Japan has passed a landmark law clarifying the legal status of stablecoins, surging ahead in an international race to construct safety nets around the tokens whose peg to mainstream currencies underpins the broader cryptocurrency market.

The move by Japan, part of a five-year effort to protect consumers investing in cryptocurrencies, followed last month’s shock collapse of TerraUSD, which triggered a debate about whether the tokens should be regulated, banned or left alone.

Japan’s Financial Services Agency had been preparing regulations for stablecoins well before the market unravelled, and argued in a paper last year that “a higher level of regulatory discipline” was required for instruments with such significant potential impact on financial stability.

The upper house of Japan’s parliament on Friday passed a bill that essentially defined stablecoins as digital currencies, imposed a mandatory link with the yen and enshrined the right to redeem them at face value.

The legal structure will come into effect in 2023, with the FSA expected to clarify the rules for stablecoin issuers in the coming months. Analysts said the legal framework may make it difficult for foreign players to enter the market.

Under the new legal definition in Japan, the issuance of stablecoins will be restricted to banks, trust companies and certain licensed money transfer agents.

The move echoed the FSA’s successful push in 2017 for Japan to become the first major economy to recognise bitcoin as a currency. It shortly afterwards became the first government to issue formal operating licences to crypto exchanges.

Japan’s official legitimisation of bitcoin triggered a significant early boost in its market value, though the FSA’s enthusiasm was damped in late 2017 after customers of the Tokyo-based exchange Coincheck lost $530mn in a digital heist.

Ahead of the bill’s passage, Mitsubishi UFJ Trust and Banking Corp outlined plans to issue its own stablecoin, called Progmat Coin.

Japan’s regulatory effort came during a global debate about whether regulations should be tightened for stablecoins and other digital currencies.

The collapse of terra, which briefly lost its peg with the US dollar last month, sent shockwaves through global crypto markets and heightened regulatory concerns.

Stablecoins such as TerraUSD offer what should be a stable store of value against traditional currencies in contrast to other, more volatile crypto tokens, including bitcoin.

In a speech this week, Andrew Hauser, an official at the Bank of England, warned about the risks of holding TerraUSD and other digital currencies, saying that any stablecoin that reached “systemic size” should meet standards equivalent to those of commercial bank money.

“In practice, that is likely to mean being issued by a bank, or by a non-bank that is subject to rigorous central bank regulation and supervision,” he said.