Startale CEO Says Japan Must Connect Competing Yen Stablecoins or Risk Fragmentation

Beyond Speculation: Staking as Infrastructure

For years, Japan’s Web3 ecosystem has balanced world-class institutional support against a tough domestic tax climate. Although the government has promoted the country as a global hub for digital-asset innovation—backed by major corporations exploring blockchain infrastructure and IP integration—individual participants have faced steep tax barriers.

A key milestone came with the reclassification of cryptocurrencies under the Financial Instruments and Exchange Act (FIEA) and a new framework that applies a 20% flat capital-gains tax rate to designated spot crypto assets. While this is a major win for retail and institutional trading, a primary friction point remains: decentralized finance (DeFi) yields, staking rewards, and other yield-generating on-chain activities are still taxed as progressive miscellaneous income, rising as high as 55%.

In a recent discussion, Sota Watanabe, CEO of Startale Group and a board member of the Japan Blockchain Association (JBA), outlined the strategy needed to close this gap. He warned that capital flight remains an active risk if regulators fail to understand the fundamentals of on-chain mechanics.

The policy challenge is conceptual. Regulators unfamiliar with crypto often interpret “yield” through conventional financial categories, framing high returns as speculative trading or passive income rather than essential network functions. Watanabe argues that lawmakers must recognize that DeFi yields and staking are not merely speculative. In proof-of-stake systems and decentralized liquidity pools, staking and yield generation serve as the underlying machinery for consensus, attack resistance, and basic market depth.

Taxing network validation at rates up to 55% penalizes participants for providing essential infrastructure utility. For Japan’s ecosystem, high tax friction on core activities creates a structural drain. When on-chain participation carries a heavier tax burden than holding spot assets or trading traditional equities, local capital naturally moves elsewhere.

“If users and builders face uncertainty or very high tax burdens on normal on-chain activity, liquidity will move offshore,” Watanabe said. “That is not good for users, not good for startups, and not good for Japan’s position in the global digital economy.”

The Capital Drain: Why On-Chain Liquidity Matters

A sustainable crypto economy cannot depend solely on localized spot trading. Without native on-chain liquidity—supported by domestic users interacting with decentralized exchanges, lending protocols, and staking—Japan-based startups face higher slippage, thinner markets, and greater difficulty retaining early-stage talent locally.

According to Watanabe, the JBA’s approach is a step-by-step evolution grounded in evidence, rather than an overnight rewrite of the entire tax code.

However, tax reform is only half the equation; Japan also needs enterprise-grade rails capable of moving sovereign currency on-chain. As major financial groups—including MUFG, SMBC, and SBI—move toward issuing commercial, fiat-backed yen stablecoins under Japan’s updated regulatory framework, the focus shifts from issuance to utility.

For Watanabe, the real value of these assets goes far beyond balance-sheet digitization.

“Regulated yen stablecoins can become very important settlement infrastructure, but only if they are usable beyond a closed environment,” Watanabe said. “The opportunity isn’t just to issue digital yen. The opportunity is to make yen liquidity programmable, interoperable, and available for real use cases—payments, treasury operations, remittances, creator monetization, and tokenized assets.”

To handle the split between consumer engagement and institutional compliance, Startale’s approach relies on a specialized, modular architecture. Rather than forcing a single blockchain to solve all problems, each layer in the stack fulfills a targeted operational mandate.

Japan’s regulatory framework permits distinct issuance pathways ranging from trust banks to electronic payment institutions. While this encourages healthy market competition among corporate consortia, it introduces an immediate risk of liquidity fragmentation. Watanabe rejects the notion that a single corporate stablecoin will eliminate all competitors in a winner-take-all monopoly.

“I do not think yen stablecoins will necessarily be winner-take-all,” Watanabe said. “Different issuers may serve different use cases. Some may be stronger in banking. Some may be better for enterprise settlement. Some may focus on consumer payments, capital markets, or cross-border flows. That diversity is not automatically bad.”

Nevertheless, diversity without connective infrastructure risks replicating the silos of legacy banking systems.

“The risk is fragmentation. If each stablecoin becomes a closed pool of liquidity, then we recreate the same problem that blockchain is supposed to solve,” Watanabe explained. “Users and businesses do not want to manage 10 different versions of digital yen with different integrations, liquidity venues, and redemption pathways. So the important layer will be interoperability.”

Regulated Access to Open Infrastructure

To solve fragmentation, the ecosystem requires shared standards and unified liquidity venues capable of converting competing stablecoins without breaking compliance requirements. Watanabe advocates for “regulated access to open infrastructure”—building compliance checks directly into smart contract boundaries rather than locking assets inside walled gardens.

“For Soneium, the goal is to provide infrastructure where enterprises and developers can build applications that are compliant at the edges but still benefit from public blockchain rails,” Watanabe said. “Highly regulated assets do not have to mean completely closed systems. You can have identity, compliance, custody, and issuance controls while still allowing broader interoperability.”

The rollout of this hybrid framework will be phased and methodical. As compliance standards, identity primitives, and cross-chain messaging mature, these regulated assets can expand safely into broader global liquidity networks.

Meanwhile, as the FIEA sets the regulatory baseline for spot crypto exchange-traded funds (ETFs) in Japan, the market faces a pivotal strategic question: Will institutional liquidity flow strictly into passive ETF wrappers, or will it spill over to revive direct venture funding for local Web3 founders?

Historically, strict venture capital regulations and limited partnership (LP) restrictions have prevented Japanese VC funds from holding native crypto tokens directly on their balance sheets. While spot ETFs offer traditional institutions an easy and familiar route for price exposure, Watanabe cautions against viewing them as a silver bullet for the startup economy.

Although ETFs normalize digital assets as a recognized asset class, they do not inherently generate technical breakthroughs or back seed-stage teams.

“ETFs are an important step because they make crypto exposure easier for traditional investors to understand,” Watanabe noted. “They create a regulated wrapper, familiar custody arrangements, and clearer access for institutions. But ETFs alone do not build the next generation of Web3 companies.”

If institutional inflows remain confined to passive tracking products, Japan risks becoming a pure consumer of global crypto assets rather than an architect of new protocol infrastructure. Ultimately, Watanabe sees passive financial products and active venture capital as complementary pillars of a mature market rather than competing forces.

The overarching blueprint articulated by Watanabe blends legislative modernization with purpose-built infrastructure. By pushing for fair tax rules on staking and DeFi yields, establishing unified liquidity layers for competing digital yen issuers, and ensuring that venture capital can back early-stage founders alongside spot ETF adoption, Japan is constructing a comprehensive framework. The end goal is clear: an environment where global capital can comfortably enter, local liquidity remains vibrant, and domestic innovation can scale natively on the world stage.

Hero/Feature image source: x.com/StartaleGroupJP