For cryptocurrency regulations, Japan holds a unique place. It’s no coincidence that Satoshi Nakamoto, the pseudonymous creator of Bitcoin, has a Japanese name. Japan has a rich history of traditional values coexisting with technological innovations, particularly in computer science and cryptography.
Early on, the Japanese recognized the potential of digital decentralized ecosystems and were among the first to mine Bitcoin. Japan quickly became a global cryptocurrency hub, with many individuals mining Bitcoin even when its value was relatively low. Mt. Gox, once the world’s largest cryptocurrency exchange, was a Japanese company that facilitated millions of Bitcoin transactions.
Despite the infamous Mt. Gox hack in 2014, the Japanese government did not stop cryptocurrency activities. Instead, it focused on protecting consumers. In 2016, Japan officially recognized cryptocurrency as a form of money.
Background of Unique Journey
Interestingly, while Japan has a strong technological background, cashless payments represented only 26.8% of transactions in 2019. A 2020 Statista survey also revealed that only 4% of Japanese residents owned or used cryptocurrencies, lagging behind countries like China, India, and Vietnam.
The COVID-19 pandemic has prompted a shift away from cash, but the stability of the Japanese yen has somewhat limited cryptocurrency adoption. Countries with more inflationary fiat currencies tend to see higher cryptocurrency adoption rates.
However, the introduction of stablecoins tied to the yen, like JPYCoin, has attracted more people to cryptocurrencies. Stablecoins offer stability by pegged to traditional assets, making them more appealing for everyday transactions.
Japan’s cryptocurrency landscape benefits from healthy competition among various crypto exchanges and continued investments from established companies like Rakuten. A well-defined regulatory environment in Japan has allowed legitimate crypto projects to thrive while weeding out fraudulent ones.
With anticipated crypto reforms, Japan is poised to simplify its regulatory framework, providing a more conducive environment for crypto projects to flourish. Japan’s journey in embracing cryptocurrency continues to evolve, reflecting its unique blend of tradition and innovation.
Central Banks and Cryptocurrencies
In Japan, the law does not recognize Crypto Assets as money or compare them to traditional fiat currencies. They lack endorsement from the Japanese government or the Bank of Japan (BOJ).
However, the BOJ has shown interest in digital currencies. In July 2020, it discussed the technical hurdles of Central Bank Digital Currencies (CBDCs) mimicking cash. By April 2021, the BOJ had initiated practical studies on CBDCs, focusing on their technical viability for general use.
The BOJ aimed to finish the initial assessment stage of CBDCs by March 2022. The subsequent phase, starting April 2022, was set to examine more intricate functions. The bank also intended to create a unified CBDC system, considering the institutional impact and potential collaboration between the BOJ and private sectors.
Legally, “Crypto Asset” doesn’t fall under “Security” in Japan’s Financial Instruments and Exchange Act (FIEA). However, specific tokens might be regulated under the Act. The Payment Services Act (PSA) mandates registration with the Financial Services Agency (FSA) for entities handling Crypto Asset Exchange Services (CAES). Non-compliance leads to legal penalties. The exact definitions of ‘Crypto Asset’ and ‘CAES’ hold significant legal implications.
From April 2021 to March 2022, the BOJ’s Payment and Settlement Systems Department undertook a proof of concept study. They tested various CBDC ledger designs to check the operational soundness of basic functions.
In the study’s second phase, from April 2022 to March 2023, the BOJ added more functions to the basic CBDC ledger for evaluation. They assessed technical aspects and performance, exploring innovative technologies related to data models and databases not used in Phase 1.
The decision to adopt CBDCs will stem from public discourse in Japan. The BOJ commits to ongoing rigorous preparation, including technical trials, to aptly address evolving situations.
Cryptocurrency Regulation in Japan
Cryptocurrency in Japan is subject to regulation by the Japanese Financial Services Agency (FSA). The FSA collaborates with two key associations for regulatory purposes: the Japan Virtual Currency Exchange Association (JVCEA) and the Japan Security Token Offering Association (JSTOA).
The JVCEA focuses on creating rules and policies for crypto exchange service providers, while the JSTOA oversees token offerings and crowdfunding events. Japanese lawmakers have progressively tightened regulations, particularly concerning derivatives trading of digital assets.
In October 2022, Prime Minister Fumio Kishida announced plans to digitize national identity cards, involving the issuance of NFTs to local authorities through digital solutions. The Japanese government is also actively promoting adopting Web3 services integrated with the metaverse.
The PSA categorizes crypto assets as non-fiat payment methods for unspecified payments. It mandates that crypto asset exchange services register with the Financial Services Agency. Importantly, Japanese citizens are not restricted from owning and investing in cryptocurrencies.
Different activities related to cryptocurrencies fall under specific regulatory frameworks. The PSA governs cryptocurrency custody service providers, while cryptocurrency derivatives companies are regulated under the Financial Instruments and Exchange Act (FIEA).
Anti-Money Laundering (AML) regulations, outlined in the Act on the Prevention of Transfer of Criminal Proceeds (APTCP), apply to exchanges, and these standards are enforced by the Japan Financial Intelligence Center (JAFIC) and the Financial Intelligence Unit (FIU).
Japanese lawmakers have implemented rules that require custody service providers to perform client identity checks to maintain market integrity. Exchanges must adhere to strict record-keeping standards and submit annual compliance reports to the FSA.
The legal definition of Financial Instruments Service Operators encompasses various aspects, including business management systems, advertising methods, electronic data transmission, and consumer information sharing.
Regarding cryptocurrency transactions, authorities may request user information such as wallet addresses, geographical details, and customer identification numbers.
Japan’s Payment Services Act (PSA) and Cryptocurrency Regulation
In 2012, Japan introduced the Payment Services Act (PSA), intending to enhance the safety and efficiency of its financial market. The PSA is designed to safeguard investors by mandating that companies providing financial payment services register with Japanese authorities. Notably, in 2020, Japan expanded the PSA to encompass the regulation of “crypto-assets,” bringing cryptocurrencies under the purview of its broader financial regulatory framework.
Under these PSA amendments, cryptocurrency exchanges seeking licensure in Japan must furnish specific information, including company details, cryptocurrency support, capital holdings, and business models. Notably, exchanges must maintain a minimum capital of 10 million yen to be eligible for licensing.
The PSA defines crypto-assets as any property value recorded electronically, transferable through electronic data systems, not tied to traditional currencies, and used for goods and services transactions. On the other hand, cryptocurrency exchanges are defined as businesses providing services for buying, selling, or exchanging cryptocurrencies or acting as intermediaries or custodians for these activities.
The amendments to the PSA serve several objectives including, protecting cryptocurrency users from exchange hacks, establishing transparent regulatory frameworks, and limiting crypto derivatives trading through margin trading restrictions.
To achieve these goals, cryptocurrency exchanges must register with the Japan Financial Services Agency (JFSA) and implement robust security measures, customer due diligence procedures, and record-keeping practices to ensure the safety of customer assets.
The JFSA is Japan’s primary economic regulator responsible for maintaining market stability and enforcing regulations. It collaborates with regulatory bodies, such as the Securities and Exchange Surveillance Commission and the Certified Public Accountants and Auditing Oversight Board, to develop and enforce financial regulations.
The JFSA also combats money laundering and terrorism funding, striving to safeguard financial institutions, investors, and national welfare.
To ensure compliance with Japanese regulations, financial institutions are encouraged to adopt risk-based approaches, rigorous KYC procedures, and appoint compliance officers for AML systems.
Additionally, cryptocurrency exchanges in Japan must segregate customer funds from their own and hold the same types and quantities of crypto-assets as their customers, ensuring reimbursement in case of asset theft.
The PSA designated the Japan Virtual and Crypto Assets Exchange Association (JVCEA) as an official self-regulatory organization (SRO). The JVCEA collaborates with government regulators to protect cryptocurrency investors and build trust in the market. It has the authority to enforce crypto-related regulations for virtual asset service providers (VASPs) and sets guidelines for exchanges, including limiting margin rates to reduce the risk for investors.
Recognizing the fast-paced nature of the cryptocurrency industry, the JFSA appointed the JVCEA to facilitate swift rule-making and ensure that regulatory measures remain relevant in this dynamic sector. This collaboration aims to prevent future hacks on cryptocurrency exchanges and promote effective regulation that keeps pace with technological innovations.
Cryptocurrency Taxation in Japan
Is cryptocurrency taxable in Japan? The National Tax Agency (NTA) in Japan treats cryptocurrency earnings as “miscellaneous income” and imposes taxes accordingly. Here’s an overview of how cryptocurrency taxation works in Japan:
Tax Rates: Permanent residents in Japan must pay taxes on income derived from cryptocurrency activities, including trading, Bitcoin mining, and DeFi lending. The tax rates can range to 55%, depending on the income bracket. On the other hand, non-permanent residents are subject to a flat 20% tax rate on all cryptocurrency income.
Tax Slabs: Tax rates are determined based on income brackets. It’s important to note that there is also a 10% local inhabitant’s flat tax rate in addition to the income tax.
Income Tax Slabs and Corresponding Tax Rates on Cryptocurrency Earnings (excluding the 10% local inhabitant’s tax):
Types of Crypto Assets: Japanese crypto laws classify various cryptocurrencies and utility tokens as crypto assets. These include digital currencies like BTC and ETH, stablecoins pegged to fiat currencies, and NFTs. However, tokens representing shares, bonds, or securities-like financial products are categorized as security tokens under the Financial Instruments and Exchange Act (FIEA).
Regular Transactions: Everyday activities such as investing in a crypto project or using cryptocurrency for purchases are considered regular crypto transactions and are subject to taxation based on the applicable income tax slab.
Gifts and Airdrops: Individuals must determine their acquisition cost based on market value when receiving cryptocurrency as a gift. If they later trade or sell the gifted cryptocurrency, they must pay taxes on the difference between the sale and acquisition costs. Airdrops are also considered gifts, and taxes apply when selling airdropped tokens.
Capital Gains: Unrealized capital gains on crypto assets are treated as income at the end of each fiscal year (March 31). Taxpayers must file taxes by March 15 of the following year, based on the previous year’s activities ending on December 31. Losses from cryptocurrency transactions cannot be carried forward to offset future gains.
Stolen Crypto: No taxes are owed if cryptocurrency assets are stolen. However, this is subject to individual cases, and it’s advisable to consult with the NTA before filing taxes in such situations.
Transfer Fees: Capital gains tax applies to cryptocurrency used for paying transfer fees when moving assets. Transferring crypto assets between one’s wallets is exempt from taxation.
Proposed Tax Reforms: High cryptocurrency taxes have prompted proposed tax reforms in 2023, aiming to foster the growth of the Web3 industry in Japan. These reforms are expected to bring changes to the existing tax regime.
Japan imposes taxes on cryptocurrency income, with rates varying based on residency status and income brackets. The tax regime is well-defined but comes with high taxation rates, leading to potential reforms to support Japan’s cryptocurrency industry.
Japan has established a comprehensive regulatory framework for cryptocurrencies and has implemented taxation policies to govern the burgeoning crypto industry within its borders. The National Tax Agency (NTA) classifies cryptocurrency earnings as “miscellaneous income” and levies taxes on permanent and non-permanent residents based on income levels.
The taxation system in Japan includes tax slabs and rates, ensuring that cryptocurrency activities are subject to proper taxation. Various types of crypto assets, including digital currencies, stablecoins, and NFTs, are categorized and taxed accordingly. Regular crypto transactions, gifts, airdrops, and capital gains have specific tax implications.
Moreover, the Japanese government is actively exploring the potential of cryptocurrencies and blockchain technology, with proposed tax reforms 2023 that aim to support the Web3 industry and promote innovation.
While Japan’s cryptocurrency regulations and taxation policies are well-defined, the high tax rates have sparked discussions about potential changes to create a more favorable environment for the crypto sector. These reforms could significantly impact the future of cryptocurrency adoption and innovation in Japan.
Japan’s approach to cryptocurrency regulation and taxation reflects its commitment to ensuring a transparent and secure crypto ecosystem while balancing the needs of investors and the government. The ongoing evolution of these policies will shape the country’s role in the global cryptocurrency landscape.