Japan’s Cryptocurrency Legislative Landscape Prior to 2024

In the years leading up to 2024, Japan’s approach to regulating cryptocurrencies was characterized by a structured yet adaptive framework. Key to understanding this landscape is recognizing the distinct roles played by various regulatory bodies and the specific laws that guided the operation of cryptocurrencies.

Regulatory Framework

Japan’s regulation of cryptocurrencies was anchored by the Financial Services Agency (FSA), in collaboration with the Japan Virtual Currency Exchange Association (JVCEA) and the Japan Security Token Offering Association (JSTOA). The JVCEA was responsible for creating rules for crypto exchange service providers, while the JSTOA supervised token offerings and other crowdfunding events​​.

Payment Services Act (PSA) and Financial Instruments and Exchange Act (FIEA)

The PSA was pivotal in regulating cryptocurrencies and utility tokens, requiring business operators to register as providers of Crypto Asset Exchange Services (CAES). Stablecoins like USDC and USDT were classified as “Electronic Payment Instruments” (EPIs) under the PSA, necessitating a different set of registration requirements for their handlers. The FIEA, on the other hand, regulated security tokens as electronically recorded transferable rights (ERTRs), requiring operators to register as Type I Financial Instruments Business Operators (Type I FIBOs)​​.

Amendment Act of 2023

A significant development was the implementation of the Amendment Act in 2023. This act introduced new regulations for stablecoins, distinguishing EPIs from other currency-denominated assets and imposing strict anti-money laundering and counter-financing of terrorism (AML/CFT) regulations​​.

NFTs and Central Bank Digital Currency (CBDC)

NFTs, which gained considerable attention, were not classified as securities or ERTRIS under the FIEA, nor as crypto assets under the PSA due to their unique, non-fungible nature​​. The Bank of Japan (BOJ) explored the concept of CBDCs, conducting feasibility studies but did not commit to issuing them by 2024​​.

Registration and Compliance Requirements

CAES providers were subjected to rigorous registration processes and compliance requirements. They had to adhere to stringent cybersecurity, AML, and counter-terrorism funding measures. The FSA’s registration process was comprehensive, involving a detailed checklist and due diligence to ensure that applicants met all necessary standards​​​​.

Protection of Users’ Property

Following incidents of crypto asset leakage, Japan imposed strict regulations to protect users’ property. CAESPs were required to segregate users’ fiat currency and crypto assets from their own, with at least 95% of users’ crypto assets managed in cold wallets. These regulations aimed to mitigate the risks associated with hot wallets and ensure users’ preference rights in case of CAESP’s bankruptcy​​.

Transparency and User Information

CAESPs had to ensure the security of important information, establish risk management systems, and provide detailed information to users about each crypto asset handled, including transaction rules, fees, and transaction history. They were also mandated to respond fairly to user complaints and resolve disputes through alternative dispute resolution procedures​​.

Taxation

The National Tax Agency classified earnings from cryptocurrency trading as “miscellaneous income,” with progressive tax rates up to 45% and an additional 10% payable as local inhabitant tax. Losses from crypto asset trading could be used to offset such profits​​.

In summary, Japan’s legislative framework for cryptocurrencies prior to 2024 was a complex yet well-structured system, balancing the need for innovation with the imperative of user protection and market integrity. The evolving nature of these regulations reflected Japan’s cautious yet forward-looking approach to the rapidly evolving world of digital assets.