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Cryptocurrency in Japan

On March 29, 2018, Mr. Exchange, a cryptocurrency exchange located in Fukuoka, announced on their website that they decided to withdraw the application for registration as a cryptocurrency exchange in response to an administrative guidance given by Japan’s Financial Service Agency (“FSA”) three weeks before the announcement. This decision reflects the recent change of the FSA’s stance towards cryptocurrency in Japan.

What is cryptocurrency?

A cryptocurrency is digital money designed to work as a medium of exchange that uses cryptography to secure transactions, operating independently of a central bank. The first and most circulated cryptocurrency is Bitcoin. It works through technology called distributed ledger, typically a blockchain, that serves as a public transaction database. Roughly speaking, it means that digital data (e.g. transaction history) is shared by all the users without a middleman (e.g. a bank). The most exciting idea about blockchain (or cryptocurrency) for me lies here. We might be able to remove a middleman (e.g. a bank, Google, etc.) from the exchange of money and information. People call such a society a decentralized society.

Confusingly, in Japan, we use the term “virtual currency” (仮想通貨 kasô tsûka) to indicate Bitcoin and altcoins (e.g. Ethereum) which are called cryptocurrency in English-speaking countries. Virtual currency is used as a wider concept than cryptocurrency in such countries. This usage in Japan was originally made by the media at the early stage of introducing Bitcoin, purportedly, to let their readers grasp the concept easier, but it had been pervasive and finally was adopted in the so-called Virtual Currency Act *1 (“Act”), which was enacted and came into force in April 2017, as a term indicating Bitcoin and altcoins in Japan. In this article, I use the word “cryptocurrency” to indicate them.

Regulations in Japan

The Act introduced a registration system for cryptocurrency exchanges. As of today, 16 exchanges including Bitflyer, Zaif and Quoine are operating as a registered cryptocurrency exchange in Japan. Although Japan had been taking a crypto-friendly stance (its original intention at the time of legislation was to enable startups to engage in cryptocurrency business), the registration review became stricter in mid-2017 because of the surge in cryptocurrency prices, and became further stricter after the Coincheck incident, in which the cryptocurrency exchange Coincheck lost ¥58 billion in virtual NEM coins to a hacking attack in January 2018.

Closure of the exchange in Fukuoka mentioned at the beginning of this article was part of this trend. Binance, the world’s largest cryptocurrency exchange also left Japan after being given a warning from the FSA on March 23, 2018. Until recently, Japan has been deemed as one of the most crypto-friendly countries, but it possibly is missing a chance to be a major global market hub by strengthening regulations. No new exchange has been admitted since last December.

For individuals, registration is not necessary for buying and selling cryptocurrencies as long as they trade as an investor, not as a business.

Cryptocurrency and taxes in Japan

Bitcoin is designed to use as a currency but has mainly been treated as an investment asset. The Act defines a cryptocurrency as a form of payment method (not a legally-recognized currency though) and therefore cryptocurrency trading is exempted from consumption tax. As for capital gains tax, if income obtained from cryptocurrency is earned at the individual level, this is treated as miscellaneous income and subject to tax on aggregate income. For corporations, it is treated as operating revenue. On July 11, 2018, it was reported that the police, for the first time, seized Bitcoin equivalent to ¥5,000 owned by a man who failed to pay parking fines.

Cryptocurrency and local government

On June 13, 2018, a small village called Nishiawakura in Okayama Prefecture with a population of only 1,470, announced that they decided to launch an ICO (Initial Coin Offering *2), technically supported by blockchain company Chaintope located in Iizuka, Fukuoka Prefecture. This will be the first time in Japan for a municipality to use a token sale *3 to raise funds.

This is an interesting move. I am of the view that Fukuoka City, which is calling itself a startup city, should do the same to secure local independent financial resources. This could be another way to realize a decentralized society though it differs from the meaning originally intended by the word.

Notes:
*1 – The Bill to Revise Portions of the Banking Act to Account for Changes to the Economy per the Growth of Telecommunications Technologies has been approved. Section 3 of Act on Financial Transactions in this bill now includes wording on virtual currency and is being tentatively called the “Virtual Currency Act”. Click here for more information (Japanese only).
*2 – An Initial Coin Offering (ICO) is a fundraising mechanism in which new projects sell their underlying crypto “tokens” in exchange for other cryptocurrencies such as bitcoin and ethereum. It is similar to an Initial Public Offering (IPO) in which investors purchase shares of a company.
*3 – ICO “tokens” constitute, to the extent that they have the probability of being listed later, “virtual currency” defined in the Act and therefore will be regulated by the Act.

Disclaimer: While every effort has been made to ensure that the information on this article is accurate at the time of posting, it is not intended to provide legal advice as individual situations will differ. If you do require advice or wish to find out more about the information provided and related topics, please contact the author.

Text by Atty. Atsushi Miyake of Miyake Law, Aug. 2018.
Read more installments from this series here.

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Others
Fukuoka City
Published: Aug 6, 2018 / Last Updated: Aug 6, 2018

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