Based on the Japanese yen flow into bitcoin, it's
believed that approximately 60% of the trading volume of
bitcoin is done by Japanese investors. Japan was the first
country to introduce licensing for cryptocurrency exchanges, by
amending the Payment Services Act (PSA) in 2016. The new
regulatory regime for cryptocurrencies under the amended PSA
came into force on April 1 2017. Since then, the Accounting
Standards Board of Japan (ASBJ) has published tentative
accounting standards for cryptocurrencies and the National Tax
Authority (NTA) has published a method for calculating income
from cryptocurrency transactions for the purpose of individual
users' tax returns.
But even though the regulation of cryptocurrencies is quite
advanced, the regulation of initial coin offerings (ICOs) has
yet to be addressed.
Inspections conducted by the Financial Services Agency
(JFSA) into each cryptocurrency exchange after the recent
massive Coincheck theft revealed compliance and security
problems at many of them. The regulator put together a new
study group in March 2018 to consider a number of issues around
cryptocurrency exchange businesses, including possible
regulations on margin trading and ICOs.
Regulatory regime for cryptocurrency exchanges
Under the PSA, a cryptocurrency exchange must register with
the Prime Minister (in effect the relevant finance bureau).
The term cryptocurrency under the PSA means any of the
following (excluding currency-denominated assets):
(a) property value which can be used in relation to
unspecified persons for the purpose of paying consideration for
the purchase or leasing of goods or the receipt the of
provision of services, can also be purchased from and sold to
unspecified persons acting as counterparties, and which can be
transferred by means of an electronic data processing system;
(b) property value which can be mutually exchanged with what
is set forth in the preceding item with unspecified persons
acting as counterparties, and which can be transferred by means
of an electronic data processing system.
The term currency-denominated assets means assets which are
denominated in Japanese currency or in a foreign currency, or
for which performance of obligations, refunds, or anything
equivalent has to be made in Japanese currency or in a foreign
Under the said PSA regime, cryptocurrency exchange service
(a) the sale, purchase or exchange of cryptocurrencies;
(b) intermediary, agency or delegation services in relation
to the acts in (a); or
(c) management of users' money or cryptocurrency in
connection with the acts in (a) or (b).
A cryptocurrency exchange must establish systems and
procedures to enable it to comply with user protection rules,
particularly the segregated management of cryptocurrency and
money deposited by its users.
It must also submit to auditing by an accounting firm or
certified public accountant, and be responsible for verifying
the identity of users, thus enhancing the anti-money laundering
(AML) regime under the Act on Prevention of Transfer of
According to the Tentative Practical Solution on the
Accounting for Virtual Currencies published by the ASBJ on
March 14 2018, the calculation of the value of cryptocurrencies
at the balance sheet date for cryptocurrencies held by an
entity on its own behalf (that is, excluding those held by a
cryptocurrency dealer on behalf of its customers) can be done
(a) If an active market exists for the cryptocurrency, such
cryptocurrency should be valued using the market price at the
balance sheet date, and any difference between the market value
and the book value should be recognised as a gain or loss.
(b) If an active market does not exist for the
cryptocurrency, such cryptocurrency should be valued at its
cost. However, if the estimated disposal value is lower than
the cost, the cryptocurrency should be valued using the
estimated disposal value (including zero or a memorandum
value), and the difference between the cost and the estimated
disposal value should be recognised as a loss.
Individual tax returns
On December 1 2017, the Individual Taxation Group of the NTA
published the following information on the calculation method
for income from cryptocurrencies. In principle, profit arising
from the sale or use of cryptocurrencies by an individual is
classified as miscellaneous income and an income tax return is
required (unless the profit is made incidentally to acts that
are the basis of business income etc). For instance, the profit
from the following sale or use will be the amount of taxable
(a) when the cryptocurrency held is sold (converting to fiat
currency) – the difference between the selling price
and the acquisition price of the cryptocurrency.
(b) when the cryptocurrency held is used for settlement at
the time of purchasing a product – the difference
between the product price at the timed purchase and the
acquisition price of the cryptocurrency.
(c) when the cryptocurrency held is used for settlement when
purchasing another cryptocurrency (ie exchanging one
cryptocurrency for another cryptocurrency) – the
difference between the market price (purchase price) of the
other cryptocurrency at the time of purchase and the
acquisition price of the cryptocurrency held.
Investors have pointed out that the handling of income from
cryptocurrencies as described above is problematic. In
particular, it is very difficult in practice to calculate the
realised profit and loss, and the amount of taxable income
every time a cryptocurrency is sold and exchanged, or a product
is purchased using a cryptocurrency by determining the current
market price of the cryptocurrency and calculating the
acquisition cost by the moving average method or the total
Further, the methods are different from those for handling
income from share trading and foreign exchange trading where
15% national income tax (plus a five percent local tax) is
applied since the taxable amount for income tax on
cryptocurrency trading is calculated along with other income
(aggregate taxation) and thus a progressive taxation rate is
applied, which means in the case of a person with an annual
taxable income over JPY40 million ($364,500 approximately), the
highest national rate of 40% (plus applicable local taxes) is
applied. These tax issues may hinder the usage of
cryptocurrencies and the entry of overseas operators into the
Japanese cryptocurrency market.
In addition, when acquiring cryptocurrency via mining, the
income is deemed to be business income or miscellaneous income
subject to aggregate taxation. In this case, the amount of
taxable income is calculated by subtracting the expenses
necessary for the mining (eg electricity bills etc) from the
amount received (the market price at the time of acquisition of
the cryptocurrency acquired by the mining). However, the fact
that the time the acquisition of the cryptocurrency was
recorded and the time the related expenses were recorded is
different causes a problem from the viewpoint of the principle
of matching costs with revenue.
Initial coin offerings
The JFSA takes the view that ICO tokens can be characterised
as either cryptocurrencies regulated by the PSA or as
securities regulated by the Financial Instruments Exchange Act
In the case of an ICO where the issuer plans to list a token
on exchanges, the issuer requires a cryptocurrency exchange
licence and must submit a notification of the ICO token as
dealing in cryptocurrency to the JFSA pursuant to the PSA. The
PSA also regulates prepaid payment instruments which are issued
in exchange for the receipt of consideration corresponding to
the amount recorded using electromagnetic means which can be
used for the purpose of paying consideration for the purchase
or leasing of goods or the receipt of provision of services
from the person designated by the issuer. If ICO tokens are
deemed prepaid payment instruments rather than
cryptocurrencies, the issuer could be required to effect a
registration or notification under the PSA.
The 'User and business operator warning about the risks of
ICOs' document released by the JFSA on October 27 2017 states
'If an ICO has the characteristics of an investment and
the purchase of a token by a virtual currency is practically
deemed equivalent of that by a legal tender, the ICO becomes
subject to regulations under the Financial Instruments and
The definition of securities under the FIEA includes a
collective investment scheme interest which consists of three
(a) an investor invests or contributes invested money
(including resources similar to money) (the equity holder);
(b) business is conducted using such money and/or other
resources by a person other than the Equity Holder (the
invested business); and
(c) the equity holder can receive dividends from profits
arising from the invested business or a distribution of the
assets of the invested business.
When soliciting the acquisition of collective investment
scheme interests (ie securities under the FIEA) to investors in
Japan, registration as a type II financial instruments business
|The following chart
lists enforcement actions taken by the JFSA in 2018, and
Macau-based Blockchain Laboratory.
sanction of Coincheck, Tech Bureau, GMO Coin, FSHO, bit
station, Bicrements and Mr. Exchange.
||Warning to Hong
Kong-based Binance. Administrative sanction of FSHO,
Eternal Link and LastRoots.
announced that it had completed reimbursement for stolen
coins to its customers.
sanction of Blue Dream Japan.
sanction of BEMEX.
completed acquisition of Coincheck.
establishment of a new self-regulatory organisation.
sanction of everybody's bitcoin.
Recent enforcement by the JFSA
On January 26 2018, 260,000 users lost a total $534 million
in the theft of 500 million NEM coins from Tokyo-based
Coincheck. Coincheck was ordered to improve the operation of
its business, and in April was acquired by a Japanese online
brokerage firm Monex Group.
At the time of the theft, the JFSA had granted licences to
16 exchanges and allowed 16 other exchanges, including
Coincheck, to operate while awaiting a decision on their
licence applications pursuant to the amended PSA (which allowed
a person who had operated cryptocurrency exchange business
before April 1 2017 and applied for the licence within six
months from that date to continue such business until a
decision on its licence application was made).
After the Coincheck theft, the JFSA conducted on-site
inspections of certain exchanges, and most of the 16 exchanges
awaiting a decision on their application were sanctioned by the
JFSA, and half of the 16 decided to cancel their applications.
The content of the JFSA's orders to improve business operations
primarily focused on risk assessment of each type of
cryptocurrency, AML/counter-terrorism financing measures,
disclosure of problems in the trading etc system and measures
for preventing a recurrence of such problems, security
measures, the segregated management of users' assets,
management of outsourcing vendors, internal audits, and the
roles of the board of directors and company auditors. It should
also be noted that the JFSA issued warnings to two foreign
cryptocurrency exchanges which had been providing services to
users in Japan without registration under the PSA.
In order to improve security measures and develop standards
for activities relating to ICOs, a new self-regulatory
organisation was established by the registered exchanges
following a request by the JFSA.
Partner, Atsumi & Sakai
T: +81 3 5501 1184
Yuri Suzuki, a Partner of Atsumi & Sakai, has
experience advising on banking & finance,
structured finance, insurance, TMT, M&A,
international transactions, and international
She heads the firm's fintech team and supports the
Fintech Association Japan as a member of its
secretariat. She also serves as a legal advisor to the
Japan Blockchain Association and an advisor to the MUFG
Digital Accelerator Program.
Ms. Suzuki is also vice-chair of the Banking,
Finance & Securities Committee, the Inter-Pacific
Bar Association, a trustee of the Japan Institute of
Life Insurance and a member of the Individual-type
Pension Policy Formulation Committee of the National
Pension Fund Association. She was admitted as an
attorney (Bengoshi) in Japan in 2001 and
worked in the Chicago office of Kirkland & Ellis
from 2005 to 2006. She was recommended as a Leading
Lawyer in Banking for IFLR 1000 Financial and Corporate
Partner, Atsumi & Sakai
T: +81 3 5501 2361
Takafumi Ochiai is a Partner of Atsumi & Sakai.
He acts for a wide range of Japanese and international
clients in the financial and information technology
sectors, including related dispute resolution and
He is a member of the firm's Fintech team, and
supports the Fintech Association Japan as its
secretariat general. He is a legal advisor to the Japan
Blockchain Association, a member of Finomentor, an
advisor to the Incubation & Innovation Initiative
(a consortium comprising of Sumitomo Mitsui Banking
Corporation, Toyota, NEC and Japan Research
Institution), a member of Ministry of Economic Trade
and Industry's Committee to Discuss Legal System for
Blockchain and a member of Japan Bank Association's
research committee for promotion of open API.
Mr. Ochiai was admitted as an attorney
(Bengoshi) in Japan in 2006, and holds a B.S.
degree from Keio University (2004). He worked in the
Beijing office of another leading Japanese law firm in