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Yuri Suzuki and Takafumi Ochiai of Atsumi & Sakai look at efforts made by the financial and tax regulator to tackle digital currencies


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; and

(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 currency.

Under the said PSA regime, cryptocurrency exchange service means:

(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 Criminal Proceeds.

Accounting standards

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 as follows:

(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 income:

(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 average method.

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 (FIEA).

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 that:

'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 Exchange Act.'

The definition of securities under the FIEA includes a collective investment scheme interest which consists of three elements:

(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 is required.

The following chart lists enforcement actions taken by the JFSA in 2018, and related events.

January 26

Coincheck theft.


Administrative sanction of Coincheck.


Warning to Macau-based Blockchain Laboratory.


Administrative 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.


Coincheck announced that it had completed reimbursement for stolen coins to its customers.


Administrative sanction of Blue Dream Japan.


Administrative sanction of BEMEX.


Monex Group completed acquisition of Coincheck.


Announcement of establishment of a new self-regulatory organisation.


Administrative 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.

About the author



Yuri Suzuki

Partner, Atsumi & Sakai

Tokyo, Japan

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 trade.

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 2017 (Japan).

About the author



Takafumi Ochiai

Partner, Atsumi & Sakai

Tokyo, Japan

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 regulatory matters.

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 2013.

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