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The Financial Services Agency (FSA), the top financial regulator in Japan, is working on a legislative proposal that would only allow banks and wire transfer companies to issue stablecoins in a blow to companies like Tether, Nikkei reports.
Fiat-backed cryptocurrencies will have to be backed by reserve assets.
The government agency is also focused on strengthening anti-money laundering regulations in the country.
Last December, a subsidiary of Tokyo-based IT behemoth, GMO, launched the first regulated stablecoin pegged to the value of the Japanese yen.
Stablecoin issuers have also come under intense scrutiny in the U.S. Last month, the Treasury Department urged Congress to police dollar-backed cryptocurrencies like banks to ensure "adequate" protection.