Japan is one of the biggest cryptocurrency markets in Asia. This is especially surprising given that two high profile cryptocurrency hackings took place in 2014 and 2018. These involved Mt. Gox and Coincheck with a combined loss of almost US$1bn. This just goes to show the resilience and progressiveness of the Japanese government and regulatory authorities in being able to bounce back from such a scandal and transform the Japanese cryptocurrency market into the well-regulated and progressive market it is now. In doing so, they have managed to develop a regulatory framework and cryptocurrency market that has managed to encourage continued development and accessibility to such a dynamic industry, without stifling innovation or compromising on investor protections. These are just some of the reasons why it is such a popular cryptocurrency market for businesses and investors alike. In addition to these reasons, Tetra Consultants has also picked out the 4 key things for you to know about Japan cryptocurrency asset regulations before you register company in Japan to operate a cryptocurrency business.
Key aims of cryptocurrency asset regulations in Japan
Cryptocurrency regulation first came about as a result of the Mt. Gox hack in 2014. Despite the prior establishment of the Payment Services Act and the Financial Services Agency of Japan (JFSA), such cryptocurrencies were not covered by these regulations or regulatory authorities. The lack of regulation and security measures later proved to be the source of weakness that hackers capitalized on.
Based on the findings of the JFSA working and study group, changes were made to the Payment Services Act, and the first form of cryptocurrency regulations were established in Japan in 2016. Many of the original key aims still remain and are listed out below. These aims have set the tone for the regulatory systems in Japan since then and continue to shape the cryptocurrency market in Japan to date.
- To introduce a system to register virtual currency exchange businesses in Japan
- To ensure all virtual currency transactions are compliant with anti-money laundering regulations
- To create a regulatory system which protects all users
From these three aims, we can tell why the Japanese crypto market is such an attractive option for many. With protection and accountability at the forefront of their aims, the Japanese crypto market has managed to earn a reputation as a well-regulated and reputable crypto market that makes it easy for investors to do business.
Who are the regulatory authorities?
A key aspect of Japanese cryptocurrency regulations is that it adopts a combination of bottom-up and top-down approaches. Unique to Japan, there are several self-regulatory organizations that have also been given the authority to issue and enforce cryptocurrency asset regulations. They work alongside the governmental authorities, the JFSA, to protect and instil trust in the crypto market.
The Japanese Financial Services Agency is the governmental body overseeing the financial services sector in general in Japan. They are the main financial regulator in Japan and aim to ensure the stability of the financial system by creating and enforcing financial legislation. As the overarching body governing the financial service sector, they also serve as the link and representative between the individual financial services and international regulators such as the Financial Action Task Force. They help to standardize the terminology and regulations not just for compliancy’s sake but also for standardization to minimize confusion. This includes key directives from the FATF such as the international anti-money laundering and counter-terrorist financing guidelines. Holding the Japanese financial market accountable to international standards is one of the ways that the JFSA maintains the reputation of Japan as a financial hub, and this makes it easy for foreign investors to do business.
The JFSA is also the key administrator of the self-regulated organizations that help to implement and enforce financial regulations in Japan. We will cover these organizations in depth in a section below.
The Japanese financial intelligence unit is the Japan Financial Intelligence Center (JAFIC), and they work alongside the JFSA specifically in the area of preventing money laundering and terrorist financing. They are a branch of Japanese law enforcement that track and monitors suspicious transaction reports to flag out possible money laundering or terrorist financing activities. Much like how the JFSA serves as the Japanese representative to the FATF, the JAFIC serves as the Japanese representative to Egmont Group, an international group of financial intelligence units that work together and share information to prevent such illegitimate activities from taking place, ensuring the reputability of the international financial markets as a whole.
Self-regulated organizations (SRO)
The Japan Virtual and Crypto Assets Exchange Association (JVCEA) is composed of JFSA-licensed entities, but crucially have been vested with the power by the JFSA to enforce and implement legislation on all cryptocurrency exchanges, regardless of whether those exchanges are their members. Combining this with their status as a professional body, they have both the ability and mandate to be able to nimbly enact meaningful legislation. This is one of the main reasons why the Japanese crypto market is so much more responsive as compared to other international crypto markets that often get slowed down by bureaucratic barriers.
Beyond its regulatory role, it also has the power to enforce these regulations as well. However, the fact that they extend membership to licensees that are still in the process of registration with the JFSA also highlights their other role of helping such licensees to meet the necessary requirements for registration.
The Japan Security Token Offering Association (JSTOA) is the counterpart to the JVCEA that oversees security token offerings. This is an up and coming sector and their role is crucial in facilitating its safe development as opposed to restricting it.
How all these organizations work together to regulate the Japanese crypto market
At the heart of Japanese cryptocurrency regulation is the JFSA. Working alongside JAFIC, it helps to ensure the protection and accountability of Japanese cryptocurrency systems. It does this by keeping local regulations in line with international standards, and also by administering more nimble SROs to support the cryptocurrency exchanges. This allows it to maintain its responsiveness without compromising on standards, allowing the Japanese crypto market to enjoy a good balance of both, making it one of the most popular options for cryptocurrency exchanges to establish themselves.
What business activities fall under these cryptocurrency asset regulations?
According to the PSA, conducting the following activities will require you to be registered.
- Sale, purchase or exchange of crypto assets
- Serving as an intermediary or agent to such activities
- Managing customer’s funds in relation to such activities
- Management of customer’s crypto assets
What are the key regulations on cryptocurrency in Japan?
Cryptocurrency firms can only operate as a joint-stock company (kabushiki kaisha) or if you are a foreign firm looking to do business in Japan, establish a subsidiary joint-stock company or branch office. The minimum capital for this will be JPY 10 million (US$ 91,000), and you must also have an appropriate organizational structure and internal control systems in place to ensure compliance to all rules and regulations. These rules and regulations include:
- Taking adequate measures for safe information management
- Providing full and accurate information to customers regarding transaction details and crypto assets handled by the firm
- Taking adequate measures to protect users and ensure it can carry out its services
- Segregating company-owned assets from customer-owned assets (for both cash and crypto assets)
- Undergoing external audit by a chartered accountant or audit firm
- Establishing an internal management system to respond to customer complaints and subsequently resolve them