Knowledgebase

Cryptocurrency Regulations in Japan

Cryptocurrencies: Legal, treated as property
Cryptocurrency exchanges: Legal, must register with the Financial Services Agency

Japan currently has the world’s most progressive regulatory climate for cryptocurrencies and recognizes Bitcoin and other digital currencies as legal property under the Payment Services Act (PSA). Following those regulations, crypto exchanges in Japan are required to be registered and comply with traditional AML/CFT obligations. Japan is the world’s biggest market for Bitcoin and, in December 2017, the National Tax Agency ruled that gains on cryptocurrencies should be categorized as ‘miscellaneous income’ and investors taxed accordingly.

Recent regulations include amendments to the PSA and to the Financial Instruments and Exchange Act (FIEA), which took effect in May 2020. The amendments introduce the term “crypto-asset” (instead of “virtual currency”), place greater restrictions on managing users’ virtual money, and more tightly regulate crypto derivatives trading. Under the new rules, cryptocurrency custody service providers (that do not sell or purchase crypto assets) fall under the scope of the PSA while cryptocurrency derivatives businesses fall under the scope of the FIEA. 

Cryptocurrency Regulations Japan

Cryptocurrency Exchange Regulations

Cryptocurrency exchange regulations in Japan are similarly progressive. Under the PSA, only businesses with a competent local Financial Bureau are allowed to operate as a cryptocurrency exchange, however, in keeping with Japan’s progressive stance, foreign cryptocurrency exchanges are permitted to register where they can demonstrate an equivalent registration standard in their host country.  

While exchanges are legal in Japan, after a series of high profile hacks, including the notorious Coincheck heist of $530 million in digital currency, crypto regulations have become an urgent national concern. Japan’s Financial Services Agency (FSA) has stepped up efforts to regulate trading and exchanges: amendments to the PSA require cryptocurrency exchanges to register with the FSA in order to operate – a process which can take up to six months and which imposes stricter requirements around both cybersecurity and AML/CFT. In Japan, exchange-based regulations primarily aimed at protecting market integrity, users, investors, and exchanges, must observe certain record-keeping requirements and provide the FSA with an annual report. Subsequent amendments in 2016 and 2019 updated this requirement to include checking customer identification and to cover custodian services providers.

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Future Cryptocurrency Regulations

Japan remains a friendly environment for cryptocurrencies but growing AML concerns are drawing the FSA’s attention towards further regulatory steps. Following talks between exchanges and the FSA, an agreement to form two self-regulatory bodies – the Japanese Virtual Currency Exchange Association (JVCEA) and the Japan STO Association – was put in place in April 2020. Japan is the first country to take this self-regulatory step: all exchanges are members of the JVCEA while 5 major Japanese financial institutions collaborated to establish the Japan STO Association. The JVCEA and the STO Association work to provide advice to as-yet unlicensed exchanges and promote regulatory compliance: both promise to play a significant ongoing role in establishing crypto industry best practices and ensuring compliance with the recently-implemented regulations.

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