Article: Jin Jianzhi, Senior Lawyer at Shanghai Mankun Law Firm

In the process of communicating with industry professionals, Mankun Law Firm found that Japan is also one of the countries with a hot atmosphere for blockchain entrepreneurship. Many well-known former Web2 giants are engaged in blockchain entrepreneurship in Japan, such as Guo Yu. However, due to language limitations, Japan is often overlooked by Chinese entrepreneurs. But as the world's third largest economy, Japan's crisis awareness has somewhat influenced the authorities' regulatory attitude towards the blockchain industry. The authorities are trying to use new technologies such as blockchain to maintain the position of the world's third largest economy, while also protecting domestic investors from turning Japan into a regulatory loophole with frequent chaos.

In this dilemma, Japan's regulatory policies for the blockchain industry have matured and stabilized, creating a favorable atmosphere for blockchain entrepreneurship.

This article will introduce the regulatory policies of the Japanese blockchain industry in several parts, including the development of the Japanese blockchain industry, the legal status and tax policies of digital currencies, the licensing system and self-regulatory organizations of digital currency exchanges, the rules and guidelines for digital currency issuance financing (ICO/IEO), and the Japanese government's support for and prospects of blockchain technology, in order to provide Mankun's friends with an overview and comprehensive and accurate information.

01 Development of the Japanese Blockchain Industry

Japan's regulatory policies in the blockchain industry are gradually developing and improving. From early emphasis on the security of digital currency (Japanese: 暗号資産) transactions to later promotion of the application of blockchain technology in various industries, Japan has demonstrated foresight and innovation in this field. The following are significant events in the development of the Japanese blockchain industry.

2014: Lessons from the Mt.Gox Incident

In 2014, Japan experienced the famous collapse of the Mt.Gox Bitcoin exchange, resulting in a significant loss of bitcoins. This event triggered the government's high attention to the security of digital currency transactions, marking an important turning point in the development of Japan's digital currency regulatory policies.

2016: Legalization of Digital Currencies

As mentioned earlier, in 2016, the Japanese Cabinet passed amendments to the "Payment Services Act" (Japanese: 資金決済に関する法律), formally incorporating digital currencies into the legal regulatory system. The amendments took effect in April 2017, marking the legalization of digital currencies in Japan.

2017: Introduction of the Licensing System

With the enforcement of the "Payment Services Act," the Japanese Financial Services Agency began requiring digital currency exchanges to apply for licenses and accept its supervision to ensure transaction security and protect investor interests.

2018: Establishment of JVCEA Self-Regulatory Organization

To further strengthen industry self-regulation, improve industry standards, and enhance transparency and consumer protection, Japanese digital currency exchanges established the Japan Virtual Currency Exchange Association (JVCEA) to enhance industry transparency and consumer protection.

2019: Regulatory Framework for ICO and IEO

The JVCEA issued the "New Currency Issuance Rules" and accompanying "Guidelines for New Currency Issuance Rules," providing a clear regulatory framework for the issuance financing activities of digital currencies.

2021: Establishment of STO Association

The Japanese Financial Services Agency officially approved the Japan Security Token Offering (STO) Association as a self-regulatory organization responsible for formulating and implementing rules and standards related to STO.

2022: Bank of Japan Initiates Trial of Digital Yen

The Bank of Japan announced the initiation of the trial phase for Central Bank Digital Currency (CBDC), which is currently undergoing testing. The Governor of the Bank of Japan plans to make a decision on issuance by 2026.

02 Legal Status and Tax Policies of Digital Currencies

In 2016, the Japanese Cabinet passed amendments to the "Payment Services Act," which took effect in April 2017, providing a legal definition of digital currencies and recognizing their legitimacy. Under the "Payment Services Act," digital currencies are defined as meeting all of the following criteria:

1) Property value recorded electronically on electronic devices or other items; 2) Transferable using electronic information processing organizations; 3) Not denominated in domestic or foreign currencies or other currency-based assets; 4) Usable for purchasing, renting items, or receiving services from unspecified persons; 5) Available for purchase and sale by unspecified persons.

In other words, Japan recognizes digital currencies as a legal means of payment. The "Payment Services Act" is the world's first law to incorporate digital currencies into the legal regulatory system, holding significant importance for the digital currency market.

Japan only taxes income from digital currency transactions, categorizing it as "other or miscellaneous income," and applying a progressive tax rate of 5% to 45%, with the maximum tax rate reaching approximately 55% when combined with resident tax and special income tax for reconstruction. In addition, since July 1, 2017, digital currencies are exempt from the 8% consumption tax.

03 Licensing System and Self-Regulatory Organizations of Digital Currency Exchanges

According to the amendments to the "Payment Services Act," institutions engaging in digital currency transactions in Japan are required to apply for licenses from the Japanese Financial Services Agency and accept its supervision. Generally, to operate a digital currency exchange in Japan, the following four basic conditions need to be met:

• Entity: Kabushiki Kaisha (stock company) or foreign digital currency exchange institution (with a place of business in Japan and a representative in Japan)
• Registered capital: Possessing a financial base, with a registered capital of over 10 million yen and positive net assets
• Corporate system: Having a corporate system capable of properly and effectively conducting business (such as segregating user assets from company assets, establishing effective risk management systems, and preventing risks such as hacking, system failures, money laundering, and terrorist financing)
• Compliance: Complying with relevant laws and regulations, protecting user privacy, fulfilling anti-money laundering obligations, and cooperating with inspections and investigations by the Financial Services Agency

Currently, a total of 23 digital currency exchanges in Japan have obtained licenses from the Financial Services Agency, including well-known platforms such as Huobi Japan, bitFlyer, and Coincheck.

In addition to the Financial Services Agency's supervision, to enhance industry credibility and transparency, protect investor interests, and promote the healthy development of the digital currency market, with the approval and authorization of the Financial Services Agency, Japan established the Japan Virtual Currency Exchange Association (JVCEA) in April 2018, initiated by 16 licensed exchanges, to engage in self-regulation. The association has formulated a series of self-regulatory rules and guidelines, including:

• Categorizing and managing digital currencies provided by exchanges based on factors such as security, liquidity, and transparency to determine listing conditions
• Assessing risks for exchanges, setting limits on leverage ratios, margin ratios, and implementing forced liquidation mechanisms
• Requiring exchanges to disclose information, such as trading rules, fee standards, and customer complaint handling methods
• Providing consumer education for exchanges to enhance understanding and awareness of digital currencies

04 Rules and Guidelines for Digital Currency Issuance Financing (ICO/IEO)

In September 2019, the JVCEA issued the "New Currency Issuance Rules" and accompanying guidelines, allowing public issuance and sale of tokens for financing (IEO and ICO). This marked the first time Japan established a clear regulatory framework for digital currency issuance financing.

According to the rules and guidelines, to issue and sell tokens in Japan in compliance, the main requirements include:

• The issuer or underwriter must be a licensed exchange and report relevant matters to the Financial Services Agency and the association
• The issued tokens must meet the association's standards for security, liquidity, transparency, and pass the association's review
• The issued tokens must have a reasonable pricing mechanism and fully disclose relevant information to consumers
• The issued tokens must be fully sold within a certain period and report the sales situation to the association

Currently, under the "New Currency Issuance Rules," there have been no ICOs in Japan, and only 4 IEOs have been conducted. Therefore, on September 26, 2023, to further improve the situation of IEOs, the JVCEA further released an initial proposal for the direction of IEO reform.

05 Japan's Support for and Prospects of Blockchain Technology

The Web3 project team of Japan's ruling party released a white paper on April 6, 2023, viewing Web3 as a national strategy. As a result, the Japanese government has invested a significant amount of resources in promoting research and application of blockchain technology. For example, the Japanese Cabinet Office has established multiple special funds to support the innovation and practical application of blockchain technology. Additionally, the Japanese government is actively promoting international cooperation and exchanging ideas with other countries on the establishment of standards and regulatory frameworks for blockchain technology. The Japanese government believes that through international cooperation, it can promote the healthy development of blockchain technology while creating more opportunities for Japanese businesses and consumers.

According to a forecast by Yano Research Institute, the size of Japan's blockchain market is expected to reach 123 billion yen by 2022, approximately 8.1 billion RMB. Japan's application of blockchain technology covers various aspects such as real estate registration, identity authentication, interbank clearing, Bitcoin insurance, and supply chain finance. Here are some specific cases:

• Real Estate Registration: The Japanese government plans to integrate the national real estate data, approximately 230 million land parcels and 50 million buildings, into a single blockchain ledger to improve the visualization, accuracy, and security of the data. The project is currently in the testing phase and is expected to be completed within the next five years.
• Identity Authentication: The Financial Services Agency of Japan (FSA) has developed a blockchain platform that allows customers to share personal information among multiple banks and financial institutions and open accounts using a shared ID. In addition, SoftBank Group has collaborated with TBCASoft to launch a blockchain-based identity identification and verification project, using zero-knowledge proof and distributed ledger technology to protect personal identity information from theft.
• Interbank Clearing: Fujitsu, in collaboration with Mizuho Financial Group, Sumitomo Mitsui Financial Group, and Mitsubishi UFJ Financial Group, has developed a peer-to-peer remittance service using blockchain, improving the efficiency and security of remittances.
• Bitcoin Insurance: Due to frequent hacking attacks on Bitcoin exchanges resulting in customer asset losses, Mitsui Sumitomo Insurance in Japan has launched a Bitcoin insurance product in partnership with bitFlyer, providing compensation for Bitcoin assets and covering losses caused by internal incidents and employee misconduct.
• Supply Chain Finance: Mizuho Bank and IBM Japan have jointly developed a blockchain trade finance platform, enabling fast and secure digital transaction documents and exchange of supply chain transaction data, while enhancing transparency and credibility among the parties involved in the transactions.

Conclusion

In conclusion, Japan is a country with an open and proactive attitude towards blockchain technology and digital currencies. It has established relatively comprehensive and clear regulations in areas such as law, taxation, licensing, and self-regulation, and continues to explore and innovate to adapt to the rapid changes and diverse application scenarios of blockchain technology, aiming to secure a foothold in the global blockchain industry. For blockchain entrepreneurs, the ambitious initiatives of the Japanese government may provide a favorable entrepreneurial environment.

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