Japan Crypto Asset Regulations | 日本の暗号資産規制

Home » Compliance Insights » Japan Crypto Asset Regulations | 日本の暗号資産規制

Japan crypto asset regulations allow users to buy, sell and own crypto assets. Purchasable from exchanges, ‘Bitcoin ATMs’, and one another.

Alongside having a long, rich history of technological innovation, Japan is a global financial hub. The country’s laws and business environment are thus highly conducive to blockchain technology, with many DLT-native businesses operating in Japan, including Coinfirm. On a per-capita basis, the country has one of the highest adoption rates of the technology. Japan is currently trialing the use of a CBDC (Central Bank Digital Currency) of the Yen (JPY).

Additionally, Japan has been a member of the Financial Action Task Force (FATF) – the global financial regulatory watchdog – since 1990, and as such closely aligns it’s compliance laws surrounding anti-money laundering (AML) and combatting the financing of terrorism (CFT) to the FATF’s recommendations.

Japan crypto asset regulations Key Takeaways;

The regulator of Japanese crypto assets and VASPs is the Financial Services Agency (FSA)
Payment Services Act (PSA) and Financial Instruments and Exchange Act (FIEA) and the Act on Prevention of Transfer of Criminal Proceeds (APTCP)
‘Crypto Assets’ coined as a legal term

Japan Crypto Asset Regulations on Taxes

Crypto assets taxation can be classed as ‘miscellaneous income’, which means that gains or losses made from the sale of crypto assets cannot be offset by other income streams.

Japanese crypto asset regulations governing taxes stipulate that the assets are subject to inheritance tax upon the estate of a deceased person.

Japan Crypto Asset Regulations on Mining

There are currently no Japanese crypto asset regulations specifically governing the activity of mining.

Japan Crypto Asset Regulations on AML/CFT

Japanese crypto asset regulations on anti-money laundering (AML) requirements are set out in the Act on Prevention of Transfer of Criminal Proceeds (APTCP), which are enforced by Japan’s financial intelligence unit (FIU), the Japan Financial Intelligence Center (JAFIC).

Under the APTCP, VASPs conducting exchange services are obligated to maintain stringent KYC (Know-Your-Customer) checks and records of suspicious transactions.

These include;

Verifying the identity (KYC) data of customers, as well as an individual that retains significant control over the customer in question’s business to ascertain the nature of conducting transactions.
Create, keep and update verification and transaction records.
Maintain the records for at least 7 years.
Exchange providers need to report to the relevant authority any suspicious transaction (and must report any transaction over 30 mln JPY (~209,000 GBP), in crypto or fiat, to the Ministry of Finance under the Foreign Exchange and Foreign Trade Act).

Watch: How can crypto companies be compliant and avoid regulatory penalties through AML frameworks? with Coinfirm’s CIO & co-founder Paweł Aleksander

The Payment Services Act (PSA)

In May of 2019, amendments were made to two long-standing financial regulations overseen by the FSA – the Payment Services Act (PSA) and the Financial Instruments and Exchange Act (FIEA) – to more adequately cover the regulation of crypto assets in Japan and their safe incorporation into the wider financial system. These amendments have been enforced since May 2020.

Virtual Currency Crypto Assets

The Japan crypto asset regulation the PSA has changed the term of ‘Virtual Currency’ in reference to cryptocurrencies to ‘Crypto Asset’, mirroring the use of the term cryptoassets at the G-20. This is now a legal definition. This amendment, however, is not compulsory for implementation by exchanges and the media.

Payment Services Act (Japanese & English) – Download PDF

Crypto Asset Custodians Face Tighter Rules

VASPs (Virtual Asset Service Providers) that offer custodian services must bear the same level of accountability for the risks as VASPs offering exchange services (i.e. loss of customers’ crypto assets and AML/CFT. Therefore, custodians must now register with the Japan Financial Services Agency (FSA).

Exchanges Segregating Funds Between Themselves & Users

After April 2020, exchanges operating in Japan must segregate customers’ funds separately from their own. Exchanges thus need find a 3rd-party entity to custody users’ cash and crypto assets (a trust or the same legal entity).

According to the amendments to the Payment Services Act, “reliable methods” must be used to manage customers’ funds (i.e. cold wallets). If not in the form of segregated cold wallets – crypto asset exchanges must hold “the same kind and the same quantities of crypto assets” as the customers’ crypto assets if they are held in hot wallets. This will ensure exchanges to reimburse customers in the case of stolen crypto assets.

Read:How to Trace Stolen Crypto

Privacy Protocols

On March 15th, the JFSA noted that it would deal with “problematic crypto asset” that are easily used for money laundering (ML) due to transaction records not being traceable/auditable. But, the amendments to the PSA does not specifically regulate privacy coins or anonymous cryptocurrencies like monero/zcash.

In May 2019, Japan imposed inspections on VASPs offering trading of those kinds of protocols/coins.

The Financial Instruments and Exchange Act (FIEA)

The Financial Instruments and Exchange Act (FIEA) is Japan’s main regulation on financial securities. It additionally covers broker-dealers, tender offers, disclosure obligations of publicly traded companies and investment trusts.

ICOs & STOs

The revised FIEA states that initial coin offerings (ICOs) and security token offerings (STOs) are defined as electronically recorded transferable rights (ERTRs) and regulated by the FIEA. Japan’s ERTRs help close the question of certain types of crypto asset coins (i.e. security tokens) as financial securities – that are issued and presented to investors with the expectations of profits. Additionally, ERTRs are excluded from using the legal term ‘crypto assets,’ as per the Payment Services Act.

Tokens issued under STOs can constitute ERTRs if the 3 requisites below are attained:

Investors (i.e., right holders) invest or contribute cash or other assets to a business,
Funds/assets contributed by investors are invested in the business, and
Investors have the right to receive dividends of profits or assets generated from investments in the business.

Financial Instruments and Exchange Act (Japanese & English) – Download PDF

In addition, the Japan Security Token Offering Association (JSTOA) is now a recognized SRO (Self-Regulatory Organization) and thus must help aid in the regulation of STOs and ICOs.

Derivatives

After April 2020, crypto asset-based derivatives transactions shall be regulated under the FIEA. The FIEA does not specify margin rates in relation to leverage. However, the Japan Virtual Currency Exchange Association (JVCEA) – an association of VASPs that seeks to be ‘self-regulatory’ – has a guideline that proposes to restrict margin rates by 4X or less (a guideline made with conservative requirements bearing in mind that ~80% of crypto trades comes from derivatives based on futures, options and leveraged margin trading).

Prohibited Activities

The Japan FIEA regulation prohibits individuals/legal entities from partaking in certain activities with crypto assets; dissemination of false rumors and using fraudulent means of selling/purchasing/engagement in any transaction (including derivatives).

Potential breaches of regulations under the Japanese crypto asset regulation FIEA are:

engaging in fraudulent sales/purchases;
engaging in collusive sales/purchases;
custody/accepting the custody of fraudulent sales/purchases or collusive sales/purchases;
engaging in market manipulation via ‘real’ sales/purchases (i.e. cartels);
Or
engaging in market manipulation via ‘perceived’ representations

CBDC of the BoJ

The Bank of Japan (BoJ) – the central bank of Japan – has been exploring the uses of a Central Bank Digital Currency (CBDC) for a number of years. The digital-Yen is currently in a testing stage, and as of January 2021, the BoJ has moved onto its second stage of the three-part pilot.

BoJ CBDC Approach – Download PDF

The digital-Yen project comes at a time of experimentation with DLT applications for fiat currency by other major central banks, with a continued roll-out of the digital Yuan (China’s CBDC project) and further explorations of the digital Euro (the EU’s CBDC project).

Many posit that with the advent of CBDCs, blockchain and the wider crypto asset market will gain more mainstream adoption as the application of DLT passes to everyday transactions. As the CBDC is rolled out in Japan it is likely than more crypto asset-friendly regulations will come into force.

Read: Central Bank Digital Currencies (CBDCs): A Crisis Recovery Tool For Governments by Coinfirm CEO & co-founder Paweł Kuskowski

The Financial Services Agency: FSA of Japan

The Financial Services Agency of Japan is the main regulator for financial markets and crypto assets.

Self-Regulatory Rules (JVCEA)

Japan’s Financial Services Agency (JFSA) has determined that the Japan Virtual Currency Exchange Association (JVCEA) be granted the status of a self-regulatory organization (SRO). While it is not a legal obligation for a VASP to be registered with the association, the JFSA will closely monitor which entities apply to the association and contribute to it.

Business handling relationship

Customer property management, system safety management, etc.

Solicitation / Advertising

Rules regarding solicitation and advertising related to crypto asset-related derivative trading business

AML / CFT / antisocial forces