Discover the Cryptocurrency Regulations in Japan

Hi, This is Qadir A.K, Crypto lover and Research Columnist.

The immense success and the hunger to explore crypto regulations in different countries ended up in bringing the next chapter of my writing series, ‘The Cryptocurrency Breakthrough 2020 – Synopsis 9’.

Japan and Cryptocurrency Regulations

Japan is one of the world leaders in the development of the blockchain industry and currently the world’s most crypto-friendly country. Cryptocurrency in Japan is considered as a legal tender and accepted widely as a mode of payment. Japan is the world’s biggest market for Bitcoin and one of the first countries to regulate cryptocurrencies, exchanges, institutions, and the funds involved in the business.

Did you know? Nomura, a Japanese Analyst claims that Bitcoin adds 0.3% to Japan’s G.D.P and About 3.5 million individuals actively use and trade cryptocurrencies in Japan.

This article will take you on a Strategic and friendly ride to Cryptocurrency and Blockchain Regulations in Japan. Just like Cryptocurrency regulations in Singapore

Japanese Government on Cryptocurrency

Japan has always been on the leading edge of technology development of all the times. And the research brings a major breakthrough to the world in the field of robotics, high-speed rail, and portable devices.

So, it’s not surprising that cryptocurrency has found such a foothold in the country. Japan found it’s a new mode of payment in cryptocurrency (specifically Bitcoin).

Moreover, any technology that benefits the economy of Japan, receives tremendous support from the government. The government has worked with many tech companies as they are aware of the fact that technologies and inventions are always profitable for the economy.

Recently in January 2020, Japan’s ruling party lawmakers proposed the idea of issuing Japan’s own digital currency. However, the finance minister Aso clarified that the central banks would study the idea positively but at present, the government has no plans to issue crypto.

How the government has Regulated Cryptocurrencies?

Cryptocurrencies in Japan are treated as legal tender and the exchanges are required to register with the financial service agency. Cryptocurrency has a good, progressive base in Japan until a series of hacks that took place led to an urgent national concern. Hence, Japan’s Financial Service Agency(FSA) stepped in to regulate trading and exchanges.

An amendment was passed to the Payment Service Act which requires the Cryptocurrency Agencies to be registered with FSA in order to operate. The FSA imposed stricter requirements under cybersecurity, Anti-money laundering, and Counter Terror Financing.

Japan’s FSA held talks with the exchanges and agreed to form a self-regulatory body the Japanese Virtual Currency Exchange Association (JVCEA) which will provide advice to unlicensed exchanges and promote regulatory compliance.

Established in April 2018, JVCEA announced to enforce stricter regulations for the ‘Hot Wallet’ after the hot wallets were targeted in the hacks. It became an officially recognized regulatory body on October 24, 2018.

In case of the ICO’s, if the ICO’s target the customers in Japan then they too have to get registered as a Virtual Currency Exchange Provider

The Crypto Regulations in Japan are getting stronger with the time

Taxation and Mining

Government Taxes on Cryptocurrency

Japan terms the income from the cryptocurrency as ‘Miscellaneous Income’. The Japanese National Tax Agency which looks after the taxations in Japan have released some guidelines on the Tax treatment on Cryptocurrencies. Interestingly not all the people are subjected to tax on their cryptocurrency investments as per the guidelines.

The people with more than 200,000 Yen ($1,700) remuneration are subjected to tax and the income less than the mentioned amount are exempted. However, they too need to declare their income.

In case of gains incurred from cryptocurrencies, the tax varies from 5% – 45% and an additional 10% is added to every level as ‘Municipal taxes’. Hence the cryptocurrency owners in Japan pay the highest tax rate of about 55% on their profits.

Crypto Mining in Japan

As said above, Japanese citizens were among the first to start mining. Japan has attracted more of the crypto miners by its cheap electricity from geothermal, winds and hydropower. Many companies have set up mining businesses with more than 500 servers in Japan. However. The mining business is still under the process of regulation.

Laws Implemented on Crypto Activities

The Financial Service Agency (FSA) is the regulatory body of Japan, being concerned over organized crime and other criminals using digital currencies to launder money. Therefore, FSA made it mandatory for all crypto exchanges in Japan to be licensed with FSA to operate. The crypto exchanges need to comply with the KYC process and impose Anti-Money laundering laws.

On May 31, 2019, the house representatives of Japan amended two cryptocurrency-related laws, the Payment Service Act (PSA) and the Financial Instruments and Exchange Act (FIEA), which came into effect in April 2020.

Payment Service Act (PSA)

The new law revises the term ‘Virtual Currency’ to ‘Crypto Assets’. The Act mainly emphasized on:-

Tighter Restrictions on Custodian Service – According to the new Act, Custodian Service providers will need to be registered with the FSA even if they don’t provide a crypto exchange or trading service.

Store restrictions on Exchanges:- The exchanges will have to manage user’s money separately from their cash flows. The exchange has to use a third party operator such as ‘Cold Storage’ to keep hold of user’s money. If the exchanges store them in a hot wallet, then they have to hold the same kind and same quantities of crypto assets as the user’s assets.

The Financial Instruments and Exchange Act (FIEA)

The amended FIEA act introduced the concept of electronically recorded transferable rights (ERTR’s) which are coins issued, to define ICO’s are regulated under FIEA.

Crypto Derivatives:- Since 80% of the crypto trades come out of derivatives, which are an agreement between the two parties, regulating them was very much mandatory. And hence the derivative transactions have been regulated under FIEA from April 2020.

FIEA Prohibitions:- The FIEA prohibits anyone from engaging in activities like spreading rumors, using fraud ways to buy or sell crypto assets or derivatives.

Series of Events

08-09-2019:- Yuriko Koike, Governor of Tokyo announced to issue digital currency to residents who have made social contributions in environmental conservations and eradicating poverty. However, the name of the currency is not yet announced.

17-07-2019:- FATF approved the plan for establishing the new international network for cryptocurrency payments, similar to the SWIFT network used by banks, in an effort to fight money laundering. A FATF team would monitor its development and Japan will cooperate with other countries.

19-04-2019:- Japan’s Financial Service Agency (FSA) now requires the crypto exchanges to strengthen the internal oversight of ‘Cold Wallets’ used to store user’s money. FSA also restricted the use of less secure hot wallets.

18-03-2019:- The Japanese Government has approved the draft on the amendments to govern the margin the trading of cryptocurrencies. The exchanges that allow the margin of trading cryptocurrencies are required to register with the government, failing to which the exchanges would be closed.

12-02-2019:- Japan’s largest bank Mitsubishi UFJ Financial Group (MUFG) is collaborating with American internet start-up Akamai, to build and deploy the world’s fastest payment network on blockchain technology. Japan would experiment with this payment system to handle millions of transactions per second in time for the Tokyo Olympics 2020.