In September last year, the Japanese banks announced that they were launching a digital currency, originally dubbed as the J-Coin. The project went into radio silent mode for more than a year with most feeling that it was either too ambitious or radical that such a transformation of this magnitude will bring to the economy.
Lo and behold, this week, the second largest Japanese bank, Mizuho Financial Group, announced that it will launch a JPY stable coin by March 2019. Surprisingly, this headline hasn’t created as much excitement despite the many implications.
This announcement is significant because of the following:
- Mizuho holds $1.8 trillion in assets with over 505 branches and offices domestically and in 38 other countries, and is the only bank to have branches in every prefecture in Japan
- This program already has 60 domestic regional banks on board, where consumers are able to use the cryptocurrency at any of the participating banks
- Smartphone app compatibility where users pay via QR codes
- Retail shops using the digital currency will be charged fees significantly lower than for credit card services
- Free transfers to/from smartphone to bank, to/from other users
- Merchants will not be charged fees for users depositing with instantaneous settlement
- The launch of the cryptocurrency is ahead in the timeline for the Tokyo Olympics in 2020
The Implications
1. A digital transactional ecosystem will materialize with this digital currency should the following be accomplished; cost of goods (COGS), seamless UX/UI experience (ease and convenience), and public awareness (i.e. education). For any smart city, mobile purchases are already a norm — and, so the inclusion of cryptocurrencies alone will not simply drive consumer usage. What should move the dial would be a lower COGS that will be translated into cost savings for the average consumer. This could take place through eliminating existing payment rail transaction fees (think 2–3% charged per credit card transaction and etc), lowering merchant banking fees (i.e. less cash transactions and credit lines will translate to less fees) and reducing trade financing or processing fees (more automation in the trade finance chain). The UX/UI experience should be as seamless as it works no differently than current mobile apps. For awareness, this would be an ongoing process where joint public-private sector efforts in education have to be made.
Most concerning, with Japan facing a seemingly unwinnable fight against deflation and potential global economic instability in the near future, it is more likely than ever that some of these cryptocurrencies will be perceived as better store of values or simply a logical diversification to their general exposure to JPY.
2. Mizuho will allow convertibility of other digital currencies, which thereby introduces an array of cryptocurrencies into the real economy. While this would naturally bode well for mainstream digital currencies such as Bitcoin and Ethereum, it would also be positive for popular domestic centric cryptocurrencies such as MonaCoin, NEM and Ripple.
3. One of the biggest obstacles to mainstream adoption and usage of cryptocurrencies has been fiat on-ramp access (i.e. fiat to crypto, and vice versa) from traditional banks, which will be required for this program to materialize. With Mizuho and 60 domestic banks participating in and thereby, opening up their fiat on-ramp channels, this would open up the floodgates for start-ups, merchants, and enterprises, who want to integrate crypto into their businesses.
For immediate impact, this would be positive for the stocks of participating domestic banks, fast-moving consumer goods (FMCG) sector, and onshore cryptocurrency exchanges (i.e. Coincheck, Bitbank, bitFlyer, BTCBox and etc). It would however be negative for credit card companies (think Visa, Mastercard), non-participating domestic or offshore banks. In the longer term, it will result in a more frictionless real economy, thereby potentially reducing profitability of traditional banks and payment rails, which may eventually lead to further consolidation in these sectors.
4. The infrastructure stack will get even more exciting with adoption and usage from merchants, consumers and traditional financial institutions. The entire ecosystem will develop alongside with the core and peripheral layers of the market structure being built out, thereby driving waves of innovation and investments into the distributed space. Immediate beneficiaries in the infrastructure layer will include:
- Wallets (i.e. onshore firms such as Ginco, and especially those that will win approval from the Japanese regulator),
- Interoperable gateways such as oracles where offline data meets on-chain world (the equivalent of ChainLink) and blockchain interoperability services (i.e. how Mizuho’s blockchain connect with other public or private chains or the likes of Cosmos, Polkadot and etc),
- Consumer and merchant security solutions with onshore presence (i.e. Nomura Research Institute’s security tool, Thales eSecurity, RSA and Sepior),
- Blockchain analytics and CRM for merchants and banks (think Salesforce in crypto or current market leader, Chainalysis),
- Custody solutions will be highly sought after by high net-worths, merchants, and banks (i.e. Komainu, Fidelity and Coinbase).
Infrastructure-specific second order effects will include:
- The convergence of Internet of Things (IoT) and blockchain services will likely generate many use cases such as management of IoT networks, asset-sharing networks, end-user authentication, surveillance and compliance — with identity, security, interactions and transactions as the core component (i.e. onshore IoT infrastructure stack, solutions and even domestic tech companies which focuses on IoT such as Nayuta),
- Digital connectivity with other global payment networks such as Alipay and WeChat Pay. As was disclosed earlier that the Japanese stablecoin should be integrated in these applications so as to tap demand from Chinese and foreigners visiting Japan (may be bullish for JPY in the longer term should critical mass be reached),
- Proliferation of blockchain services will digitalized and automate the entire value chain of trade finance, from issuing the letter of credit to delivering trade documents. (this will lower COGS further, and drive consolidation towards tech-focused banks),
- Accelerate the pace of innovation, investments and regulatory clarity in other countries.
5. The Japanese regulator made it clear that a Japanese bank would have to be involved in launching a stablecoin tied to JPY within Japan. This put those domestic stablecoins at an advantage over non-Japanese crypto projects who would have to partner with a Japanese bank to move forward with any launch. Eventually, these participating onshore banks will outperform offshore banks and stablecoins.
6. Accelerate regulatory clarity within Japan, as the country’s regulator is thinking of placing cryptocurrencies into a dedicated legal category called “crypto-assets” to prevent confusion with legal tender, which is positive for the crypto asset class in the long term.
7. Given that Mizuho and IBM have been working on blockchain transactions and settlements since last year, it is likely that the Japanese bank will be building on Hyperledger Fabric. When the domestic digital transactional ecosystem gets built out and momentum follows, the next phrase development would logically follow international currency transactions. Then, this could derail the bank’s partnership with Ripple that was inked in 2016 to establish a cross-border distributed system. Should this narrative play out, this would be slightly negative for the XRP token in the longer term.
This forward-looking move towards a more frictionless transactional economy by the Japanese could be a step mirroring the early innovative days of Sony, a global electronics giant in the 1900s, with products including the transistor radio, the Walkman, the Compact Disc and the PlayStation console, that have changed our everyday lives. Or to put it simply, the J-coin may just be Japan’s remedy for it’s deflation cancer.
Thanks to Joshua Nair, Aaron Tay and Alex Levine for their insights and comments on this blog post.
