On-Chain Finance and Stablecoins: What is Risk Management to Prepare for Financial Crises? ("So That Was Blockchain Ep.20" Yoshihiko Uchida, Yuya Sakai, Shinya Otsuga)

"So That Was Blockchain" Ep.20

In this podcast episode, Yoshihiko Uchida, who has a background in bank supervision at the Bank of Japan and the Financial Services Agency and currently teaches blockchain at Shunan University, Yuya Sakai, a founder of a gourmet app who has built a Web3 business by combining blockchain with Web2 services, and Shinya Otsuga, deputy editor of the crypto media "New Economy," introduce what you need to know about blockchain today.

In this 20th episode, continuing from the previous one, we discussed the theme of "Market Stability and Financial Order," focusing on what "Risk Management" means to maintain financial order.

First, we explained that the purpose of risk management is not to eliminate risks but to manage the probability of occurrence and the magnitude of losses. We confirmed that, in the overall financial system, it is necessary to consider the balance between social losses and the economic benefits gained from taking risks.

There are four types of risk responses: "Retention," "Avoidance," "Transfer," and "Reduction." Even if individual entities are sound, the overall system can become unstable, so authorities try to capture the seeds of crisis from a macro perspective. We organized factors that exacerbate crises, such as "Procyclicality," which amplifies economic fluctuations, the strengthening of "Interconnectedness" among market participants, and the decline of "Resilience," which is the ability to absorb losses.

We then presented a framework for observing the market from the perspectives of risk pricing, leverage, short-term liquidity, and interconnectedness. We introduced a way of analyzing crypto assets from the perspective of capital markets and stablecoins from the perspective of non-bank finance and market-based finance. We also touched on the FSB's perspective of viewing crypto assets, stablecoins, and DeFi as an integrated whole, as well as the IMF's idea of applying the same regulations to the same activities and risks.

We discussed that for stablecoins, it is important not only to have "reserve assets" but also to be able to actually redeem them for fiat currency when needed, emphasizing the necessity of scenario analysis such as large-scale redemptions by arbitrageurs. We debated the possibility that even if each participant acts rationally to protect themselves, the concentration of redemptions or the sale of reserve assets could spread impacts throughout the entire financial market.

Next, using the stock market's "circuit breaker" as an example, we explained the role of mechanisms that halt trading to suppress the chain of crises. In the crypto asset market, we noted that even if one exchange stops trading, transactions continue on other exchanges or DEXs, confirming the need to prepare for risks across the entire market.

Finally, we pointed out that when discussing "On-Chain Finance," it is necessary to distinguish between the use of DLT (Distributed Ledger Technology), tokenization, and public chains, and to examine the specific advantages and disadvantages. Regulations reflect the "will" of each country, and it is essential to build calm discussions rather than unconditionally following other countries.

The next episode, Episode 21, is scheduled to be released on October 13, 2026. As an extension of Part 2, it will cover the current state of financial regulations and crypto asset-related business regulations in Japan and major countries. We will organize what regulations target, such as assets, issuers, intermediaries, and market infrastructure, and consider the differences in each country's positions and goals.

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