2. Problem Statement
Any argument for a new Layer 1 blockchain must begin with a clear statement of the problems it is designed to solve, and a credible claim that those problems cannot be solved adequately by existing infrastructure. MIZUHIKI addresses two such problems. They are related but distinct, and both are specifically Japanese in character.
2.1 The Sovereignty Problem
Critical infrastructure has historically been understood to require sovereignty. Electricity grids, communications networks, transportation systems, and payments rails have been treated as extensions of national authority: subject to domestic regulation, operated by parties accountable under domestic law, and insulated from the caprice of foreign jurisdictions. As economic and financial activity migrates onto digital infrastructure, the question of digital sovereignty acquires greater and greater importance.
Existing public blockchains sit uneasily within this framework. Their validator sets are distributed across jurisdictions in ways that are often opaque. Their operators may be subject to the regulatory authority of governments whose interests are not aligned with those of any particular user base. The legal status of on-chain transactions, of the tokens they settle, and of the parties who participate in their validation is ambiguous in ways that would be intolerable in any other area of financial infrastructure.
For Japanese financial institutions, this ambiguity is a binding constraint. A bank considering whether to hold customer funds in an on-chain primitive must ask where the servers are located, which jurisdiction's regulators may compel action against them, and who would be accountable in the event of operational failure. The answers available from most existing Layer 1 networks are, at best, unsatisfactory. At worst, they are unanswerable.
The Financial Services Agency of Japan has identified three specific concerns with the use of public blockchains as infrastructure for regulated activity in Japan.1
- the absence of clearly identifiable governance parties at the blockchain and application layers who can be held accountable for consumer impacts
- the difficulty of enforcing anti-money-laundering and combating the financing of terrorism obligations in a permissionless setting
- the absence of mechanisms for controlling circulation of regulated instruments (notably stablecoins) once they are on-chain
Each of these concerns reflects the limitations of existing general-purpose blockchains.
Each of these concerns must be addressed at the infrastructure layer if regulated Japanese stablecoin activity is to achieve mainstream acceptance and scale. This is MIZUHIKI's goal.
2.2 The Stablecoin Issuer Economics Problem
JPY-denominated stablecoin issuers face a structurally challenging economics problem. Japan's 2025 Payment Services Act amendment — similar to the US requirement under the GENIUS Act2 — restricts eligible reserve assets to short-duration instruments and time deposits with maturities of three months or less. However, and unlike the US stablecoin policy, the Japan FSA caps short-duration bonds to a mere 50 percent of total stablecoin backing, with the remainder locked in low-yielding demand deposits.3
At the Bank of Japan's current policy rate of 0.75 percent, the cap on short-duration bonds exacerbates the poor reserve economics for JPY stablecoin issuers, especially when compared to the United States. USD issuers operating under the GENIUS Act may back US dollar stablecoins with up to 100 percent of short-duration Treasuries, earning reserve yield revenues in the 3.5 to 4.0 percent target range. With Japanese rates only gradually increasing from historically low levels, the reserve yield revenues for JPY stablecoin issuers remains structurally challenging.
The implication is that any JPY stablecoin business relying on reserve yield alone operates on thin margins. A natural second revenue line for issuers would be one that emerges directly from on-chain transaction fees and scales automatically with circulation, rather than reserve balances alone.
2.3 One Chain, Two Solutions
The two problems are connected. The sovereignty problem makes it difficult for regulated Japanese institutions to participate in on-chain finance at all. The economics problem makes it difficult for regulated Japanese stablecoin issuers to sustain profitable businesses even where participation is possible.
MIZUHIKI is designed to solve both.
The sovereignty problem is addressed through a Japan-sovereign validator set, a compliance infrastructure tied to Japanese national identity, and a governance architecture accountable under Japanese law (Sections 4, 6, and 11).
The economics problem is addressed through a canonical paymaster that enables users to pay gas in stablecoins and structurally shares transaction revenue with stablecoin issuers (Section 5).
The remainder of this whitepaper describes these components in detail.