Japan's Crypto Regulatory Landscape

Japan has always welcomed new innovative technology because of its young and tech-savvy population, and this has enabled the widespread adoption of Bitcoin and Blockchain technology. Like any other technological innovation, regulations always drag their feet but in Japan, the situation is a bit different as regulations are closely behind blockchain innovation. Japan is one of the most forward-thinking and crypto-friendly nations in Asia, unlike its neighbors in South Korea. Let’s take a dive at some of these crypto regulations in Japan 🌊. Relevant Crypto Regulation in Japan 

1️⃣In April 2017, the Payment Services Act (PSA) recognized Bitcoin and other virtual assets as legal property. Making it legal to own virtual assets within its shores.

2️⃣December 2017, Japan’s National Tax Agency, classified earnings on cryptocurrencies as “miscellaneous income” . This classification ensures that buyers/sellers of cryptocurrencies are properly taxed.

3️⃣October 2018, The Financial Action Task Force (FATF) updated its guidelines. These changes allowed cryptocurrency exchanges and other relevant parties to implement anti-money laundering and counterterrorism funding procedures. In order to comply with the FATF requirements, changes were made to the Payment Service Act and they went into effect on May 1, 2020.

4️⃣March 2021, The Japan Virtual Currency Exchange Association (JVCEA) was given a notification to adopt ‘Self Regulatory Rules’ from the FSA concerning the ‘Crypto Travel Rule’ by April 2022. The cabinet secretariat passed an amendment in December 2022 enforcing the ‘Crypto Travel Rule’ for Cryptocurrency exchanges and trading platforms.

5️⃣May 2022, amendments were made to the PSA and the Financial Instruments and Exchange Acts (FIEA), where the term “virtual currency” was replaced with “Crypto asset” this brought about the much needed clarity as to the role and classification of crypto exchanges and trading platforms. Under the PSA, cryptocurrency exchange platforms are required to register with the Financial Service Agency (FSA) and follow the same AML/CFT regulations applicable to banks within the country.

6️⃣February 2023, the FSA launched a draft Cabinet Orders to partially review the Act on Prevention of Transfer of Criminal Proceeds (APTCP) enforcement order. The review will determine how the Travel Rule applies to Virtual Asset Services Providers (VASPs) in Japan.

⏩2024 so far is seeing some critical changes to Japan’s existing regulatory framework, one of the such amendments proposed by the FSA is the increased capital reserved requirement for exchanges. To align Japan’s crypto industry closely with global standards, more strict Anti Money Laundering  (AML) and Know Your Customers (KYC) procedures have been put in place. Also, stricter processes have been placed on token listing by understanding the underlying technology, practical application and the credibility of the team behind these tokens.

💰Crypto Tax in Japan Japan’s current tax rate on cryptocurrencies is up to 55% which is one of the highest in the world. However, there are indications that there is a potential change soon. There is a consideration to exempt unrealized gains on cryptocurrencies held by companies from corporate tax in the 2024 tax reform plan. This will encourage corporate organizations to adopt and hold cryptocurrencies on their balance sheet.

🔎Looking Ahead We now know that Japan is among the few nations that have actively regulated cryptocurrencies to offer protection, security, and transparency to investors. In April 2017, the PSA declared Bitcoin and other virtual assets to be legal property. Since then, Japan has updated and modified its current regulatory framework multiple times. One such update was the word "virtual currency" was replaced with "crypto-asset," which clarified the regulations governing cryptocurrency exchanges and trading platforms. In addition, the nation has set up record-keeping requirements, KYC checks, and AML/CFT duties to guarantee the safe and transparent operation of cryptocurrency exchanges. 

Japan’s regulation will likely continue to change as the crypto sector grows. The Asian powerhouse is at the forefront of the crypto regulatory landscape giving it direction and shaping the future of digital finance both domestically and internationally by having a flexible yet strong regulatory environment.