In June 2018, the Government of Japan introduced a framework under the Act on Special Measures for Productivity Improvement (seisansei koujou tokubetsu sochi hou) to encourage innovation through a project- based ‘regulatory sandbox’. The purpose was to create an environment in which businesses can conduct proof of concept and pilot testing for new technologies and business models that are not covered by existing regulations. The aim is to facilitate the collection of data and contribute to regulatory reforms.
Japan’s regulatory sandbox is not limited to any particular sector. It was designed to encourage innovation across all industrial sectors and any company can apply to participate in the scheme. Although the regulatory sandbox is overseen by the Headquarters for Japan’s Economic Revitalization (which sits under the Cabinet Secretariat), individual projects are reviewed and supervised by the relevant ministries from within the Japanese government. For FinTech related projects, this will primarily be Japan’s Financial Services Agency (JFSA).
On January 18, 2019, the JFSA announced that Crypto Garage, Inc.’s application to participate in the regulatory sandbox had been approved.
Crypto Garage’s pilot will focus on testing a blockchain based delivery-versus-payment (DvP) settlement system between JPY and crypto assets. According to Digital Garage, Inc., the Tokyo Stock Exchange listed parent of Crypto Garage, under this project:
“Crypto Garage will provide the participating crypto-exchanges with “SETTLENET”, which allows the exchanges to issue a stablecoin pegged to Japanese Yen (JPY-Token) on the “Liquid Network”, and trade against Liquid Bitcoin (L-BTC) that are pegged to Bitcoin on a Bitcoin sidechain launched by Blockstream Corporation (HQ: Victoria Canada, CEO: Adam Back). Furthermore, by utilizing atomic swap technology, “SETTLENET” allows the exchanges to simultaneously deliver L-BTC in exchange for the receipt of JPY-Token on the “Liquid Network”. This will enable rapid, secure and confidential transfer of crypto assets while eradicating counterparty risk. In addition, SETTLENET will provide the regulatory authorities with the functionality to monitor any unlawful trade, including money laundering.”
The sandbox testing period will be one year from January 21, 2019 and only licensed cryptocurrency exchanges in Japan will be able to participate in Crypto Garage’s pilot.