The ‘Permission-based Progmat Coin’ system enables efficient settlement in line with the characteristics of the ‘real asset tokenisation market’, which has already established a certain position.
At the same time, the ‘Permissionless Progmat Coin’ system meets the settlement needs of the ‘so-called Web 3.0 markets such as crypto and NFT’ using the same trust-based stablecoin mechanism.
In both payment segments, stablecoins will be issued and made available for circulation on multiple blockchains, in line with the blockchain on which the payment target exists.
On the other hand, the ‘Central Bank Digital Currency (CBDC)’, as published in the publication, not only describes multiple chains, including public blockchains, but the word blockchain itself does not actually appear.
The current payment market has the so-called ‘Zengin Net/Bank of Japan Net’ system as the payment mechanism (layer 1), which is responsible for settling funds between financial institutions and the central bank, and a layer above this system that enables general payments such as bank transfers and XXPay. The system has a hierarchical structure, with a mechanism (second layer) that enables bank transfers and general payments such as XXPay on the layer above the system.
Even if the CBDC system goes into production, it is necessary to design the payment system with an appropriate division of labour in mind, such that in reality, the first layer of the system is responsible for settlements between stablecoin issuers, while the second layer, which requires direct settlement with the assets on the blockchain, is handled by stablecoins. The second layer, which requires direct settlement with the assets on the blockchain, will be handled by stablecoins.
--What are the advantages of Progma being the first to enter the stablecoin space?
Saito: There is talk of issuing stablecoins using bank deposits, but as mentioned above, it will be difficult to launch in the immediate future.
In the public comments on the latest amendments to the law, it was pointed out that ‘careful consideration is needed in light of international concerns’ for banks to handle stable coins using deposits, and that further international discussion is required to make this possible. To make this possible, further international discussions and amendments to the Enforcement Order are required.
Therefore, the issuance of stable coins using bank deposits is expected to take at least one to two years.
As for fund transfer-type stablecoins, as mentioned above, the upper limit is set at JPY 1 million, which limits the usage scenarios. Although this may be sufficient for person-to-person settlements, we believe that the upper limit on the amount of money that can be transferred is too low to be used for corporate settlements at the very least.
Trust-type stablecoins, on the other hand, do not have these restrictions. Furthermore, as the definition of a trust-type stablecoin does not require the existence of a ‘destination agreement’, it can be used either as a ‘permissionless’ or ‘permission’ type coin.
Progma's locus of responsibility is that it covers all the key positions in the stablecoin issuance scheme. Specifically, the ‘trustee of the stablecoin issuing trust’, the ‘trustee of the stablecoins entrusted by intermediaries to their customers’ and the ‘platform provider enabling the issuance and distribution of trust-type stablecoins’ can work closely together, making it possible for software companies to create a mechanism that is far faster and more resolved than a financial institution from outside. It is possible to create a high-resolution mechanism faster.
In addition, as already announced, Progma will establish an independent company as a ‘national infrastructure’ and transfer the licence to it, and the trust layer will not necessarily be limited to Mitsubishi UFJ Trust and Banking Corporation, but will be available to any financial institution. The trust layer is not necessarily limited to Mitsubishi UFJ Trust Bank, but can be used by any financial institution.
--How do you intend to deal with stablecoin as Progma? What are your future plans?
Saito: Firstly, overseas operators will be able to issue stablecoins in Japan, secondly, banks will be able to launch coins as a new business, either on their own or as part of a consortium, and thirdly, users in Japan and abroad will be able to use the coins. The third is for businesses with domestic and foreign users to issue their own coins as a cross-border payment method.
The aim of the Progma Coin System as an enabler is to enable these three patterns to be realised without any restrictions.
In terms of timelines, intermediaries need to obtain a licence to deal in stabled coins, and it usually takes about one year after the law comes into force for the first intermediary to obtain a new licence of this kind. Therefore, if simple calculations are correct, progress will be made by June 2024.
The platform will focus on covering the needs of all payment segments, keeping in mind the above timelines for multi-chain and cross-chain implementation.
Tatsuya Saito
Joined Mitsubishi UFJ Trust and Banking in 2010, established the FinTech Promotion Office in 2016, planning and promoting digital strategies. As a ‘serial entrepreneur’, he has developed the information banking platform Dprime, the digital securities platform Progmat, the stable coin platform Progmat Coin, the functional NFT platform Progmat UT, the industry In 2022, he announced the formation of an independent company for the digital asset infrastructure business with investments from several financial institutions, exchanges and software companies, and plans to become its representative. Seven patents registered.
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