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Japan: Regulating virtual currencies

On March 4 2016, Japan’s government submitted to the Diet (the national legislature) a Bill to regulate virtual currencies such as Bitcoin

Takashi Unoki

On March 4 2016, Japan's government submitted to the Diet (the national legislature) a Bill to regulate virtual currencies such as Bitcoin. The aim was to have the Bill passed into law during the current Diet session. The Bill includes amendments to the 2009 Payment Services Act (PSA) and the 2007 Act on the Prevention of Transfer of Criminal Proceeds (PTCP).

The current PSA contains provisions regarding electronic money, which is issued by a specific issuer and can only be used for such transactions as agreed to by the specific issuer. However, there is no provision regarding virtual currencies, which have no specific issuer and can be used as a medium of exchange beyond this limitation, like real currency.

Japan has gradually recognised the need for regulation. This recognition has developed as a result of international and domestic arguments regarding the regulation of virtual currencies, including discussions held at the most recent G7 summit, discussions of the Financial Action Task Force, and the recent bankruptcy of Mt. Gox, the most prominent Bitcoin exchange.

The envisaged regulation includes:

(i) the adoption of a registration system for persons who engage in the purchase, sale, or exchange of virtual currencies as a business (a Virtual Currencies Exchange Operator, or VCEO);

(ii) the introduction of regulations for VCEOs. Under the amended PSA, VCEOs will have to segregate customers' assets from their own assets, prepare and preserve books, prepare and submit an annual report to the governing authority, and take necessary measures to protect users;

(iii) VCEOs will fall within the scope of the PTCP and will thus have obligations thereunder. These include verifying customer identification data at the time of any specific transaction and reporting any suspicious transaction to the regulator.

The Bill's main purpose seems not to be to facilitate the use of virtual currencies, but rather to regulate VCEOs, thereby securing the transparency of virtual currency transactions. There remain some unanswered questions regarding virtual currencies, such as how to tax such transactions. Nevertheless, the introduction of specific rules governing virtual currencies into Japan's legal system has great significance for the future use of virtual currencies. It is hoped that further in-depth discussions over virtual currencies will follow.

Takashi Unoki

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