Namaste Yogis! Welcome to the Blockchain & AI Forum, where your technology questions are answered. As a bonus, a proverb is also included. Today’s question, was submitted by Chisato and she wants to understand the evolution of crypto regulations in her native Japan.
Chisato, you came to the right place. Let’s examine the Japanese regulatory milieu of crypto by dividing the eras into three distinct periods, and ending by defining four key terms. A big thanks and acknowledgment to So Saito and Kazuki Imanari of So & Sato Law Offices for the source of this information:
Early Era: 2014 – 2017
Japan was an early leader in crypto but after the Mt. Gox exchange collapse in 2015, crypto fell from grace. One year before the collapse of Mt Gox, the Japanese government decided to not regulate the industry and instead asked the industry to self-regulate. It didn’t work. Although some retail users fled, crypto developers continued to build and true believers remained and by 2017 Japan was home to the number one crypto exchange.
Era of Stricter Regulations: 2017 – 2020
In America, stricter regulations always happen after a catastrophe; Japan is no different. In 2018 there was a massive hacking, known as the Coincheck incident, and immediately thereafter Japanese financial regulators came charging. Exchanges were forced to comply with new regulations, leading to a shake-out in the industry.
Web3 Makes the National Growth Strategy List: 2021 – Present
In 2021, the Japanese government approved a Web3 White Paper wherein it committed to Web3 as a national priority. They quickly followed that action by being among the first to enact stablecoin regulations.
Let’s now examine the Japanese definition of four key crypto concepts.
Stablecoins
As noted above, Japan was a pioneer in crypto regulations and consequently was one of the first to establish stablecoin regulations. In Japan, stablecoins pegged to fiat currency are defined as electronic payment instruments and require the issuer to obtain a license. Stablecoins classified as assets are subject to crypto regulations, while stablecoins classified as securities are subject to securities regulations.
Non-Fungible Tokens (NFTs)
NFT regulations are generally clear. The basic rule says, that if the NFT does not function as a payment instrument it is not considered a crypto asset. Japanese regulators say “pure” NFTs have technical features that prohibit their use as payment instruments. Japanese regulators also examine whether the quantity and price of NFTs are suitable for payment instruments. Bottom line: NFTs are not regulated in Japan; they are treated analogous to trading cards. However, if an NFT is linked to a real-world asset, e.g. real estate, it could be considered a security.
Crypto Lending
Crypto lending is not regulated in Japan. What do I mean by crypto lending? In crypto lending, a service provider borrows crypto assets from users for a certain period of time and pays a lending fee in exchange. Why is this not regulated? Because crypto assets are not considered money, therefore the Money Lending Business Act does not apply. However, crypto lending maybe regulated in cases where the service is considered custody.
Crypto Taxation
Death and taxes are inevitable everywhere, including Japan. In Japan, tax authorities define crypto asset profits as miscellaneous income. Profits generated by crypto asset transactions are taxed based on the personal tax bracket of the individual. Income tax rates in Japan go from 5% to 45%! Ouch.
I end now with a proverb from Japan, where they say: “the mouth is the source of disaster”.
Until next time,
Yogi Nelson
Blockchain & AI Forum 